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Vanguard votes
Every year, thousands of US public
companies hold nonbinding shareholder votes on a handful of
symbolic questions. The most important of these is generally
“should we re-elect our board of directors,” which sounds like
it would not be particularly nonbinding or symbolic, though it
usually is. Usually nobody is running against the
current directors, so even if they don’t get a majority of the
votes they can keep their jobs. But if there are a lot of no
votes, that is symbolically embarrassing. (“At the end of
August, there were 35 zombie board directors at 27 US-based
Russell 3000 companies,” reports
the Financial Times,
where a “zombie director” is one who “failed to win at least
50 per cent support from shareholders” but stayed on the
board.)
And then there are other
questions, which are often proposed by shareholders and
address environmental (“should our company worry more about
climate change?”), or social (“should our company try to have
more racial diversity,” “should our company try to have less racial
diversity?”) or
governance (“should we have a chair of our board who is not
also the chief executive officer?”) matters.
If you are a diversified
individual investor who owns hundreds of different stocks, you
will get hundreds of proxy statements asking you to vote on
perhaps thousands of these questions. You will generally own
something less than 0.0001% of each of these companies, so
your vote is unlikely to tip the scales on anything. Even if
it did, though, it would tip the scales on some nonbinding
symbolic vote; it’s not like your vote will force the
company to do anything. And even if the company did do
something in response to the proposal — if it separated its
board chair and CEO roles, or became more or less diverse, or
even replaced a few directors — it is not immediately clear
whether, how much and in what direction that would affect the
stock price. Perhaps you could do some research to figure that
out, but, again, you’re voting on thousands of these
questions.
For most investors, there is
exactly one rational response to all of these proxy
statements, which is to throw them away without reading them.[2] Not
everyone will do this, however. Some people have a lot of time
on their hands and an intense interest in symbolic questions,
and they might go and vote all their proxies. If you are
passionately committed to making public companies more
diverse, or less diverse, perhaps it will be worth your while
to vote on thousands of shareholder resolutions at hundreds of
shareholder meetings. (After all, some shareholder went and wrote each
of those shareholder proposals, and those shareholders
probably weren’t motivated by rational economic calculation
either.) But that’s not a matter of investing; that’s
activism, or a hobby.
(Meanwhile, every year, a few
companies will hold binding votes
on economically material questions.
The most important of these is usually “should we do this
merger,” though there are also sometimes contested elections
for the board of directors (“proxy fights”) where the two
different slates have different strategic visions for how the
company should be run. And “should we be allowed to issue more
stock?” is also a surprisingly
common, surprisingly
important question put to binding shareholder votes. It might
be more rational for individual shareholders to vote on these
questions, though they frequently don’t, which can cause
trouble for companies with a lot of retail shareholders.)
Most normal diversified individual
investors these days, though, don’t own
hundreds of different stocks, not directly. They just own
mutual funds, index funds or exchange-traded funds. Those
funds own the shares of hundreds of different companies, and
those funds’ managers vote on all of these questions. This is
a good division of labor because these votes almost never
matter, economically, to the ultimate investors. Meanwhile the
funds’ managers have a fiduciary obligation to vote in some
reasonable way, and they have some economies of scale in
voting.
Do the fund managers vote in a way
that is in the best interests of the individual investors in
the funds? I think the rough answer is:
-
It doesn’t matter;
these are mostly nonbinding symbolic votes with limited
economic impact.
-
Yes, probably: They
have fiduciary duties, they have governance teams that
think about these questions, and they do the best job they
can to maximize the value of their portfolio on behalf of
their individual investors, including in shareholder
voting. I’m sure they get some calls wrong — they vote to
re-elect a director who is a bad director, or they vote
against a nonbinding proposal to ask for a report on
carbon emissions that would actually improve the company’s
performance — and there is at least one SEC
enforcement action against
a mutual fund manager who voted its shares too lazily.
But, in the aggregate, they are trying to do a good job,
and they are doing a good enough job,
taking into account Point 1, which is that none of this
matters very much.
-
On the other hand if
you are an individual investor who cares about these
nonbinding symbolic proposals as a matter of activism, or
as a hobby, you will probably be dissatisfied with how
your fund manager votes, at least some of the time.
There are two possible solutions
to the problem in Point 3. One is to have a bunch of different
fund managers with differing voting philosophies, who
advertise those
philosophies to investors to try to attract the ones who share
them. And in fact there are socially responsible investing
funds that try to attract customers by voting in favor of
diversity proposals, and anti-woke funds that try to attract
customers by voting against them.
There are problems with this
approach, though. First, the investors you attract this way —
the ones who care a lot about these nonbinding symbolic
proposals — probably won’t share your philosophy exactly,
and they’ll get mad at you if your environmentally responsible
fund votes in favor of directors at a coal company or
whatever. Second, you will attract very few investors
this way, because most individual investors rationally do not
care about how their shares are voted on nonbinding symbolic
shareholder proposals.
The other solution is to just give
the ultimate investors in the mutual fund the option to vote
their shares themselves, or at least some menu of voting
approaches, so that (1) almost everyone doesn’t have to worry
about it and (2) anyone who does want to worry about it can
get what they want.
The strongest flavor of this is
called “pass-through voting,” and you would expect that any
mutual fund that implemented it would find that almost all of
its customers reply “I don’t care” and then a few get pretty
into it.
Anyway:
|
About 40,000 individual investors in
Vanguard Group’s index-tracking funds participated in a pilot
program that allowed them to make their viewpoints known on
important issues facing shareholders. ...
John Galloway, Vanguard’s global head
of investment stewardship, said the program has succeeded in
giving clients a voice in the voting process. The firm plans
to add more US equity index funds over time, so that more
individual investors can “align their investment portfolios
with their personal preferences,” he said. …
In the pilot, investors were given
four options: They could vote in accordance with what the
companies’ boards are recommending; they could support what
Vanguard’s stewardship team is advocating; they could decide
not to vote at all; or they could back Glass Lewis’s stance on
environmental, social and governance shareholder resolutions.
Vanguard said Tuesday that 30% of the
40,000 investors opted to stick with the companies’
recommendations, 43% went with Vanguard’s team, 2% decided not
to vote and 24% aligned their voting with Glass Lewis.
|
And:
|
“It is a data-driven answer to the
question that some have raised about, ‘What do investors
actually want?’ and ‘Is it appropriate that the asset manager
is picking how their shares are voted?’,” said John Galloway,
global head of investment stewardship at Pennsylvania-based
Vanguard, who heads the proxy pilot programme. The data shows
that for many investors, “that seems totally appropriate
because they are choosing to pick that same policy”.
|
It is a modest program in that it
gives investors three “let a professional vote my shares for
me” choices (with the professionals being Vanguard, Glass
Lewis or company management) and one “don’t vote my shares at
all” option. A more ambitious program would have more options,
like “let me vote my own shares individually on each
question,” for the people who are really into it, or “let a
celebrity vote my shares for me,” for pure marketing.
That’s a good idea, someone should do
that, you pay like Ryan Reynolds and Taylor Swift and Jordan
Peterson and Oprah Winfrey to go through all the proxies in
proxy season and decide how to vote, and then you market to
investors “vote your shares the way Taylor Swift tells you
to.” Actually never mind, I doubt you could pay them enough to
do this. Because it’s not very valuable!
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2.
You probably get them all electronically so this is not
especially wasteful. View in article
