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Index fund investing is taking the world by storm. In December, for the first time, U.S. investors put more money into index funds than actively managed funds, where managers pick stocks and bonds.
There’s a good reason why index funds are popular. For most people, owning a slice of the entire market at a lower cost with an index fund is more profitable than buying and selling securities on your own or through a manager.
But the continued growth of index funds has come at a cost. One significant problem is that most diversified funds own shares in every publicly traded company in the market. So if you don’t like a company or its specific policies, you’re stuck. Until recently, you couldn’t even exercise your vote on issues you thought were important because your fund manager insisted on voting for you.
Well, a lot has changed.
BlackRock announced this month that it is expanding an experimental program that gives investors six policy choices when voting on corporate issues, including a focus on climate change and prioritizing religious values. State Street already has a similar program in place, and Vanguard is also sneaking into this type of voting choice.
Collectively, the three giant fund companies have given millions of investors with $4.6 trillion in assets a way to express their opinions on corporate issues. This is certainly an improvement. And even if it alleviates some thorny issues for the big index fund companies, it could ultimately lead to significant changes for corporate America as a whole.
problem
In the view of scholars such as John Coates, author of “12 Problems: When a Few Financial Institutions Control All,” the growth of index funds has the unintended consequence of undermining shareholder democracy. is bringing.
Coates, a Harvard Law School professor and former Securities and Exchange Commission official, said in an interview that a handful of index fund companies, led by BlackRock, Vanguard and State Street, have become universal owners.
“The power of index funds is too strong,” he said. “They are the largest shareholders of nearly every publicly traded company. And the trend toward over-concentration of ownership continues.”
Until recently, index fund executives, rather than the millions of people who invest in the funds, had full authority to vote for, or represent, fund shareholders. This voting power gives fund executives the power to vote on important issues, such as how much a company’s chief executive is paid, whether a company’s operations are environmentally responsible, and whether it treats its employees well. I was able to have a decisive say.
For example, three years ago, BlackRock, State Street, and Vanguard cast a pivotal vote in a proxy fight for fossil fuel giant Exxon Mobil, adding dissident members to energy giant Exxon Mobil’s board of directors. Supported the selection of three people. Reduce your carbon footprint.
However, fund companies are worried about being in the public eye. They are embroiled in a culture war, criticized by the left for not fully embracing environmental considerations and by the right for overemphasizing them. Financial companies such as State Street and BlackRock have recently backed away from full-scale efforts to combat climate change, saying they need to focus more on purely financial imperatives.
Given that context, it is important to note that fund companies are beginning to give fund shareholders a significant degree of proxy voting options, and in effect share responsibility for difficult decisions with individual investors and institutional investors such as pension funds. It’s not at all surprising that this is starting to happen.
Whatever the motivations of fund companies, changes in voting choices can change the configuration of power in the corporate world.
voting choice
What companies are experimenting with is not true “pass-through voting,” but instead asking millions of fund shareholders how they would like to vote in thousands of specific proxy contests each year, and then actually voting accordingly. It’s about casting individual votes.
Instead, companies are offering investors something simpler and more manageable: a wider range of policy options.
For example, BlackRock announced on February 13 that it would offer a “pilot” voting selection project for the iShares Core S&P 500 ETF, a mediocre and popular S&P 500 index fund, to 3 million retail investors. (This stands for exchange-traded fund, which refers to an index fund that trades throughout the day on a stock exchange.) Many of the pension funds and other institutions that invest in BlackRock already vote by proxy as they wish. can do.
At BlackRock, half of the firm’s equity index assets, or $2.6 trillion, will be subject to what the firm calls “voting selections.” “As of December 29, 2023, customers with total assets valued at $598 billion use Voting Choice,” the company said in an email. “This represents approximately 25% of the total eligible assets,” it added.
State Street has already made $1.9 trillion of assets (more than 80% of total equity index assets) eligible for inclusion in the Proxy Selection Program. This includes a wide range of popular ETFs, although not the largest S&P 500 ETF, known as SPY.
