Faculty of law blogs / UNIVERSITY OF OXFORD

‘Direct’ Voting by Institutional Investors: A Trojan Horse?


Louise van Marcke
PhD candidate, Ghent University


Time to read

6 Minutes

A recent trend in shareholder voting at listed companies is that of voting choice: a program initiated by asset manager BlackRock in 2022 that allows its institutional clients to exert greater control over the exercise of voting rights in listed companies.

In essence, from January 2022, BlackRock has allowed some institutional clients of its index funds to exercise the index fund’s voting rights in portfolio companies in proportion to the percentage of the fund they beneficially own. For example: if the index fund holds 10% of the shares of a portfolio company, and an institutional investor is a 20% participant in the index fund, it will be allowed to decide how to vote 2% of the shares of the portfolio company. This is a departure from the status quo. After all, traditionally, to the extent that the assets of institutional investors were invested together with those of other investors in so-called pooled funds managed by BlackRock, at general meetings the BlackRock Investment Stewardship team (‘BIS’) would simply cast the fund’s votes in a uniform way, based on its own voting policies. In addition to this standard arrangement of having BIS cast votes according to its own voting policies, institutional investors in pooled vehicles can now also opt to 1) cast their portion of the fund’s votes through their own infrastructures, or 2) through BIS, but according to the voting policies of a third party such as voting advisory firms Institutional Shareholder Services and Glass Lewis.

For institutional clients who hold their portfolios through separately managed accounts (which allow investors to have a customized portfolio managed by BlackRock), these new options are less innovative: these clients have always been allowed to exercise voting rights themselves, through their own voting infrastructures. What’s new for them is that they are also given the option of exercising voting rights in accordance with the voting policies of third parties.

By the start of the 2023 proxy season voting choice will also be offered by two of the other largest asset managers in the world, Vanguard and State Street Global Advisors. It is to be expected that Fidelity will follow along shortly, though probably not before the start of the 2023 proxy season.

As a result, BlackRock, Vanguard an State Street, commonly referred to as the ‘Big Three’, have now fully committed themselves to extending voting choice to their institutional clientele.

The new voting choice options may well cause considerable change in (the perception of) shareholder voting at listed companies. Drawing on ShareAction’s observation in its 2021 voting analysis that ‘the six largest asset managers in the world (…) back fewer shareholder proposals than their proxy advisors – ISS and Glass Lewis – recommend’ and its confirmation in its 2022 voting analysis that ‘the four largest asset managers in the world vote more conservatively than their proxy voting advisors’, the possibility to vote according to proxy advisors’ voting policies may well have important implications for general meetings—in particular, when it comes to sustainability or ESG shareholder proposals. Based on ShareAction’s findings, while ISS and Glass Lewis recommended voting in favour of 75% (ISS) and 41% (Glass Lewis) of all environmental and social shareholder resolutions during the 2022 proxy season, the percentages by which the four largest asset managers supported such resolutions were well below 30%. It can thus be expected that the choice of voting in accordance with the guidelines of proxy advisors will, in the future, generate more ‘yes votes’ for ESG-oriented shareholder proposals.

Based on the latest numbers available, it seems that the uptake of the voting choice program at BlackRock has been relatively modest in its first year. While nearly half of all BlackRock’s index equity AUM are now eligible for voting choice, clients have only committed a quarter of those eligible assets to the program. Hence, 75% of eligible assets are held by institutional investors who have not engaged in voting choice and whose votes are still being exercised by BIS, in accordance with BIS’ voting guidelines.

Intermediated holding chains and shareholder engagement

Arguably, the idea of voting choice fits within the perception of granting more voting power to those who ultimately benefit from the equity stake in a listed company, and less to those institutions holding shares on beneficial owners’ behalf. Commentators have recently referred to voting choice as ‘pass-through and client-directed voting’ and argued that it falls within a set of ‘twenty-first-century developments [that] signal a new era of dynamic change to shareholder voting rights’. In fact, listed shareholdings are nowadays characterized by the presence of chains of intermediaries—(custodian) banks, brokers, central securities depositories (‘CSDs’), asset managers etc. that position themselves ‘in between’ listed companies and the shareholder base—that often cause discrepancies between the notions of ‘shareholder’ and ‘share owner’. Under different legal systems, this raises issues about who can be considered a formal shareholder, entitled to exercise voting rights (eg in the UK, only top-tier intermediaries who are CREST-members are recognized as ‘company members’ under the CA 2006). In many cases, the actor who is the formal point of contact vis-à-vis the listed company is not the beneficial owner. To make matters more complex, a secondary form of intermediation arises in the case of institutional investors, such as mutual funds, that pool the investments of many underlying (in their turn often institutional) investors.

