How investors can have more say

How investors can have more say

Big index fund companies such as BlackRock, Vanguard, State Street and Fidelity are typically among the largest shareholders of publicly traded companies. Yet their ultimate owners – the millions of people who own stakes in index funds – have had little voice.

(NYTIMES) – When you buy shares of a publicly traded company, you’re a part owner and, in theory, have a right to vote on some important matters that come before that company’s board of directors.

Yet millions of people have had virtually no voice in the decisions of publicly traded corporations, even though they have ownership stakes.

The problem is that those stakes are indirect – held through mutual funds, exchange-traded funds (ETFs) and pension funds. Under current regulations, these funds control voting rights that might otherwise go to shareholders and to those who receive or are vested in pensions. And as indirect ownership of stocks grows, the problem is worsening.

Historically, these obstacles have made the notion of shareholder democracy something of an oxymoron, as I’ve pointed out in several columns.

But there has been substantial progress lately in three areas that could give shareholders a far greater voice: innovations aimed directly at retail investors, redistribution of some of the power held by asset managers so institutions such as pension funds and universities can more readily control their proxy votes, and proposals on the regulatory front that would reverse Trump administration measures restricting proxy access and investor choice.

Asking investors what they want

Investing in broad, low-cost, diversified mutual funds and their cousins, ETFs, makes a lot of sense. They enable working people and retirees to hold shares in the entire stock and bond market easily and inexpensively, producing excellent long-term investment returns.

But from the standpoint of shareholder democracy, such funds have amassed so much power that, in the view of many experts who have studied them closely, they have come to pose enormous danger. The Securities and Exchange Commission estimates that indexed mutual funds and ETFs own 30 per cent of the equity in the US stock market, and the proportion may be approaching 50 per cent when you include indexing strategies used by institutional investors.

Big index fund companies such as BlackRock, Vanguard, State Street and Fidelity are typically among the largest shareholders of publicly traded companies. Yet their ultimate owners – the millions of people who own stakes in index funds – have had little voice.

Fund companies have rarely asked shareholders what issues concern them, to say nothing of how they’d like their votes cast. And it’s extremely difficult for investors to know how their fund companies voted, and what their policies are on issues like climate change, corporate compensation (“say on pay”) and diversity, equity and inclusion.

Well, that’s beginning to change. Several intriguing experiments are under way.

One of the most interesting is a collaboration between an activist hedge fund, Engine No. 1, and asset management platform Betterment, demonstrating that it’s easy to ask index fund investors what corporate battles they believe are most worth waging.

The hedge fund in June started a new ETF, available to individual investors. The fund is formally called Engine No. 1 Transform 500 ETF, but it has a catchier ticker symbol: VOTE. In important ways, the fund is quite ordinary: a plain vanilla ETF with an expense ratio of 0.05 per cent, making it a reasonable alternative to standard S&P 500 index funds run by far bigger companies.

But this one has the express aim of “harnessing the power of investors to actually change companies”, said Mr Michael O’Leary, managing director of Engine No. 1. Those may seem idle words, until you recall that Engine No. 1 has already shaken up one company – ExxonMobil, in one of the most startling proxy fights of recent times.

The little hedge fund managed this spring to get three dissident directors elected to Exxon’s board with the goal of pushing the energy giant to reduce its carbon footprint and accelerate its shift from fossil fuels. While Engine No. 1 held only a tiny fraction of Exxon’s shares, its arguments persuaded BlackRock, State Street and Vanguard to take its side.

Now, Betterment has included the new VOTE fund in an investment portfolio aimed at “socially responsible” investors, and has been conducting a test poll, asking those investors what battles they want Engine No. 1 to wage. More than a thousand shareholders responded, with 60 per cent saying they wanted the hedge fund to stick with climate change: “Push more oil and gas giants to embrace the transition away from fossil fuels” was the overwhelming preference.

Mr Boris Khentov, head of sustainable investing at Betterment, said: “We need shareholder democracy, and we’re not going to have it unless shareholders have a way of expressing what they want. Well, we decided that it was important to actually ask them.”

Regulators and big institutions taking steps

British regulators have been pushing money managers to give institutional investors such as pension funds more control over their corporate proxy voting. That movement has begun to reach the United States.

BlackRock manages US$4.8 trillion (S$6.5 trillion) in stock index strategies and controls the proxy votes for most of it. An announcement by the company last month indicated that it will be dispersing some of that power, giving institutional investors, such as pension funds and universities, more options and control over their voting starting next year.

BlackRock’s move is voluntary. Regulators in the United States haven’t been involved, so far.

And the Securities and Exchange Commission in September issued a proposal that would make fund proxy voting much easier for investors – and journalists – to track. It would require that reports on voting decisions be issued in a standard computer-friendly format, making them readily available for tabulation, analysis and dissemination. What the proposal has not done, however, is to speed up the frequency of reporting on proxy votes, which needs to be done only annually under existing rules.

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