Law professor Caleb Griffin writes in the Oxford Business Law Blog offers three options for addressing the problem he sees in concentration of proxy voting rights in just a small handful of players, primarily index funds:
Passive funds will soon own the majority of all U.S. equity assets, and the way they vote their proxies will effectively be the ‘last word’ in corporate governance.As a result of this phenomenon, two seismic shifts in corporate governance are underway. The first is an unprecedented concentration of voting power in the hands of these few large shareholders. Indeed, passive indexing has concentrated the power of dispersed investors to such a degree that it is beginning to challenge long-held assumptions about the separation of ownership and control. Due to their dominance, Big Three proxy voting ‘guidelines’ essentially become market-wide governance standards, which issuers ignore at their peril. Thus, indexation has concentrated shareholder power to such an extent as to potentially upend the balance of power assumed in a Berle-Means corporation.
The alternatives he suggests are generalized input from investors, generalized information from investors gathered by the institutions, or some form of pass-through voting.
We appreciate Professor Griffin’s concerns but see no merit in his proposed solutions. Anyone who wishes to have a say in how proxies are cast has two good options already: purchase stock directly or select the fund manager on the basis of the proxy votes and proxy voting policies, which are now publicly disclosed thanks to the tireless work of our Chairman, Robert A.G. Monks, though not as easily accessible as they should be.
Professor Griffin has no data to show that the exercise of the franchise by sophisticated financial professionals managing funds over the long term and operating as fiduciaries is anything less than optimal, or in any event, less optimal than the alternatives he proposes. Data show that only 29 percent of investors who opt in to voting actually vote. It will be tough to get a quorum if participants in 401(k)s start getting flooded with shrink-wrapped blue packages every spring. These people have no special expertise in the portfolio companies or the complexities of CEO pay plans. Why are their views more valid or more economically efficient than those of the fund managers?
The solution here is better disclosure and more customer choice. If investors/plan participants can choose between one index fund that votes against excessive pay and in favor of shareholder resolutions on climate change and another does not, let them decide how important these issues are and which manager they want. That is far more likely to produce an optimal result than setting up some sort of unfocused focus group.