Corporate execs see complications from more fund democracy

By Ross Kerber

November 27, 2024  12:10 PM EST

Nov 27 (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....

Programs to let investors influence the votes cast by their mutual funds at corporate annual meetings could complicate the contests, company leaders worry, hardly the goal of reformers.

BlackRock, Vanguard and State Street have each rolled out capabilities for investors to shape the funds' votes on matters like the election of directors or advisory votes on executive pay. Sometimes known as the Big Three, these providers of low-cost passive funds have come to run some $26 trillion between them, a massive share of Corporate America.

The programs offer an intriguing path for shareholders to shape executives' decisions rather than just to sell the stocks of companies when they aren't happy - the "Wall Street Walk." The programs also could reduce the political criticism the firms face over their votes tied to climate change or workforce diversity matters.

So far the major programs do not allow fund investors to direct votes at particular companies. Instead they allow investors to choose among voting policies like those licensed from proxy advisory firms Institutional Shareholder Services, Glass Lewis, and Egan-Jones.

Paul Washington, CEO of the Society for Corporate Governance, which represents corporate secretaries and other professionals, said its members welcome the efforts in principle. But some worry it will be harder to communicate with individual fund investors than it is now, when company executives must only win support from the stewardship teams at each of the Big Three.

"There are some challenges with moving the voting further upstream" Washington said.

Fund executives have acknowledged voting technology and accounting need improvements to facilitate shareholder communications to grow programs that have accounted for few votes so far. Even a small reduction in the voting power of the Big Three could make a difference in close contests.

"The impact of voter choice programs is that they introduce a new variable into these wells of support that didn’t previously exist, potentially drawing from them and making it less certain how much voting authority those investors will ultimately retain," said Steven Pantina, the co-founder of Proxy Analytics LLC of Newark, N.J., which helps companies interact with shareholders.

Last year Washington's group sent ISS a letter objecting to the name of one of its voting policies, which it terms "board-aligned." The Society said the policy was essentially the same as ISS's traditional benchmark policy with a few exceptions such as on environmental or social matters.

Asked about the letter, an ISS representative said the policy is clearly described to clients and accurately labeled. "The policy is not 'vote with management,' and, accordingly, nor is its name," said the representative.

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....