Active Passive Management - Proxy Voting
Contrary to popular belief, passive ETFs which track indices do make active decisions when it comes to proxy voting elections.
Proxy votes are collective ballots cast on behalf of investors at company annual general meetings. Examples include proposed changes to share ownership, the structure of the board of directors, merger or acquisition approvals, and executive salary and benefits.
Ultimately, investment managers have a fiduciary duty to act in the best interest of investors facilitated by taking an active position regarding proxy votes.
Passive strategies continue to grow in Australia and globally. In the US, assets managed under passive strategies overtook active strategies in 2019. As passive investment strategies continue to grow, the power of proxy votes and corresponding manager elections will become more forefront to investor decisions. Ultimately, investment managers have a fiduciary duty to act in the best interest of investors facilitated by taking an active position regarding proxy votes.
At VanEck we have chosen to use a proxy agent who votes on our behalf. We have chosen to use the proxy voting company Glass Lewis which have developed a specific set of Environmental, Social and Governance (ESG) proxy voting guidelines which closely align with our views. The overall voting guidelines and ESG-specific policies are reviewed and updated annually.
Some examples of the proxy voting guidelines include:
- Director appointments
Evaluation of a company’s policies and actions with respect to board refreshment and diversity. Glass Lewis will vote against members of the nominating committee in the event that the board has an average tenure of over ten years and the board has not appointed a new nominee to the board in at least five years; or vote against the male members of the nominating committee in instances where the board is comprised of fewer than 30% female directors for large-cap companies, or against the nominating committee when there is not at least one woman on the board at mid- and small-cap companies.
The guidelines generally support proposals regarding the environment, in particular, those seeking improved sustainability reporting and disclosure about company practices which impact the environment.
- Labour and Human Rights
The guidelines generally support enhancing the rights of workers, as well as considering the communities and broader constituents in the areas in which companies do business.
- Health and Safety
The guidelines support proposals calling for the labelling of the use of genetically modified organisms (“GMOs”), the elimination or reduction of toxic emissions and use of toxic chemicals in manufacturing, and the prohibition of tobacco sales to minors.
In addition, some of the ESG-specific updates include:
- Board Accountability for Climate Related Issues
For companies with GHG emissions representing a financially material risk, clear and comprehensive disclosure regarding climate risks, including how they are being mitigated and overseen, should be provided in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Generally, the boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues.
- Retirement Benefits and Severance
Shareholders are required to approve severance payments exceeding 2.99 times the amount of the executive’s base salary plus bonus. If above the threshold, considerations may be given to vote against these proposals.
- Racial Equity Audits
When analysing racial or civil rights-related audits, some of the factors are assessed:
- The nature of the company’s operations;
- The level of disclosure provided by the company and its peers on its internal and external stakeholder impacts and the steps it is taking to mitigate any attendant risks; and
- Any relevant controversies, fines, or lawsuits.
We always have the option to override the Glass Lewis recommendations. We will vote against recommendations if we review major material proxy votes and deem they are not in the best interest of investors.
Even though passive funds do not actively select securities, they can influence the way companies are operating by actively voting.