Proxy voting: what fund investors need to know about it and how it’s going

For U.S. public companies, Election Day is held annually when common shareholders can vote on directors, executive compensation, and other business-related matters.

But if you are an investor whose primary exposure to equities is through mutual funds and retirement accounts, your role in this “shareholder democracy” will likely be limited. This is because the votes are generally not awarded to small investors in mutual funds or exchange traded funds. Instead, the asset management company that manages the fund votes, by proxy, on behalf of investors.

The result is that asset managers wield great power, although investors, large and small, seek more voice. With that in mind, we’re answering some frequently asked questions about how your money is spent in proxy voting.


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Who controls public enterprises?

For the most part, public companies are controlled by the votes of common shareholders and the directors of companies they elect. But asset managers have tremendous influence. John C. Coates of Harvard Law School extrapolates this concentration of ownership to the “twelve problem.” In a discussion paper, he argued that “in the near future, around twelve people will have practical power over the majority of US state-owned companies.” He meant that asset managers like BlackRock Inc.,

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Vanguard Group and Fidelity Investments, investing primarily on behalf of retirement investors and savers, would essentially serve as a 12-headed board of directors, dominating all public companies.

Who holds the keys

Percentage of listed shares held in the United States, by investor category

How do asset managers tend to vote?

For years, asset managers have been criticized for too often supporting the status quo in public companies, which has meant that they have consistently voted their stocks in accordance with management. (Shareholders can vote “for,” “against,” or “abstain” on their ballots.) But in recent years, asset managers have taken their fiduciary duty to the next level by backing the proposals. dissenting shareholders and directors and opposing mergers. Their positions on burning issues such as climate change, diversity and board composition have also become more specific, culminating in the election of Exxon Mobil XOM directors last summer. 0.82%

board of directors who were appointed by upstart hedge fund Engine No. 1. With a relatively small stake, but in-depth analysis on Exxon‘s

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position in the market, Engine No. 1 succeeded in convincing the major shareholders of the company to support three of its four candidates for director position

Could asset managers ever give up control of their votes?

Perhaps slowly, as asset managers resist criticism of their voting power. Starting this year, BlackRock is giving more of its institutional clients, such as pensions and endowments, the ability to vote themselves. BlackRock called the change “the first in a series of steps to expand the ability of clients to participate in proxy voting decisions when they are legally and operationally viable.”

Haven’t the big investors always had their say?

For years, some big clients of index managers like BlackRock, State Street Body

State Street Global Advisors and Vanguard have retained their proxy voting rights and, of course, individual shareholders and institutional investors who manage their own money retain their voting rights. BlackRock’s change this year extends that right to around 40% of its $ 4.8 trillion index-linked equity assets in the United States and the United Kingdom, including $ 750 billion in institutional mutual funds such as those that could be held in pension plans. This shift has come amid the rise of ETFs (including those offered by BlackRock) that focus more on environmental, social and governance (ESG) factors in investing. Additionally, after winning the Exxon Mobil proxy contest, hedge fund Engine No. 1 launched an ETF with the ticker VOTE, aimed at giving small investors a voice in what S&P 500 companies are doing by promising adopt a more critical view on management and shareholder proposals related to ESG issues. “For years, the typical S&P 500 fund voted against 80% or 90% of social and environmental shareholder proposals,” said Yasmin Dahya Bilger, Managing Director and Head of ETFs at Engine No. 1. “For de many investors, this is not enough. . “

How do I know how my fund voted?

While some asset managers have started communicating their proxy race votes ahead of time, the bigger ones are still playing their cards close to the waistcoat.

More in ‘Need to know’

Since 2003, fund managers have filed an N-PX form with the Securities and Exchange Commission each year, detailing how the shares were voted on and whether they voted for or against management’s recommendations. This means that investors often have to wait for those deposits to find out how their funds voted. In September, the SEC proposed additional rules on the disclosure of proxy votes by fund managers and other large holders, including standardization of voting categories (board of directors, extraordinary transactions, e.g. compensation, etc. .) and a requirement that reports be machine readable. , allowing better comparability between funds. The SEC followed that up in November by passing a universal proxy rule for contested elections that, among other things, would reduce costs and simplify the vote count, making it easier to come up with dissenting directors.

Who else could influence voting decisions?

If a new voice were to emerge in proxy voting, it could be pension plan participants, especially those whose company plans access shares through separate accounts or mixed trusts. “Even pension funds are facing increasing calls from their own members – teachers, firefighters, police, construction workers – to exercise their shareholder voice more,” says David Webber, professor of law at Boston University and author of “The Rise of the Working Class Shareholder.” He adds, “It’s not just a top-down story. There is also an upward pressure.

Could ordinary investors eventually have a say?

While they don’t probe opinions on every hot topic or contested vote, mutual fund companies have recognized the shift in consciousness and become more transparent about their voting policies and expectations of companies. “I think we’re going to see an expansion of what it means to be a trustee as a forward-thinking asset manager,” says Alex Lebow, co-founder and CEO of Say Technologies, an investor engagement company recently acquired by Robinhood Markets Inc.

While Say initially focused on individual investor questions during corporate earnings phone calls, Mr. Lebow said the company could also help asset management firms and individual mutual funds contact their clients. own shareholders with regard to the orientation of proxy voting.

Glossary

Trustee: Portfolio managers, who invest in stocks on behalf of mutual fund and ETF shareholders and others, are expected to act in the best interests of their clients, including with respect to how they vote on business matters.

Proxy contest: When a shareholder or group of shareholders votes on certain shares of the company (director nominees, mergers) directly to all shareholders without the support of the company or its board of directors.

ESG: Shareholder proposals in the areas of the environment, society and governance (disclosure on climate change, racial equity, human rights) are on the increase and obtain the support of a greater number of shareholders of listed companies in the USA.

Stewardship: When asset managers take responsibility for engaging companies and voting by proxy on behalf of fund shareholders, pooled investment vehicles and separately managed accounts.

Mr. Weinberg is a writer from Connecticut. He can be contacted at [email protected]

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