Your Mutual Fund
Has Your Proxy, Like It or Not
think executive compensation is out of control or that a company
should have to disclose its political contributions?
you may also think that your mutual fund should vote on these and
other issues in accordance with your beliefs. Good luck with that.
As investors, we
are supposed to be able to sound off on corporate governance matters at the
companies whose shares we own. We do so by voting on the issues when they arise
at a company’s annual shareholders’ meeting.
But if you invest,
as most people do, with a large fund manager, like BlackRock or the Vanguard
Group, the chances are very good that your objections to common corporate
practices are not getting through. That is because fund overseers vote your
shares and often do so without regard to your views.
The result is a
breakdown in one of the few accountability mechanisms available to individual
investors in our so-called ownership society. This failure has everything to do
with the fact that executive pay rises higher each year.
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The voting of fund managers is infected by conflicts of interest, said
Erik Gordon, a professor at the
Ross School of Business at the University of Michigan. That is because
these giant mutual fund operators don’t just own shares in many big
American companies; they also do business with them.
often avoid challenging management on executive pay and corporate
governance because they want to be included in corporate
defined-contribution benefit plans,” he said in an email. “If a fund
irritates a C.E.O. and the C.E.O.’s pals on the board, the fund risks
losing business at several companies.”
Vanguard dispute this notion, saying they put their customers’ interests first
in their voting. “We weigh all factors that could affect the long-term value of
our clients’ assets,” Ed Sweeney, a spokesman for BlackRock, said in a
statement, “including the hundreds of public pension plans, nonprofits,
foundations, endowments, educational institutions and individual investors we
Every August, fund
companies must disclose how they voted in the most recent proxy season. I asked
Proxy Insight, a data analytics firm that
tracks such votes, to tally those of
BlackRock, with almost $5 trillion in
Vanguard with over $3 trillion.
Here is what I
learned. On matters involving executive pay, in the most recent 12 months, both
fund managers overwhelmingly supported compensation practices at the companies
in the Standard & Poor’s 500-stock index. BlackRock supported executive pay at
98.3 percent of those companies in the most recent year, and Vanguard voted in
favor of pay practices in 98.1 percent of its votes. (Vanguard disputed this,
saying it voted yes a mere 96 percent of the time.)
By the way, both
companies supported the pay practices at Wells Fargo, whose executives
are under fire for overseeing
a pervasive program that prompted many
employees to set up sham accounts to generate fees and make quotas.
As head of
BlackRock’s investment stewardship unit, Michelle Edkins oversees its voting. On
executive compensation, she stressed that the firm voted against pay practices
or compensation committee members at 10 of the 50 companies with the
highest-paid chief executives this year. She also said that BlackRock discussed
compensation matters with half of those companies.
BlackRock and Vanguard both supported management by voting against most
proposals requiring that a company’s board be led by an independent chairman.
Shareholders in favor of this idea contend that such a move would reduce
management’s grip on the board and bring more accountability to corporations.
nay on 95 percent of such proposals, Proxy Insight found, while Vanguard
rejected 100 percent of them.
That is not
particularly surprising, given that neither BlackRock nor Vanguard has an
independent chairman overseeing their boards. Laurence Fink is both chairman and
chief executive at BlackRock; F. William McNabb III holds both titles at
Officials at both
companies said they voted against independent chairman proposals at companies
whose boards had lead independent directors and whose roles brought necessary
balance to the boardroom. BlackRock and Vanguard themselves have lead
independent directors on their boards.
lead director will rarely be as powerful as an independent chairman.
The actions of
BlackRock and Vanguard stand in contrast to some other big fund managers.
AXA Investment Management, with $760 billion
in assets, voted in favor of all independent chairman proposals in the most
recent year, Proxy Insight said. And
RBC Global Asset Management, with $300
billion, supported 97.5 percent of them.
Another type of
proposal nixed by both BlackRock and Vanguard would require companies to
disclose their political contributions and lobbying expenditures. Ms. Edkins at
BlackRock characterized such proposals as micromanaging but said, “We believe it
is the responsibility of the board to ensure there is a robust process around
any type of spending that has a reputational impact on the firm.”
Deutsche Bank Asset Management, with about
$800 billion in assets, and
Pax World Management, with $4 billion in
assets, voted in favor on 95 percent of those proposals.
nor Vanguard is a stranger to lobbying. During 2015 and so far this year, the
Center for Responsive Politics found,
BlackRock spent $3.73 million lobbying Capitol Hill on financial regulations and
Vanguard spent $3.38 million.
spent considerably less — $900,000 — and the database showed no expenditures for
Asked about these
and all their votes, both BlackRock and Vanguard cautioned that they were just
one way of communicating their views to companies. Company officials said they
also regularly discussed issues of concern with boards and if they got nowhere
would vote nay. BlackRock voted against 5 percent of directors up for election
this year at the approximately 4,000 companies whose shares it owns, Ms. Edkins
on almost 20 percent of shareholder proposals this year. One required companies
to report on the gender pay gap among employees. Vanguard abstained on this at
Alphabet, Citigroup, Danaher and eBay, among others.
In a statement,
John Woerth of Vanguard said the company generally abstained from voting on
social or environmental proposals that it did not believe “have a clear link to
increasing shareholder value.” Vanguard will engage on topics that could affect
long-term value, like climate change, he added, “to understand their processes
for overseeing and managing those risks.”
One of Vanguard’s
abstentions involved pay. A shareholder proposal at the Ameren Corporation, a
big utility in the Midwest, would have required its top executives to hold on to
a significant number of shares for two years after leaving the company. Such
programs align pay with shareholders’ interests by encouraging executives to
manage for the long-term.
About 50.6 percent
of shares were voted against the proposal versus 35 percent in support. Had
Vanguard voted its 22 million shares in favor, the proposal still would have
failed. But the vote would have been close enough that Ameren’s management might
have been forced to take the proposal more seriously.
to comment on this abstention.
Mutual fund voting
practices that perpetuate the status quo are on the agenda at a daylong
symposium on Sept. 27 in Washington. The
event, called “Breaking Through Power,” was convened by the Center for the Study
of Responsive Law, a nonprofit founded by Ralph Nader, who has strong views on
fund managers’ voting.
“Mutual funds are
a top-down autocracy. How can they be expected to go after the corporations
they’ve invested in when there is such conformity of abuse?” Mr. Nader asked.
“If they criticize executive compensation, they have to look at their own
executive compensation. If they deal with corporate disclosures they’re going to
have at look at their own disclosures.”
there is little that investors can do to change this dynamic.
But here is an
idea. If your fund company votes the wrong way on issues you care about,
register your displeasure by voting against the fund’s directors in its annual
election. Maybe that will get someone’s attention.
A version of this article appears in print on September 25, 2016, on
page BU1 of the New York edition with the headline: Your Fund Has Your
Say, Like It or Not.
© 2016 The
New York Times Company