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    Democracy by Proxy

    As all eyes are glued on a sunny Egyptian resort, you might have missed this somewhat less spectacular revolution-in-the-making rocking the formerly secretive club of proxy voting lately. In a rare moment of synergy between regulatory shifts and technological advances, the very foundations of the concept are shaking. Suddenly, shareholders of all kinds are (tentatively) admitted into the inner chamber and able to exercise their sacred voting rights, however few and well-wrapped in pooled vehicles their shares are.

    Typically, retail investors wouldn’t stand a chance to pitch their agendas against the behemoth institutional investors and fund managers holding the majority of shares in large public companies. In the aftermath of success stories like the Engine No. 1 ExxonMobil victory or the GameStop game changer, however, some of them have become much bolder, and collective bargaining platforms for everyday investors are popping up like mushrooms.

    More importantly, the very rules of the game are changing, too. Just last week, the Securities and Exchange Commission (SEC) adopted amendments that should bring more “detail, consistency and usability” to proxy voting reporting, according to SEC Chairman Gary Gensler. The changes imply that voting records will have to be standardised and categorised and the language of the statements simplified to make them more readable. Also, proxy voting records will now be available on fund websites.

    The popular movement has hardly escaped the attention of asset managers. Recently, two of the world’s biggest, BlackRock and Vanguard, announced that they would endeavour to give their investors a chance to exercise their rights as shareholders. Almost simultaneously and independently of each other, they have become aware that, as Vanguard puts it, “clients have diverse perspectives, and a growing number would like the option to weigh in on how their index funds vote on important proxy questions at the companies held in the funds.” Introducing its pilot program to offer proxy voting policy options for individual investors in several equity funds, Vanguard boasts that it is “reimagining investment management to level the playing field for individual investors everywhere.”

    Meanwhile, BlackRock’s CEO, Larry Fink, too, extolls the transformative power of choice in proxy voting in the latest of his famous letters to clients and corporate CEOs. He reveals that BlackRock is working with a digital investor communications platform in the UK, enabling investors in (a select number of their) mutual funds to exercise choice in how their portion of eligible shareholder votes are cast. “This revolution in shareholder democracy will take years to be fully realised, but it is one that, if executed correctly, can strengthen the very foundations of capitalism,” concludes Fink.

    Neither Vanguard nor BlackRock can claim to be the first asset manager to climb onboard the proxy-voting train, though. Already last month, Schwab Asset Management was quicker to pilot a solution developed by global fintech firm Broadridge Financial Solutions, Inc. that can poll fund shareholders to understand their overarching preferences regarding key proxy issues.

    Were I slightly more cynical, I’d start wondering at this point why all the rush. How come asset managers are so eager to offload part of their voting responsibility to the end investors? Could it be that they find themselves increasingly uncomfortable caught in that tight space between a (black)rock and a hard place?

    Yet, it must be a good thing, right? Hard to argue against permitting the actual owners of securities managed by large institutions to have greater input into how their shares are voted. The question is whether this mini-revolution will live up to its true potential. Will shareholders really make use of their newly acquired ability to vote? And, if that happens en masse, what does it mean for public companies that may need to work much harder to obtain majority shareholder votes?

    Exciting, isn’t it? I, for one, can’t wait to see what impact such investor-led voting could have on companies’ governance, sustainability issues included.

    Image courtesy of Edwin Andrade on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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