New Study on Proxy Voting by Index Funds — Our Supplemental Comment to the SEC

Another supplement to our earlier comments:

We incorporate by reference and make a part of this record a study by joseph Farizo, (Black)Rock the Vote: Index Funds and Opposition to Management (March 2020) with its conclusions, conclusively and decisively refuting the unsupported allegations of “robs-voting” and supports our description of the conflicts of interest fund managers are subject to in voting shares of portfolio companies with whom they may have conflicts in other commercial relationships of the firm.

Index funds in the sample are submitting votes on proposals at companies their family does not hold in its active funds 27% of the time.

Index funds and active funds do not differ greatly in their average rates of opposition to management, as the difference is 0.3% (t-stat = 0.89).

Index funds are more likely to vote proxy proposals against firm management on shares their fund family does not hold in active funds than on shares their family does hold in active funds.

Index funds do not appear to strictly rely on the advice of Institutional Shareholder Services (ISS), as their votes align with this proxy advisor’s recommendation only half of the time.

Funds oppose management 5.9% of the time. However, they appear friendlier to management when the fund family owns shares in both active and index funds (opposing management 5.5% of the time) than when the fund family’s active funds do not own shares (opposing management 9.0% of the time).

On non-contentious proposals, index funds vote against management 3.5% of the time, 0.5% more than actively managed funds, though this difference is not statistically significant (t-stat = 1.41).

A majority (nearly 54% of index funds in the sample) oppose management between 20% and 60% of the time on contentious issues. Thus, index funds do not always align with management or always align with ISS.

Index funds show an even higher level of engagement in proxy governance on shares their fund family only holds in its index funds than on shares their family has an active position in.

A lack of index fund support increases the likelihood a company proposal fails.
Proposals that index funds supported but failed to pass are associated with negative abnormal returns on the day of the election, while of the proposals that passed, those that were favoured most by index funds were more likely to be value-increasing. This indicates that investors value the governance choices of index funds.

Farizo concluded that the evidence “dispels the concern that index funds, at least in the aggregate, completely disregard voting responsibilities by either always siding with management or always siding with ISS.”

Download the study

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