The major ETF providers are failing to challenge management when they vote at shareholder meetings highlighting a key issue the industry needs to address.
The rise of passive investing has been nothing short of dramatic. According to Morningstar, index funds now control over half the US mutual fund market assets passing actively managed funds for the first time ever in August.
Three firms, in particular, have benefitted, BlackRock, Vanguard and State Street, who control the vast majority of these assets.
According to analysis by Reuters, these leading providers, however, are rarely voting against management. For example, all three cast the crucial votes against the reform of splitting the CEO and chairman roles at General Electric despite a decade of poor returns.
Furthermore, a study on the proxy voting history of the worst performing Russell 3000 companies over three years to 2018 conducted by shareholder-voting data firm Proxy Insight found the three US giants continued to back management.
According to the results, BlackRock voted with management 93% of the time just ahead of Vanguard at 91% and State Street at 84%.
Voting against management for climate-related issues has also been problematic for the three firms. In 2018, BlackRock backed such resolutions just 10% of the time while for Vanguard it was 12%.
A spokesperson from Vanguard said: “While voting at shareholder meetings is very important, it is one part of the larger corporate governance process.
“We regularly engage with companies on our shareholders’ behalf and believe that engagement and broader advocacy, in addition to voting, can effect meaningful changes that generate long-term value for all shareholders. So far in 2019, for example, we have engaged with companies representing 60% of our global equity AUM.”
Peter Sleep, senior investment manager at 7IM, said investors should not be too surprised by the firm’s decisions to support management the majority of the time.
He added the process of analysing these issues is very expensive and time consuming so to expect these big passive managers to have the same vigorous voting patterns as activist investors is unrealistic.
“Analysing every vote for every company held by the big passive investors will be a long, arduous and expensive process requiring legal, accountancy, corporate governance and many other experts.
“Engaging effectively is a different kettle of fish and is very difficult,” Sleep continued. “This is not to say it should not be done. Just that being effective is very difficult and requires a well-resourced team and a great deal of work.”