Not only has there been increased focus on shareholder engagement in recent years, but there is also increased awareness of these chains and the role of underlying beneficiaries. By means of the second Shareholder Rights Directive and its Implementing Regulation, for example, the European legislator has imposed standardised formats and tight deadlines on intermediaries for the transmission of (voting-related) information throughout the chain (see art 3b – 3e SRD II and the corresponding articles and tables from Implementing Regulation 2018/1212). In the US the power of brokers to vote uninstructed shares has been restricted over the years by significantly limiting the number of ‘routine’ matters for which brokers may vote when they have not received voting instructions from their beneficial owners on the tenth day prior to the GM (the NYSE ‘Ten-Day Rule’, see NYSE Rule 452 and 402.08 of the NYSE Listed Company Manual).

Arguably, these regulations reflect a growing aspiration to grant more control over the exercise of voting rights towards the bottom of the holding chain, in the hands of ‘true’ ultimate beneficiaries of shares. In essence, then, the idea of direct voting seems to fit well within the picture of increased shareholder democracy with more control by beneficiaries. Many investors want to make use of intermediaries (for reasons of convenience, efficiency and cost reduction), but at the same time wish to get involved in the voting process at listed companies. The market is now paying more attention to this trade-off by developing new voting techniques.

Deflecting ESG-related criticism: pointing the finger towards those who vote

A second notable observation is that the new voting choice options have emerged amid rising criticism pointed to asset managers over sustainability and ESG. In November 2022, for example, activist hedge fund Bluebell Capital Partners published a letter it sent to BlackRock CEO Larry Fink, in which Fink was pressured to resign over ESG ‘hypocrisy’. In Bluebell’s letter to BlackRock, the firm sharply challenges BlackRock’s high-profile public ambitions on sustainability in the light of its voting decisions at general meetings of portfolio companies, calling it a ‘gap between the ‘talk’ and the ‘walk’ on ESG investing’. Strikingly, and it seems for the first time now, the new voting choice options are purposefully made part of that argument. Bluebell heavily condemns the voting choice system as ‘a clear sign of BlackRock’s capitulation of its obligation to exercise its fiduciary duties and little more than a cute commercial tool’. Direct voting is denounced as being a Trojan horse—a technique, seemingly advantageous to institutional clients, that secretly serves an improper purpose.

There is something to be said for this position. Criticism that voting behaviour falls short on sustainability issues can probably only be directed at those who actually determine (ie control) how the votes should be exercised. With voting choice, asset managers seem to have effectively created a way to deflect some of that criticism towards their funds’ institutional clients. For many institutional investors, the exercise of voting rights can be considered a crucial delegated investment function of asset managers, from which asset managers would now free themselves. Voting choice has also been perceived by some as a response (ie counter-reaction) to growing concerns of ‘obscene’ asset hoarding by the Big Three. To say the least, picturing voting choice as ‘an attempt to defuse criticism on the centralization of voting power from common ownership’ (Bluebell) offers an intriguing new take on voting choice. Whatever its truth, such criticism at least allows institutional investors (and perhaps regulators?) to critically think about the role of institutional shareholder voting at listed companies.


While direct voting techniques offer the potential of contributing to shareholder engagement and efforts to involve ultimate beneficiaries of listed shares in how voting decisions are being made,  they also attract criticism from the field. It is now alluded that asset managers—who, compared to the opinions of proxy advisors, have been shown to vote relatively conservatively on ESG matters—shift their responsibility and voting power to their clients to avoid ESG-related criticism. Now that ‘voting choice’ has been implemented by all of the Big Three, it will be interesting to see how this narrative plays out in practice during the 2023 proxy season.

Louise van Marcke is a PhD candidate at Ghent University and a junior academic visitor to the Commercial Law Centre at the University of Oxford.


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