Corporate governance - offering meaningful participation for investors in an ESG world

BlackRock Inc. recently announced its intention to introduce systems to allow its investor clients in the UK and US direct voting in decisions proposed by the corporates in which those clients are invested. This is a significant opportunity for institutional investors and pension funds to have a more direct influence on the policies of the companies in which their funds are invested and could raise expectations of other asset managers to follow suit.

Traditionally, the "joint stock company" was a collective endeavour where the shareholders would have the ability to control the direction of the corporation and buy and sell shares without affecting the day-to-day operation of the enterprise. The shareholders or members would be entered on the company's Register of Members and received a share certificate as evidence of their ownership. Directors would be answerable to the members in general meetings. It remains the case in the UK that a director has an overarching duty to "act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole" set out in the Companies Act 2006. However, for listed companies, how members participate and make their feelings known to the directors has changed over time. Particularly with the de-materialisation of shares in the 1990s and electronic share trading, listed companies are largely controlled by asset managers or brokers holding funds on behalf of investors. The underlying investors may participate in holding asset managers to account for their voting practices but they do not exercise direct control over the businesses they are invested in.

To date, many asset managers have maintained that the systems required to allow direct participation in voting decisions are too unwieldy and expensive to put in place. However, as investors become more sensitive to Environmental, Social and Governance (ESG) issues, asset managers are coming under increasing pressure to take into account underlying investors' wishes more effectively. The Financial Reporting Council's Stewardship Code for asset owners, asset managers and service providers sets out certain principles by which its signatories must abide in the management of assets on behalf of investor clients. These principles include that the signatories will "take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them". Blackrock Inc. is taking this one step further and allowing direct voting in certain circumstances.

This move will be particularly appealing to pension funds answerable to sponsors and members for ESG matters. Rather than relying on asset managers' voting policies, funds themselves may now be able to express a view on company decisions and be able to report back to sponsors and members that they have directly represented them as investors in an effort to make a difference on the company's direction of travel. Blackrock's approach may not be a complete game changer in the sense that it will not benefit smaller retail investors but it does represent an important step forward in corporate governance for listed companies. If other asset managers follow suit, it will be interesting to see what difference this makes to contentious issues like the ever thorny question of board remuneration. Could it herald an era of more influential shareholder revolts?