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What is the ‘voting choice’?
There is a new trend in shareholder voting at listed companies named ‘voting choice’. The new trend was introduced by BlackRock in 2022 and the program allows its institutional clients to exert greater control over the exercise of voting rights in listed companies. In practice, BlackRock has introduced this new practice allowing some institutional clients of its funds to exercise the voting rights in portfolio companies in proportion to the percentage of the fund they beneficially own. as an example: if a fund holds 10% of the shares of a portfolio company, and an institutional investor is a 5% participant in the index fund, it will be allowed to decide how to vote 0.5% of the shares of the portfolio company. The practice before the initiative of BlackRock was to simply cast the fund’s votes in a uniform way, based on its own voting policies, usually using a proxy advisor.
The interesting part of the voting choice is that the institutional clients have the option of exercising voting rights in accordance with their voting policies and there are situations when the voting recommendation differs from one advisor to other. The idea of voting choice fits within the perception of granting more voting power to the final beneficiaries of the equity stake in a listed company, and less to those institutions holding shares on beneficial owners’ behalf. The voting choice was named by some commentators ‘the direct vote’.
Starting with 2023 two of the other largest asset managers in the world, Vanguard and State Street Global Advisors have offered the voting choice. It is to be expected that other asset managers will follow along and the new practice to be extended very soon.
The new voting choice options may well cause considerable change in (the perception of) shareholder voting at listed companies. It would be interesting to see how such practice will be implemented in certain jurisdiction as in some of them (including Romania) the shareholders cannot split their votes on the number of shares. However, there are some exceptions for companies with dual listing, having shares listed in the home country and depository receipts listed on other stock exchange.
Problems?
Time management
The voting choice is a new mean of implementing the second Shareholder Rights Directive and local regulation issued for implementing it. Listed shareholdings are characterized by the presence of chains of intermediaries:
- custodians,
- brokers,
- central securities depositories,
- asset managers
Sometimes the institutional investors are very busy, and they are sending the voting instructions much to late, voting arriving to the listed companies after the deadline (or even after the general meeting).
Avoiding criticism
A second comment is that the new voting choice options offer asset managers a way to deflect some of the criticism related to ESG matters towards their funds’ institutional clients. The criticism identifies a new future discussion: the role of all institutional shareholders in listed companies and the transparency of their voting behavior.