Pass-Through Voting: Giving Individual Investors a Voice in Corporate Governance

This proxy season, some of the world’s biggest fund managers are launching or expanding pass-through voting programs to give their fund investors a say on how shares of portfolio companies are voted.  Firms such as BlackRock, Vanguard and State Street Global Advisors are reaching out to their fund shareholders and providing them with multiple options for casting votes.

These programs are watched closely by governance advocates and lawmakers who’ve raised concerns about the growth of passive funds and their impact on corporate governance, especially on the outcome of votes on ESG proposals. They are also being observed by other fund companies, who may use the learnings from these initiatives to structure other programs for engaging individual investors in the proxy voting process.  Pass-through voting systems are evolving in ways that could obviate the perceived need from some quarters for regulatory solutions for democratizing corporate governance.

The proxy voting industry has spent decades developing, enhancing, and supporting systems, processing, and infrastructure for corporate proxy voting.  Innovations in pass-through proxy voting systems can leverage the robust systems and networks in use for everyday voting on directors, say-on-pay, and shareholder proposals.  These systems have proven to be accurate, reliable, efficient, and secure. Through electronic platforms such as proxyvote.com and the ProxyVote™ app, participants can cast votes anytime, anywhere, receive confirmation that votes were reported as cast, and set preferences to vote in favor or against different proposal types.  Nearly all voted shares are cast electronically.

There are any number of ways pass-through voting programs can work.  Generally, shareholders indicate their voting preferences, or choose a set of guidelines from a range of third parties.  Their preferences and choices are stored by the proxy vote processor and applied (e.g., on a pro-rata basis) by asset managers when giving voting instructions to their fund’s custodian bank.  When investors hold their shares in separately managed accounts, as is the case with many institutional investors, they own them outright and can choose to vote their shares directly or have them voted by their asset manager as it sees fit.  When portfolio companies are held in a mutual fund, retail investors don’t own the underlying shares outright so pass-through voting systems can be used to poll investors or to provide input to asset managers on how they should vote.

Each asset management company determines how the voting inputs and indications are utilized, and how much weight they will be given in their own voting determinations.  Pass-through voting programs provide a mechanism to capture more voices in corporate governance and to further democratize corporate governance.