Pass-through voting: connecting end investors – or quietly unravelling stewardship?

Pass-through voting allows investors in pooled investment funds to choose how their share of assets in the fund is voted. There are various models. The investor in the fund could be given a list of standard voting policies they can choose from, which is then applied to all their holdings. They may be able to have their own policy applied. Or they could have the ability to make specific voting recommendations on companies or issues that they particularly care about. 

Pass-through voting has been around for decades in the UK, at least in an ad hoc form. But the development of offerings from the big index fund providers has put the issue firmly on the agenda of UK investors and corporates. To assess the stewardship implications of pass-through voting, we interviewed representatives of 33 organisations from across the UK investment chain: asset owners, asset managers, issuers, service providers, and regulators. The Investor & Issuer Forum, an organisation that facilitates dialogue between institutional investors and issuers in the UK, assisted with access to the interviewees.

Why pass-through voting is gaining traction

UK equity ownership has shifted dramatically over recent decades, with domestic institutional ownership collapsing and US index managers now holding an increasingly large share of UK equities. At the same time, voting has evolved from a protection against value destruction into a frontline tool for influencing corporate behaviour on issues ranging from executive pay to climate strategy. The idea of pass-through resonates at a time when asset owners are under growing pressure to demonstrate ownership of their stewardship responsibilities, and when they find themselves increasingly at odds with their asset managers on issues like climate change.

Layer onto this the growing divergence in ESG beliefs – particularly the politicisation of ESG in the US – and it is not hard to see why some asset owners want a more direct say in how “their” votes are cast.

Alignment versus effectiveness

Asset owners frequently cite alignment as their primary motivation for adopting pass-through voting. They want voting outcomes to reflect their investment beliefs – especially where they see environmental or social risks as system-level issues affecting long-term portfolio returns. For larger, well-resourced asset owners, pass-through voting can also be a way of ensuring consistency: the same company should be voted the same way whether held directly, via a segregated mandate, or through a pooled fund.

But alignment is not the same thing as effectiveness.

A recurring concern among market participants is that pass-through voting risks separating voting from engagement. For many active managers, stewardship is not just about how a vote is cast, but about the ongoing dialogue that surrounds it. If managers no longer control a meaningful proportion of the votes attached to their holdings, their leverage with companies may diminish – and with it the quality of engagement. A widely expressed concern is that asset owners, especially smaller ones, will be less informed than asset managers and so voting quality overall may decline. Issuers worry about a chaotic process if voting authority is dispersed across multiple asset owners and policy menus.

Advocates counter that the concerns about pass-through voting are overstated. Split voting already exists through segregated mandates and differing fund strategies. Pass-through voting, they argue, merely extends to pooled fund options that have long been available elsewhere. Moreover, asset owners choosing to engage in pass-through voting tend to be those who care enough to become informed. Those arguing against empowerment of end investors are taking a fundamentally elitist position, instead of welcoming greater dialogue and engagement with the views of clients.

The proxy adviser problem

A significant implication of pass-through voting is the extent to which the practice – particularly when implemented through policy menus – implicitly hands more power to proxy advisers. 

Where voting decisions are automated according to pre-set policies, there is in practice little or no vote-by-vote fiduciary oversight. Even asset owners who have carefully selected a policy may have limited visibility into how it is applied in specific, nuanced situations. For critics, this raises the spectre of more formulaic, performative voting, driven less by considered judgement and more by box-ticking.

A second-best solution?

Pass-through voting is neither a panacea nor a pathology. For some asset owners, particularly those unable to switch managers easily or to achieve alignment through mandate selection, it may be a pragmatic second-best solution. The practice could highlight issues and client concerns that asset managers are missing in their voting approaches.

But it is not costless. Voting alignment achieved at the expense of engagement quality may be a poor trade. And pass-through voting cannot substitute for the harder work of clarifying stewardship objectives, improving manager selection, and strengthening the market for stewardship as a whole.

At the moment take-up of pass-through voting is at an early stage and its impact on UK vote outcomes is very limited. Although in the near term it’s unlikely to be transformational for UK governance practice, it’s definitely an issue to watch for the future.

The academic paper can be found here. 

A pracititoner version of the paper can be found here.  

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Suren Gomtsian is an Associate Professor at LSE Law School.

Tom Gosling is a Professor in Practice at LSE Financial Markets Group.

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