Index funds now control half the U.S. stock mutual fund market, giving the bigge...
- Index funds now control half the U.S. stock mutual fund market, giving the biggest funds enormous power to influence decisions and demand better returns at the companies in which they invest trillions of dollars.
Such votes reflect a larger trend of deference to management, according to an analysis of proxy voting at 300 of the worst-performing companies in the Russell 3000 index, as measured by three-year returns through the end of 2018. The analysis was conducted for Reuters by shareholder-voting data firm Proxy Insight.
That leaves proxy voting as the primary leverage for index funds firms to hold companies accountable for practices that undermine shareholders’ interests, such as exorbitant executive pay. But the index providers face powerful disincentives in confronting management at the companies in their portfolios, industry experts said.
BlackRock said it talks or emails with executives and directors - sometimes for years - before voting against them. “A vote against management is a sign of a failed engagement,” Michelle Edkins, who oversees BlackRock’s proxy voting, said in an interview. Proxy votes on proposals by the company or its shareholders, influence key issues of executive pay, director appointments and strategic plans, along with a company’s actions to address controversial issues such as climate change or gender pay equity.
Some activist investors cite the low rate of negative votes by top investors as a reason for the persistence of unpopular corporate practices, such as rich executive compensation and poor disclosure of climate impacts. Median CEO pay rose 25% to $12.1 million in 2018 from $9.7 million in 2014 at the 500 largest publicly-traded U.S. companies by revenue, according to the latest disclosures analyzed by executive pay researcher Equilar.
Effectively monitoring the thousands of firms in stock-market indexes would also require considerable staff and resources with little tangible payoff to an index fund’s bottom line. Because the funds all own the same stocks – under formulas calibrated to track a broad index – they can’t compete with one another on market performance. Instead, they compete with aggressive discounting of fees.
With expanded voting power, LACERA’s support for management proposals dropped to 80% in 2018 from 93% the previous year, when BlackRock had more sway, according to LACERA board presentations. Support for shareholder proposals rose to 74% in 2018, up from 56% support in 2017. LACERA declined to comment.During the 2018 proxy season, top index fund providers supported corporate leaders through some trying times for shareholders of the companies in the bottom 10% of the Russell 3000 index.
The large index funds also backed the re-election of Coty Chairman Lambertus Becht, who received a special $3.6 million payout for his work on the company’s $12.5 billion acquisition of Procter & Gamble’s beauty business in 2016. Top proxy adviser Institutional Shareholder Services said Becht’s total compensation of $4.6 million “significantly exceeds market norms for non-employee director pay.
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