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Lazy investors, unite! Vanguard takes on the challenge of 'rational indifference': Ross Kerber

The problem that would-be reformers of corporate voting continue to face is the same: It's so complicated for an individual investor. Reformers might want to be careful about what they wish for.

Shareholders in Vanguard 500 index funds, for example, could be faced with 4,500 decisions each year regarding how to vote proxy ballots during corporate annual meetings. Who could sort all that out, anyway?

In a forthcoming paper, a group of professors of law and business from Duke University, University of Florida and Columbia University refers to the "rational apathy" problem. They say that shareholders will not waste time trying to figure out how to vote in a complicated way with little effect.

Fund companies are now handling the voting themselves. Until recently, only environmentalists and social reformers cared. Then conservatives in the United States realized that they could exert pressure on companies and asset managers to change how they cast their ballots.

The top managers could avoid the fire by using "pass through" voting programs that allow fund investors to influence the proxy votes funds cast at annual corporate meetings.

John Galloway, Vanguard's chief of stewardship, told journalists in a press briefing this week that 82,000 investors had used the Voting Choice program over the 12-month period ending June 30. This is about twice as many as the previous year. They voted $9 billion worth of shares, which is triple what they did last year.

This is still a small amount compared to Vanguard, which has 50 million investors with $11 trillion of assets under management.

Get ready to see things take off. Galloway stated that Vanguard is working with corporate sponsors in order to provide voting options to participants of 401(k), or similar retirement plans. He released new statistics showing that investors are dispersing their vote across a wider variety of voting policies, including a new Egan Jones policy with anti ESG criteria.

Galloway stated, "We have seen investors demonstrate the 'choices' of Investor Choice in this year's Investor Choice.

PUMPING UP BOSSES

Reformers who want to rein in CEO compensation have high hopes that the change will take power away from the fund managers, who, among other things, earn fees by managing corporate retirement funds.

In the draft paper the academics state that a surprising result of increased pass-through voting would be an increase in the power of the boards. This is because individual investors are more likely to support policies that benefit management.

Two close votes at Tesla took place last year. Shareholders approved narrowly measures that called on Tesla to reduce its director term from three to one year and require only simple majorities for certain governance changes, rather than the two-thirds standard currently in place.

Both measures were supported by Vanguard's main stewardship group. In the pilot voting program last year, 36% of shares either abstained from voting or supported management. If that 36% had applied to all Vanguard index equity funds, then both proposals would have been just below the 50% threshold required by both items.

The authors note that as proxy voting programs increase, "the reality of a changing ecosystem becomes more and more probable."

Dorothy Lund of Columbia University Law School, one author, stated in an interview that pass-through voting is a great way to empower investors who don't agree with the voting decisions made by their managers.

Most mutual fund investors aren't interested in their holdings, much less how to vote. The new voting policies will empower proxy advisers. This could eventually include financial online influencers (FinFluencers) who would post their voting recommendations to TikTok.

Lund stated that in theory, more competition should lead to better options. She said that if proxy voting is so open, companies may not know who to listen to.

Lund stated that "implementation of an open proxy system could lead to fragmentation where issuers do not know with whom to speak because no one is really directing votes."

(source: Reuters)