Money managers in Europe are being forced to pay closer attention to their stewardship strategies as new rules have intensified investors' own governance efforts.
Now that the dust has settled on several changes to rules that are designed to improve governance in Europe — including the Shareholder Rights Directive II and requirements on U.K. trustees to formalize voting policies as part of their statement of investment principles, which became fully effective Sept. 3 and Oct. 1 this year, respectively — investors and their managers are focusing on implementation. SRD II requires investors and managers to vote on every stock in their portfolios at annual general meetings and disclose if votes were cast for or against any issues placed before shareholders and their reasons behind the vote.
Gearing up to meet these new requirements has not been an easy task for investors. Investors historically have relied on their managers and custodians to cast and deliver their votes. Challenges related to legacy voting chains remain, even with the new rules, investors said.
Managers' own policies often lack depth that would explain their rationale for a particular vote, they said. And even with the new rules paving the way for better stewardship, sources said a pooled fund setup, utilized by majority of the investors, means managers are unable split the votes — even if investors' own stewardship policies would require a different vote.
The U.K. Association of Member Nominated Trustees, which has 400 U.K. retirement plan members and combined assets of £600 billion ($791.3 billion), warned on Nov. 9 that there are technical barriers to meeting the stewardship obligations for investors in pooled funds because all investors are placed in the same omnibus accounts set up by custodians. Historically, managers haven't been terminated if their votes happened to conflict with an investor's preferences.
"Today, the only realistic option for investors wanting to express their voting preferences is to set up a segregated account, which is not feasible for many for other operational reasons," said Tim Manuel, U.K. head of responsible investment at Aon PLC in London.
"Some investors do set up segregated accounts, but for those that can't, they have little choice but to accept the manager's own voting policies and decisions," he said.
Janice Turner, co-chairwoman of the U.K. Association of Member Nominated Trustees, said that the majority of the U.K. investors utilize pooled funds, adding that many managers' voting policies available in those funds lack critical details.
"(If) fund managers' own policies are inadequate, (managers) should be pushing companies and taking an active role," Ms. Turner said. "You don't just engage with companies. If the company doesn't do anything, fund manager policy should say they are going to take action at an AGM," she added.
Aon's Mr. Manuel said managers tend to argue that they want to engage with their portfolio companies in a consistent way and follow a single policy. If votes were to be split, managers argue that the engagement with the company is weakened, he added.
However, he said: "I would say across the board the response from managers (to split votes or incorporate investors' wishes) has been weak." There is also a weak connection between engagement and voting that managers are undertaking, he added.
For example, fund managers limit their action to voting against specific resolutions but fewer votes are cast against the re-election of chairmen, he said.
Still, some managers are putting more effort to vote in alignment with investors' policies. Michiel van Esch, specialist governance and active ownership at Robeco in Rotterdam, Netherlands, said: "For pooled accounts, we would have a policy that is public so investors can verify if it aligns with their policy and we would do diligence with investors."
"At the end of every year, we check if we need to change it," he added. "We take feedback and see how we can review the policy," he said.
"We are getting questions for clarification from investors (about) how we are going to vote on this issue or that issue," he added.