Saturday, May 11, 2019

Vanguard's Votes

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.

Ann Lipton | Permalink


This is a really interesting post. I wonder how these active funds are actually going to vote. My guess is that they are not going to spend the significant resources required to becoming informed on the thousands or tens of thousands of votes they will need to make, unless it pertains to a proxy contest or M&A. This is only speculation, but my guess is that Vanguard's active funds are going to follow the voting recommendations of their investor stewardship team for the overwhelming majority of votes they need to make, even though they will not allow the stewardship team to vote for them. This would include voting on the election of board members, say on pay, shareholder proposals on ESG, best corp gov practices, etc. In my opinion, voting on these issues are more for purposes of marketing to current and prospective institutional investors than enhancing shareholder value. Therefore, it makes no sense for Vanguard to provide have conflicting messages.

Posted by: Bernard S. Sharfman | May 11, 2019 9:07:51 AM

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