US passives don’t tackle
contentious management issues, reveals research
aug 12, 2019
Report also finds
that index funds do not engage with management at all
revealing piece of research, US passive managers vote against
management at companies less frequently than their actively managed
counterparts when it comes to contentious issues such as executive
in the report
from University of Utah academics Davidson Heath, Daniele Macciocchi
and Matthew Ringgenberg and University of Geneva’s Roni Michaely, is
that passive managers are not as likely to hold companies to account.
this point, Matthew Ringgenberg tells IR Magazine that if a
shareholder disagrees with the firm’s management, there are three
‘First, it can vote against management proposals and in favor of
shareholder proposals. Second, it can engage with firm management and
convince them to change their policies. Third, it can sell its shares.
paper examines each of these channels and we find that relative to
active mutual funds, index funds are weak monitors that cede power to
firm management. Compared to traditional active funds, index funds are
much less likely to vote against firm management.
‘They are also much less likely to sell their shares when they
disagree with firm management. Finally, we find no evidence that index
funds change the behavior of firm managers by engaging with them
addition, across a variety of tests, the report finds no evidence that
index funds engage with firm management at all.
Ringgenberg adds: ‘We find that index funds are less likely to vote
against management or sell their shares, but theoretically it is
possible that index funds could engage with corporate managers in
other ways to make sure their preferences are represented.
examined several tests to look for evidence of this, and we find no
evidence they are doing this. For example, when a fund owns more than
5 percent of a stock, the fund must disclose this with either SEC form
13D or form 13G. Form 13D allows the fund to engage with the firm to
change policies, while form 13G does not. We find that index funds
never file a Schedule 13D with the SEC which signals that they do
not intend to affect firm policies.’
report therefore suggests that the rise of index investing is shifting
control from investors to firm managers. ‘Index funds have been a
great innovation in many ways, and there is no doubt that they have
benefited investors,’ says Ringgenberg.
‘However, our research shows that index funds are potentially changing
corporate governance. Investors are supposed to monitor a firm’s
management to make sure they are doing their job, yet index funds do
not have the same incentives as traditional active funds.
‘Because index funds charge low fees and do not try to beat the
market, they do not have incentives to improve managerial
behavior. Our research shows that this is giving management more
control over the firm. Put differently, investors are giving up some
of their control in the firm.’
this way it could well be leading to a long-term shift in management
monitoring, influence and control, as index funds have grown
tremendously over the last two decades – and the trend is continuing.
big three index fund families are now responsible for around one
quarter of all votes in S&P 500 firms,’ says Ringgenberg. ‘Our
research highlights the importance of the link between index funds and
corporate governance. The rise of index funds is changing how US
corporations are managed.’
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