The Investor & Issuer Forum has endorsed a set of proposed best-practice principles on pass-through voting (PTV), backing new research which says it is neither inherently good nor bad for stewardship, but depends on how clearly it is designed and governed.
Despite increased debate, the report found that PTV currently affects only a small fraction of UK equity votes. However, the research stressed that PTV, a mechanism enabling institutional investors in pooled funds to influence voting decisions, is likely to persist and potentially grow. As such, the research said it is essential to establish clear best-practice principles now rather than react later.
The principles were developed as part of research carried out by Tom Gosling and Suren Gomtsian at the London School of Economics, in collaboration with the Investor Forum, with support from the International Securities Lending Association (ISLA) University Forum.
The purpose of the research was to explore the emerging dynamics and implications of pass-through voting in the UK equity market, said Gosling.
Speaking at the Investor & Issuer end of year event in London this week, Gosling said: “Pass-through voting isn’t just going to go away. The market’s demanding it, and the market always supplies what the market demands.”
Pass-through voting principles
While the research stops short of formal guidance, it proposes a set of best-practice principles.
First is clarity of purpose. Gosling said asset owners should be explicit about what they are trying to achieve through PTV, how it supports their overall stewardship objectives, and what trade-offs they are prepared to accept.
He added that pass-through voting is not a substitute for full stewardship alignment and should be treated as a targeted or “second-best” solution where changing managers or mandates is not possible or practical.
Second, the report stresses the growing importance of policy oversight. Gosling said that asset owners and asset managers should take joint responsibility for the development, selection, monitoring and periodic review of voting policies, with a clear line of sight to fiduciary standards.
In cases where voting is effectively automated through proxy adviser policies, the report stressed the need for robust oversight of both policy content and execution, warning against uninformed or purely mechanical voting.
Finally, Gosling said that both communication and transparency are essential for effective PTV. He said that voting policies must be communicated clearly to clients, and issuers should have greater visibility over the proportion of votes subject to PTV and, where possible, the identity of significant asset owners directing votes.
Speaking to IPE, Sallie Pilot, managing director of the Investor & Issuer Forum, said: “This research has tackled a complex and evolving issue, with strong views across the market, with intellectual rigour, balance and a genuine openness to what the evidence revealed. Importantly, it reflects exactly the approach the Investor & Issuer Forum is trying to take – not advocating definitive solutions but helping the market think more clearly about the implications for stewardship, accountability and engagement.”
Without improved transparency, the report concluded that PTV risks increasing fragmentation, uncertainty and frustration across the stewardship ecosystem rather than strengthening it.
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