02. June 2023
5 minutes

Sustainable Investing with OLZ - Introduction of Proxy Voting

While February was still the reporting season, the annual general meetings are coming up in the spring. Time for management to report to shareholders on the past 12 months. Time for shareholders to express their opinion, change the composition of the board of directors or give the company a new direction. But what happens to voting rights when you own shares in companies through a fund? In the fourth part of our blog series on the topic of sustainability, we would like to show how this issue is addressed at OLZ.

Active exercise of voting rights as a challenge

If the shares are held directly in their own custody account, investors are automatically invited to the General Meetings. They are free to attend (physically or nowadays also electronically) or to have their vote exercised by independent proxies. The situation is different if shares are held via a fund. Here, it is up to the fund management to exercise the voting rights. In addition, there are dozens, if not hundreds, of individual stocks in a fund portfolio, at best from companies spread around the globe - active exercise then becomes a challenge one way or another.

Just a few years ago, active voting within equity funds was a niche activity. A few activist-driven funds were the only ones to come out of the woodwork. The vast remainder, however, went with the flow and generally voted according to the recommendations of the board of directors. In the meantime, the understanding has sharpened that this cannot be in line with good corporate governance.

The solution: Proxy Voting

Governance as part of ESG in this context means exercising voting rights as an asset manager in the interests of the shareholder (i.e. the client) and definitely not blindly following the recommendations of management. History has repeatedly shown that the interests of the board of directors, management and shareholders do not always coincide - so critical questioning is definitely in order.

But who effectively goes to the annual general meeting in the end? And who determines the rules by which voting rights are exercised? As in other areas of our sustainability approach, we rely on external expertise here as well, if only for capacity reasons. Established proxies have specialized in representing shareholders collectively. This not only guarantees that they are actively exercised, but also increases the clout for common concerns. The proxies base their votes on guidelines defined in advance with the fund provider (or other institutional investors). These can be individually designed for a fund, or they can be based on an existing set of rules, which in turn are based on broadly supported international initiatives and guidelines. These include, for example, the UN Principles for Responsible Investment (UNPRI) or the UN Global Compact.

OLZ Swiss equity funds with active voting rights

The two funds OLZ Equity Switzerland Optimized ESG and OLZ Equity Switzerland Small & Mid Cap Optimized ESG were our first two products in which active voting was introduced in 2022 with the involvement of OLZ. For this, OLZ and the fund administration work together with ISS (Institutional Shareholder Services), one of the leading global providers of proxy voting services. ISS, in turn, bases its votes on its own SRI (Socially Responsible Investing) guidelines. These include recommendations for action on the composition of the board of directors, capital structure or compensation policy, but also on environmental and social issues.

Figure 1: Over 13% of votes on companies in our Swiss equities fund were against the recommendation of the board of directors (source: ISS, 2022)

The evaluation of the votes for the Swiss Equities Fund in 2022 shows that the guidelines are also effective. Of a total of 641 transactions to be dealt with, 85 were against the recommendations of the Board of Directors. Unfortunately, many large fund providers still simply wave through most of the proposals. But the pressure is increasing to face up to the responsibility towards the end customers and to exert a sustainable influence on the companies - because it is true: active shareholders strengthen corporate governance.

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