As most people will be aware, a number of asset managers have, after many years of pressure from some clients, started to open up options for client directed voting in pooled funds. This is now commonly known as Pass Through Voting (PTV from here on). But, just as PTV seems like it might take off it has been subject to criticism.
For the whole time I’ve been interested in this topic (over 15 years) opposition to PTV has come overwhelmingly from asset managers… until now. Lately I have also seen concerns expressed by RI people from the asset owner side, and from people who campaign in the capital markets. A number of them are people I really like and respect, so I take their concerns seriously. So I thought it would be worth trying to reason through some of these questions.
Before I start, in order to be completely transparent, I think I come to this topic with (at least) two potential biases. Firstly, and most obviously, I am employed by an organisation that provides voting services. Although I am not part of any incentive scheme that pays out if more asset owners take up PTV, the growth of PTV is clearly potentially beneficial to any company providing these services. Secondly, I was previously a trustee of a pension scheme, and an organiser of a network of trustees, and was frequently frustrated that our pension schemes could not vote how they wanted in pooled funds. To be clear, my experience as a frustrated trustee came first.
I don’t think that these biases affect my reasoning on these issues, but it’s very difficult to see the kinks in your own thinking, and I would consider these are relevant factors to be aware of if I was assessing others’ arguments. Hence best to be open about them.
In addition, having thought about this topic quite a bit, I am not convinced there are smackdown arguments for or against. With that said, let’s get into the guts of it.
There are a couple of RI / campaigner arguments against PTV that need proper consideration. The first is essentially that if asset owners take control of voting rights this will lead to less asset manager commitment to ESG issues.
A strong form of this claim is that if support for ESG resolutions by asset managers that offer PTV tails off then this is evidence of the negative impact of PTV. The implication is that PTV will have caused or lead to it.
A weak form of the argument is that PTV will let managers off the hook. The chain of the argument is that Manager A starts to oppose more ESG resolutions, asset owner clients start to complain, so Manager A retorts “We’re sorry you don’t like our voting, but you can vote for yourself”. So PTV works to diffuse client pressure.
In either strong or weak form, any tail off in support for ESG resolutions is particularly problematic at a time when there are urgent challenges and we cannot afford backsliding.
A second and related argument is that if asset managers adopt PTV this dilutes the influence of asset managers over ESG issues (because they have less voting power) just at the point that managers are starting to have an impact.
I think there is power in these arguments, and they should not be dismissed out of hand. That they are currently being made by some in the asset owner community who are serious about RI demonstrates that this is not just self-interested opposition from managers. (And to be clear I think asset managers have also made arguments in opposition in good faith.)
That said, I also think there are other factors to take into consideration.
Firstly, let’s not just look at this issue in terms of the past 2 or 3 years. PTV has been in operation in segregated mandates for a very long time. A first point here is that it is not clear why PTV is in principle any different whether in pooled or segregated mandates. This leads to further questions: if PTV in pooled mandates is a problem should we also consider it a problem in segregated mandates? Are we saying we think all voting rights should lie with appointed asset managers? If not, where is the line being drawn, and why?
I also think it’s fair to say that the growth in PTV in segregated mandates coincided with the growth in asset manager support for ESG issues in general, and shareholder resolutions on ESG issues specifically.
Looking to the present day, I think it is a significant fact that the decline in support for ESG resolutions had begun before PTV has reached significant scale in pooled funds.
To put it simply, asset manager support for ESG resolutions has both increased and decreased at different points during the evolution of PTV. I think a fair and obvious conclusion is that falling support for ESG resolutions is driven by asset managers choosing not to vote for them, not because of the existence of PTV. There is no inherent reason why PTV should cause or lead to lower support for ESG resolutions.
That said, I can imagine that an asset manager where the leadership knows it is going to reduce support for ESG resolutions might consider that offering PTV will help to mitigate any client dissatisfaction. So, while personally I don’t think that PTV causes or leads to a drop in support for ESG issues perhaps it can be used as a pressure valve. I would add that asset owners who have developed their views enough to have their own voting positions are likely to be the most potentially challenging clients. So it could be quite effective at assuaging the concerns of knowledgeable clients.
But it also feels a bit incongruous to argue that because asset managers are voting more often against ESG resolutions it is a mistake for asset owners to want to cast votes in line with their own policy. I think the logic is that without PTV asset owners would be compelled to face up to the problems with manager voting policies, so they exercise their influence as clients to push their managers’ voting back in the other direction.
The obvious problem is that if managers adopt voting positions on ESG resolutions that asset owners don’t like, won’t change their position despite client dissatisfaction, and won’t offer PTV, then support for ESG resolutions will be lower than it would be with PTV. This is, of course, exactly why other asset owners have been supportive of PTV in the first place.
This is the bind I personally found myself in as a trustee. At that point there were no asset managers that would vote the way that the trustees wanted, so there was a clear mismatch between client and service provider. But, in the absence of PTV, we were stuck with seeing our beneficiaries’ assets used in a way that we knew was not in line with their values. 15 years plus away from my trustee role, I still don’t see why asset owners that can’t find a manager whose voting policy aligns with the organisation should be be compelled to follow a manager policy anyway, or why it’s wrong-headed to want to vote differently.
Having looked back and looked to the present, if we look forward, PTV will be in place in various forms at various managers. If those managers reduce their support for ESG resolutions or keep it at a low level, aren’t they still going to be the subject of criticism and client pressure?
I’m not sure whether asset owners who adopt PTV will necessarily cease to call out asset managers over their voting orientation (some do this already). Similarly, an asset owner that doesn’t like their manager’s voting position on certain issues could stick with the manager’s house policy, rather than go down the PTV route even if offered, but put pressure on the manager to change.
There’s a final point relating to PTV in pooled funds I think we need to address: concentration. As mentioned earlier, one of the arguments against PTV is that it dilutes the stewardship influence of those asset managers who allow clients to vote. But, looking at the issue from the other end of the telescope, some might retort: ‘yes, that’s exactly the point.’
Largely completely separate to the discussion in the RI community about the pros and cons of PTV, a discussion has been underway amongst people who look at competition and market concentration about the power of a handful of very large asset managers, with most of the assets in pooled funds. As I’ve written before, this is a concern that has been expressed by people on both the Right and the Left of politics. It applies to two areas: proxy voting and common ownership and obviously it is the former point we are interested in currently.
My personal view is that the recent extension of PTV to pooled funds is as much about asset managers trying to address concerns about scale and concentration as it is about managing divergent client views on ESG issues. Look at where the current moves to open up voting started. The reason why the Big Three attract so much attention is because they are so big, and control so many votes. This remains an issue whichever way they vote. I think too little attention is currently paid to this point in the RI world.
To sum it all up, I take very seriously the assertion that extending PTV from segregated to pooled funds may have a negative effect, from the perspective of wanting to maintain and increase support for ESG resolutions. But when I try and reason through it the strongest argument against seems to be that it might reduce client pressure in response to decisions the manager itself has already taken. And I’m not sure I’m convinced on that point.
Additionally, if we don’t think extending PTV is a good idea, what is our response to asset owners stuck with voting policies that they don’t like? And are we concerned, or not, about the increasing concentration of voting rights in a few institutions?
It’s because I trust the judgement and expertise of people who are concerned about PTV that I put all this out there. I may have failed to grasp other concerns people have, or not accurately captured their arguments. If so, please do comment or get in touch. I’m happy to host an opposing opinion piece if anyone wants to draft something. I feel that this topic does need more discussion and clarity wherever one currently stands.