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BlackRock, the world’s largest asset manager, in October 2021 plans to expand the voting options for US and UK institutional clients and pooled pension funds that are invested in its index strategies, allowing them to directly vote on resolutions at annual meetings. The change is currently set to take place next year and is to affect approximately half of the approximately £3.5tn index equity assets that it currently holds under management.

Under the new system, BlackRock’s clients will be able to either vote proxies according to their own policy, choose from a menu of third-party proxy voting policies, vote directly on select resolutions or companies, or continue to use .

This has been welcomed by various stakeholders, including Head of Pension Investments and Responsible Investing at Scottish Widows, , who described the ability of BlackRock’s clients to align voting in pooled funds with their own stewardship views and needs as ‘a huge deal’.

What about retail investors?

Although there is much to be celebrated in the new voting options, what is missing from BlackRock’s announcement is any form of enfranchisement for retail investors holding shares through intermediated securities.

This issue is aptly summarised by Clive Garston, consultant in corporate law at DAC Beachcroft:

‘One of the principles of English company law has always been that shareholders have the right to vote their shares, unless such shares do not carry a vote. In publicly quoted companies it was the practice for each shareholder’s name to be entered onto the register of members and for that shareholder to hold the legal title to the shares and receive a certificate of ownership. This gave each such shareholder the right to vote, receive communications from the company and exercise all the rights of being a shareholder. The only exception was if the shareholder chose for his shares to be held in a nominee name. In that case the nominee would be the legal owner of the shares and have the rights of ownership with the beneficial interest in the shares belonging to the ultimate economic owner. 

In the late nineties publicly quoted shares started to be held in electronic form rather than in the old way of holding physical certificates. In the UK, such shares have been held in CREST. Members of CREST are pension funds, brokers or large financial institutions. In theory there is nothing to prevent a retail investor becoming a member, but in practice this does not happen. The consequence of this is that small investors have in effect lost the opportunity to exercise their shareholder rights. Almost all quoted shares are now held in CREST and retail investors will have their shares held by a broker nominee company or trading platform, who will exercise these rights. The terms of any arrangements with the broker or platform could require the consent of the underlying shareholder, but this rarely if ever happens in practice.’

Garston concludes that although BlackRock’s announcement ‘will expand the opportunity for institutional investors to participate in proxy voting decisions for those that do not wish to outsource these decisions’, it will nevertheless ‘not assist small retail investors’.

Law Commission proposals

The Law Commission has looked at the issue of retail investor voting disenfranchisement through a call for evidence in 2019, and a scoping paper in 2020 (for more information, see: Law Commission seeks views on intermediated securities,  and Law Commission publishes scoping paper on intermediated securities, ). For voting rights, the suggested some possible solutions that the Law Commission believes any future review of voting should consider, which include the following:

• the creation of a new obligation on intermediaries to arrange for ultimate investors, upon request, to attend meetings, vote and receive information that the company sends to its members

• the extension of the application of the Shareholder Rights Directive II to enhance the rights of ultimate investors

• potential amendments to facilitate the confirmation to ultimate investors that their votes have been received and counted by the company

• potential improvements to the procedure under section 793 of the Companies Act 2006 in order to enable companies to identify ultimate investors

• potential amendments to facilitate the confirmation to ultimate investors that their votes have been received and counted by the company

However, as of yet, there has been no sign of concrete reforms in relation to the corporate governance concerns expressed by academics and practitioners during the call for evidence, including regarding the exercise of investor voting rights.

Garston notes that ‘the Law Commission has acknowledged that the system of intermediated securities prevents investors exercising shareholder rights…[and] advocates improvement rather than abolition of the system’. It has ‘outlined a number of possible future reforms to ensure that the ultimate investor will retain some of the benefits of share ownership. There is not a simple solution, but it is hoped that the Law Commission will be asked to give this question further consideration and make recommendations.’

Despite no discernible reforms on the horizon, in December 2020, the Minister for Pensions, Guy Opperman, mentioned the Law Commission’s findings during a to the Association of Member Nominated Trustees, which was given to announce the launching of a new working group to examine, among other things, the current ‘overly complex and archaic voting infrastructure’ and the ‘transparency of voting policies and outcomes’.

During his speech, Opperman repeated the Law Commission’s remarks set out in its scoping paper, addressing the fund industry’s line on pooled funds and voting—namely that it ‘assumes that the decision on whether to exercise voting rights to influence a company is one solely for the asset manager, and does not consider the wishes or objectives of an ultimate investor’. Opperman noted that this approach was at odds with the main principles of the updated Financial Reporting Council’s Stewardship Code, which expect fund managers to explain ‘how they have sought and received clients’ views’, as well as ‘how assets have been managed in alignment with clients’ stewardship and investment policies’—leading him to quip that for some managers the answer to both these questions should be ‘not at all’.

Blockchain as a solution?

More recently, the problem of intermediated securities has been addressed by Anne Lafarre and Christoph Van der Elst (Assistant Professor of Business Law at Tilburg University and Professor of Business Law and Economics at Tilburg and Ghent Universities respectively) in a drafted as part of the Blockchain & Procedural Law: Law & Justice in the Age of Disintermediation seminars.

The paper looked at blockchain as a technological solution to the problems associated with intermediated proxy voting and engagement systems, with Lafarre and Van der Elst arguing that blockchain technology would ‘enable us to address the main problems with current shareholder voting and engagement—the identification of shareholders by issuers, and the end-to-end confirmation that the votes are exercised by beneficial owners and are correctly included in the voting outcomes’. However, they also note that such reforms may take a while, given ‘the involvement of many intermediaries for whom the introduction of blockchain might lead to disruption of existing business models’.

BlackRock’s expansion of voting options is therefore something to be welcomed, albeit with the caveat that it does nothing to address the concerns raised in relation to the voting rights of retail investors holding shares through intermediated securities. It is yet to be seen whether anything comes of the Law Commission’s recent efforts and whether reforms will be put forward in the future.