Saturday, May 11, 2019
Vanguard recently announced that it will no longer centralize proxy voting across all of its funds; instead, its externally managed funds will set their own proxy voting policies. Although these represent only around 9% of Vanguard’s assets under management, they include almost all of Vanguard’s actively managed funds and actively managed equity assets.
I haven’t really seen much explanation for the shift from Vanguard itself – its own statement on the matter is quite vague – but I suspect they may have made the change for the same reason that Fidelity separates active and passive voting authority, namely, to avoid having the active funds grouped with the passive for the purposes of Section 13(d) of the Securities Exchange Act. Fidelity’s policy is longstanding because historically, it specializes in active funds. Vanguard, by contrast, is nearly synonymous with index funds, so my guess is that it reached a point where the active assets under management were becoming a regulatory risk, especially if those funds wanted to take positions with a view toward influencing – or supporting those who influence – management. As John Morley points out, Section 13(d) limits the ability of large fund providers to take activist stances; Vanguard, I think, just opened that door a crack. (If anyone else has more info on this or a different theory, please drop a comment or otherwise let me know.)
That said, I think this is a good move. I’ve long argued that mutual funds’ practice of centralizing their voting behavior is problematic both from the perspective of fund governance and from the perspective of corporate governance. On the fund governance side, vote centralization may fail to reflect the distinct interests of individual funds. On the corporate governance side, a diversified portfolio of funds may influence managerial decisionmaking in ways that conflict with the interests of less diversified shareholders. Given the concerns these days that mutual fund companies exercise too much power over corporate behavior, decentralizing voting authority seems like the most obvious - and appropriate - solution.