Disenfranchising investors

Just before Christmas, the Financial Reporting Council issued a report on developments in corporate governance. It's worth a read, as there's quite a lot in there about the Stewardship Code etc. But the section I would flag up is that dealing with shareholder voting in pooled funds.

Currently quite a lot of pension funds invest through pooled funds. A number of those pension funds want to direct their own voting, because they want to be active in corporate governance and they don't necessarily want to follow the asset manager's policy. Practice on this varies considerably at the moment. Some asset managers will vote a proportion of the fund's shares in line with a pension fund's instructions, but some simply refuse to.

So a number of pension funds - the people who actually own the assets that are being invested - have asked that the FRC encourage asset managers to allow asset managers to vote in pooled funds by promoting this in the Stewardship Code. Essentially asset owners want help in removing a market impediment to being more active.

The FRC has said no.

While no regulatory or legal impediments were identified that prevent managers providing such a facility in response to client demand, a number of concerns were noted: the process is highly manual and could not easily be scaled-up in its current form; splitting the vote attributed to asset managers’ control may make it harder for managers to engage credibly with companies; and companies reported concern that it would lead to increased fragmentation of their register and make engagement more difficult. It was noted that owners that wish to direct their own votes already have the option of using a segregated fund.
On balance the FRC considers that this issue should not be addressed in the Stewardship Code. The FRC encourages asset owners that wish to explore the option of directed voting to discuss this with their managers and/or investment consultants at an early stage when letting a new mandate and choosing the type of account they hold, and would encourage those managers that offer this facility to indicate the fact when reporting on their stewardship policies under the Code. In addition, the NAPF’s Stewardship Disclosure Framework explicitly invites managers to disclose whether they offer this facility. 

Let's take this is stages. First, the FRC acknowledges that there is no technical reason why asset managers cannot offer this facility to asset owners. That means we have to take each of the arguments for or against promoting asset owner voting in pooled funds on their own merits.

So here are the arguments FOR such a change provided in the report -

er... none.

Now, we know that people have made arguments in favour, because that's why the FRC held meetings on the subject. But in its report on this issue it doesn't mention a single one of them. The only arguments that are reported are those made against. This might strike you as a little bit biased.

So what are the arguments against?

the process is highly manual and could not easily be scaled-up in its current form; 

Asset managers don't want to do it because it's a lot of hassle.

splitting the vote attributed to asset managers’ control may make it harder for managers to engage credibly with companies; and companies reported concern that it would lead to increased fragmentation of their register and make engagement more difficult. 

These arguments are essentially two sides of the same coin. Allowing asset owners to vote would add an extra voice into the engagement process, which could make it more difficult for both asset managers and issuers. Note, though, that this argument, put by either side, is not specific to pooled funds, it's equally true of voting in a segregated mandate. So it's not actually an argument against voting in pooled funds, it's an argument against asset owners voting! (I'm sure that's not how the FRC intend it to appear).

So the main argument used against promoting asset owner voting in pooled funds is that it is a lot of hassle for asset managers to put into practice. I can't help feeling this falls a long way short of convincing. 

If you're an asset owner, I would draw your attention to the names of some of those asset owners which lobbied for the FRC to promote their right to vote in pooled funds - 

BTPS
Railpen
USS
LAPFF

This is a group of the largest and most asset active asset owners in the UK. Yet even all of them arguing for a minor tweak to a 'comply or explain' Code couldn't convince the FRC. It's hard not to see this as the FRC giving in to the asset management industry, and through its weakness failing to help enfranchise some of our largest asset owners.

PS. It would be churlish of me to note that some of those investors pushing the issue of voting in pooled funds have also been very critical of IFRS and, increasingly, the FRC. So I won't.