About $250 million worth of fund assets held by individuals and about 10% of institutional assets are subject to six different policies, Lori Heinel, chief investment officer at State Street Global Advisors, said in an interview. He said it would be voted on. “We don’t think of what we’re doing as an experiment. We’re in the market. It’s available.”
Vanguard has launched its first commercially available index fund, but its progress is more gradual. Six of the funds, which have $100 billion in assets, are part of what the firm calls experiments. S&P 500 Growth, Vanguard Russell 1000, ESG US Stock ETF, Mega Cap, Vanguard Dividend Appreciation Index Fund. This is just the beginning, the company said in an email.
“We are using the pilot to gather customer feedback, refine our approach, and optimize the investor experience as we expand to more funds,” Vanguard said. It says there are four options, but two are more like no options. Don’t vote at all, or let Vanguard vote for you.
How to use
What this means in practice is that if you are an eligible shareholder, you can still let the fund company make your voting decisions (or in Vanguard, withhold your vote). But now there are other options.
If selected, voting will be based on recommendations from shareholder advisory services consistent with specific policies.
These are BlackRock’s options. Institutional Shareholder Services offers three pieces of advice:
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Socially Responsible Investment (SRI) Policy. This is clearly for investors who demand that companies behave “in a socially and environmentally responsible manner.”
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Catholic faith-based policy. It also generally requires “socially and environmentally responsible” behavior.However, according to BlackRock, last year this policy He opposed Coca-Cola’s failed proposal to request a report on how state abortion restrictions affect the company’s business.
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Policies in collaboration with the global board of directors. This is what most corporate boards want, and the vote is “generally consistent” with the board’s recommendations on “environmental and social issues.”
Glass Lewis has three policies:
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Benchmark policy. This includes classic good governance principles. Although many proxies are not binding, this policy requires the board to respond to shareholder requests and act as if they were binding.
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climate policy. Make your board compliant with strict environmental standards. The policy also addresses gender diversity, stating that “if women represent less than 30 percent on a board, climate change policy will result in a vote against all incumbent male nominating committee members for large and mid-cap companies.” “It will become.”
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A policy that emphasizes corporate governance. It emphasizes a “fiduciary responsibility to promote long-term and economic shareholder value.”
That’s not necessarily how these policies play out in actual voting. clear. On many issues, they will certainly produce different results. A case in point is last year’s proxy vote, which asked ExxonMobil to report on how workers and communities would be affected by the transition away from fossil fuels as plants close.
BlackRock said in an email that Exxon management, BlackRock’s own policymakers, and the board’s alignment policy all oppose the resolution. But Catholic faith-based policies, socially responsible investment policies, and Glass-Lewis benchmarking policies all supported it.
Unlike the 2021 proxy fight at Exxon, this one ended in failure. BlackRock is Exxon’s third-largest shareholder, according to FactSet. The only companies with bigger stakes are Vanguard and State Street.
This split in BlackRock’s huge vote was intended by Larry Fink, the asset manager’s founder and chief executive, when he said in a letter to the company’s shareholders last year: It may be something you did. our customer’s money. But that money doesn’t belong to these people. It’s not ours either.it’s ours clientAnd our responsibility and obligation is to them. ”
State Street’s policy choices are similar to BlackRock’s. His two program options for Vanguard include “Board-aligned Policies” and her ESG (Climate Change) Policy.
For the future
An important question is how voting programs will affect voting in this fledgling corporate proxy season. Lindsay Stewart, director of investment stewardship research at Morningstar, closely tracks voting patterns among fund companies. He says he doesn’t know if they’ve made much of a difference in the last year.
Professor Coates said current vote choice programs are complex and may not garner much attention unless companies find a way to focus on the most pressing issues each year. He cited the long-standing labor dispute at Starbucks, major climate issues at fossil fuel companies, or disputes over reproductive rights as areas that funders might emphasize. He said it was important to translate voting policies into actual voting and needed to be made clear ahead of proxy voting.
“I think this is progress, but it’s far from perfect,” Professor Coates said.
Now, at least, there is a prospect that fund shareholders who have been forced into silence will finally have a say.
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