Low-Cost Index Funds: Management’s “Absentee” Best Friend?
John’s discussed a couple of times about efforts by large institutional investors to avert a gathering storm of criticism. Maybe they can add this research to their fodder – it says that index funds are 12.5% more likely than “active” funds to vote with management’s recommendations when they differ from ISS, with that percentage being even higher for funds with low expense ratios (presumably, because they have fewer resources to spend on monitoring).
The research acknowledges that funds could be voting with management and still monitoring to ensure corporate governance – by either selling their shares, or by engaging with the company and then supporting pre-negotiated proposals. Sales are rare, as you’d expect from an index fund. But here’s the surprising part: in a complete departure from all anecdotal evidence and company complaints about the outsized influence of institutional investors, the researchers conclude that there’s no evidence of engagement. Zero!
If they’re right, maybe companies really can rest easy about the prediction that the “Big 3” will control 40% of the S&P 500 within the next 20 years. In my opinion, though, they’ve reached that conclusion based on a flawed understanding of Schedule 13D filing requirements and the shareholder proposal & engagement process. Specifically:
– They ignore the fact that engagement on executive compensation, social issues and corporate governance doesn’t disqualify a shareholder from filing a Schedule 13G
– They assume that there’s no engagement in the absence of a fund submitting its own proposal or voting against the company in a proxy contest
-Liz Dunshee, TheCorporateCounsel.net August 27, 2019
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