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Vanguard bullish on proxy votes for the masses

By Ross Kerber

September 17, 20243:03 PM EDT

Commentary | By Ross Kerber

Sept 17 (Reuters) - The opinions expressed here are those of the author, a columnist for Reuters. This column is part of the weekly Reuters Sustainable Finance newsletter, which you can sign up for here.

Only 2% of Vanguard investors opted in to a pilot program to influence their funds' proxy votes this year, the Pennsylvania-based asset manager said, a low rate I thought might suggest its clients don't care about corporate elections.

Not so, said John Galloway, Vanguard's global head of investment stewardship. The paltry rate reflected the challenges of reaching a vast customer base through intermediaries like brokerage firms, Galloway told me and a group of other business journalists on Monday.

"We're committed to bringing this to scale," Galloway said on a video call. He said to expect new pilot programs in 2025 as his team works out technical solutions to communications problems. Eventually Vanguard aims to offer proxy voting options to all its equity index products, which account for $6.6 trillion of its $9.7 trillion of assets under management.

Traditionally individual retail investors only vote about 30% of the shares they own. That should be the natural rate for Vanguard's own investors as well, Galloway said. "We're pretty bullish," he said.

Putting more proxy voting power in the hands of investors sounds great in theory. But so far experiments by Vanguard, BlackRock, and others have had little if any impact on corporate election outcomes, said Bruce Goldfarb, president of proxy solicitor Okapi Partners.

Investors, Goldfarb said, may be content to leave the process to their asset managers. While there was a lot of early interest, "I think some of that momentum has slowed as retail investors realize it's a lot of work to vote their shares," he said.

Corporate elections have drawn increased attention since the financial crisis as activists used them to pressure companies on environmental, social and governance matters. Some executives say regulators have given shareholders too much power to shape the agenda of corporate annual meetings.

The rush of assets into low-fee passive funds like the famed Vanguard 500 Index Fund has given their managers outsized influence as major owners of top U.S. corporations. Their size has raised concerns from many sides, and giving clients more voting power could reduce the heat.

Rather than allowing votes on individual companies, the funds' programs mostly let investors chose the flavor of how their money is voted. For instance last December Vanguard said under its "Investor Choice" program it would allow investors in five funds with a combined $100 billion to choose among four policies to direct how their assets would be voted.

Of the 2 million investors eligible to participate, only about 40,000 signed up, Vanguard now says. Moreover, of that group, 43% selected the option to vote as the Vanguard fund managers would have in any case. Another 30% chose an option to vote as company boards recommended - hardly a rock-the-boat message from the Main Street shareholders Vanguard services.

Galloway said the data was still valuable as an answer to lingering questions about what investors want.

He also noted how, not surprisingly, of the investors in the Vanguard ESG U.S. Stock ETF who participated in the pilot, 78% chose an ESG-friendly voting policy, more than three times the 24% rate at which all pilot participants went with ESG.

In a report in August, Vanguard said it did not back any of 400 shareholder proposals on environmental and social matters. Galloway said that with more direct voting options, ESG-minded fund investors will be able to express their views better.

“Over time, as we bring the Investor Choice program to scale, it will be clear there is not a ‘Vanguard vote’, but rather votes based on choices made by individual investors,” Galloway told me in a followup e-mail.

Reporting by Ross Kerber; Editing by David Gregorio

Ross Kerber Thomson Reuters

Ross Kerber is U.S. Sustainable Business Correspondent for Reuters News, a beat he created to cover investors’ growing concern for environmental, social and governance (ESG) issues, and the response from executives and policymakers. Ross joined Reuters in 2009 after a decade at The Boston Globe and has written extensively on topics including proxy voting by the largest asset managers, the corporate response to social movements like Black Lives Matter, and the backlash to ESG efforts by conservative politicians. He writes the weekly Reuters Sustainable Finance Newsletter....

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