Shareholder Democracy Is Getting Bigger Trial
Fund investors are rarely asked what
concerns them or how they’d vote. But now, several measures aim to do
that. Still, it’s just a start, our columnist says.
Oct. 15, 2021
When you buy shares of a publicly traded company, you’re a part
owner and, in theory, have a right to vote on some important matters that come
before that company’s board of directors.
Yet millions of people have had virtually no voice in the
decisions of publicly traded American corporations, even though they have
The problem is that those stakes are indirect — held through
mutual funds, exchange-traded funds and pension funds. Under current
regulations, these various funds control voting rights that might otherwise go
to shareholders and to those who receive or are vested in pensions. And as
indirect ownership of stocks grows, the problem is worsening.
Historically, these obstacles have made the notion of shareholder
democracy something of an oxymoron, as I’ve pointed out in several
But there has been substantial progress lately in three areas
that could give shareholders a far greater voice: innovations aimed directly at
retail investors; redistribution of some of the power held by asset managers so
institutions like pension funds and universities can more readily control their
proxy votes; and proposals on the regulatory front that would reverse Trump
administration measures restricting proxy access and investor choice.
A radical notion: asking investors
what they want.
Investing in broad, low-cost, diversified mutual funds and their
cousins, exchange-traded funds, makes a lot of sense. They enable working people
and retirees to hold shares in the entire stock and bond market easily and
inexpensively, producing excellent long-term investment
But from the standpoint of shareholder democracy, such funds have
amassed so much power that they have come to pose an enormous danger, in the
view of many experts who have studied them closely. The Securities and Exchange
Commission estimates that indexed mutual funds and E.T.F.s. now own 30 percent
of the equity in the U.S. stock market, and the proportion may be approaching 50
percent when you include indexing strategies used by institutional investors.
The big index fund companies like BlackRock, Vanguard, State
Street and Fidelity are typically among the largest shareholders of publicly
traded companies. Yet their ultimate owners — the millions of people who own
stakes in index funds — have had little voice.
Fund companies have rarely asked shareholders what issues concern
them, to say nothing of how they’d like their votes cast. And it’s extremely
difficult for investors to know how their fund companies voted, and what their
policies are on issues like climate change, corporate compensation (“say on
pay”) and diversity, equity and inclusion.
Well, that’s beginning to change. Several intriguing experiments
One of the most interesting is a collaboration between an
activist hedge fund, Engine No. 1, and the asset management platform Betterment,
demonstrating that it’s easy to ask index fund investors what corporate battles
they believe are most worth waging.
The hedge fund in June started a new exchange-traded fund,
available to individual investors. The fund is
formally called Engine No. 1 Transform 500 ETF, but it has a catchier ticker
symbol: VOTE. In important ways, the fund is quite ordinary: a plain vanilla
E.T.F. with an expense ratio of 0.05 percent, making it a reasonable alternative
to standard S&P 500 index funds run by far bigger companies.
But this one has the express aim of “harnessing the power of
investors to actually change companies,” said Michael O’Leary, managing director
of Engine No. 1. Those may seem idle words, until you recall that Engine No. 1
has already shaken up one company — Exxon Mobil, in one of the most startling proxy
fights of recent times.
The little hedge fund managed this spring to get three dissident
directors elected to Exxon’s board with the goal of pushing the energy giant to
reduce its carbon footprint and accelerate its shift from fossil fuels. While
Engine No. 1 held only a tiny fraction of Exxon’s shares, its arguments persuaded
BlackRock, State Street and Vanguard to take its side.
Now, Betterment has included the new VOTE fund in an investment
portfolio aimed at “socially responsible” investors, and has been conducting a
test poll, asking those investors what battles they want Engine No. 1 to wage.
More than a thousand shareholders responded, with 60 percent saying they wanted
the hedge fund to stick with climate change: “Push more oil and gas giants to
embrace the transition away from fossil fuels” was the overwhelming preference.
Boris Khentov, head of sustainable investing at Betterment, said:
“We need shareholder democracy, and we’re not going to have it unless
shareholders have a way of expressing what they want. Well, we decided that it
was important to actually ask them.”
Several other experiments are underway, with the aim of giving
investors clearer information about what corporations are actually doing and a
greater say about those policies. In Britain, a start-up called Tumelo,
founded by several recent Cambridge graduates, has created a user-friendly web
platform that enables investors to obtain succinct, easy-to-read information
about corporations in their fund portfolios.
What’s more, it conveys their preferences about proxy votes to
the people who run their funds and administer their defined-contribution
retirement accounts. Tumelo’s services are already being used by investors with
major British asset managers, including Legal & General and Aviva, said Georgia
Stewart, the firm’s chief executive and one of its founders.
Tumelo isn’t available to investors in the United States yet but
Ms. Stewart said “we are going to come to the United States soon.” Tumelo is
already working with large American-based firms that do business in Britain, she
As more companies
adopt platforms like these, it may make it possible to achieve something I’ve
Investors could vote with their money, by moving to funds with whose voting
preferences they are aligned. Remember, low-cost S&P 500 index funds are
virtually identical as pure investments, but as the VOTE fund demonstrates, they
can be quite different in their approaches to social, political and
Regulators and big institutions are
taking steps, too.
British regulators have been pushing money
managers to give institutional investors like pension funds more
control over their corporate proxy voting. That movement has begun to reach the
BlackRock manages $4.8 trillion in stock index strategies and
controls the proxy votes for most of it. An announcement by
the company this month indicated that it will be dispersing some of that power,
giving institutional investors, like pension funds and universities, more
options and control over their voting starting in 2022.
BlackRock’s move is voluntary. Regulators in the United States
haven’t been involved, so far.
But American regulators have begun to embrace several other
Department on Wednesday proposed measures that would reverse Trump-era rules
for 401(k)s and other retirement plans. In effect, the proposals could make
socially conscious investing an integral part of many workplace plans.
One regulation would encourage 401(k)s
to include issues like “climate change and other environmental, social and
governance factors when they select investments and exercise shareholder rights”
in proxy voting. Another would make it easier to include funds that emphasize
these factors as core investments in retirement plans.
And the Securities
and Exchange Commission in September issued a proposal that would
make fund proxy voting much easier for investors — and journalists — to track.
It would require that reports on voting decisions be issued in a standard
computer-friendly format, making them readily available for tabulation, analysis
and dissemination. What the proposal has not done, however, is speed up the
frequency of reporting on proxy votes, which only needs to be done annually,
under existing rules.
We still don’t have an accurate tally of the 2021 proxy voting
season, for example. “Imagine if you had to wait up to 15 months to find out how
your representative voted on important legislation currently going through
Congress,” said Mr. Khentov, of Betterment. “That’s pretty much the situation
for proxy voting now, and that’s got to change. We need to give people access to
timely information, in an understandable format, and then let the market
Much needs to be done. There are no panaceas here. But giving a
voice to individual investors is on the public agenda now, and, at least,
there’s been some important progress.
Jeff Sommer writes Strategies, a column on markets, finance and the economy. He
also edits business news. Previously, he was a national editor. At Newsday, he
was the foreign editor and a correspondent in Asia and Eastern Europe.
A version of this article appears in print on Oct. 17, 2021, Section BU,
Page 7 of the New York edition with the headline: Shareholder Democracy Is
Getting Bigger Trial Runs.
© 2021 The
New York Times Company