Vanguard has launched a pilot scheme for US retail investors to decide how their votes are cast, just a year after BlackRock gave institutional clients the power to vote their shares, in a move which directly challenges the view that large asset managers hoard power through the trillions of dollars they manage through passives.

In a statement, Jack Bogle’s index-tracking powerhouse said it will “pilot a number of proxy voting policy options for individual investors to choose from in several Vanguard-managed equity index funds” from early next year.

Vanguard noted its stewardship team currently casts proxy votes on behalf of clients but it now wants to “assess ways to provide individual investors the opportunity to participate more directly in the proxy voting process”. 

The trial is set to offer investors options such as whether to allow Vanguard to continue casting their votes, choosing to rely on a third party or not to vote at all. 

Vanguard said in a statement: “Our clients have diverse perspectives and a growing number would like the option to weigh in on how their index funds vote on important proxy questions at the companies held in the funds.” 

The US giant said it will gather feedback from clients and “explore the full range of options with respect to proxy voting choices for index funds”.

The news follows a chorus of critics raising concerns that the biggest issuers of index-tracking products – BlackRock, Vanguard and State Street Global Advisors – wield too much influence through the growing assets flowing into passive products and the resulting increase in ownership of individual companies.

In February, Berkshire Hathaway vice chairman Charlie Munger said the ‘Big Three’ are creating a new centre of ownership, with power over the votes attached to trillions of dollars of index fund assets creating “a new bunch of emperors”.

This was followed by Tesla founder and CEO Elon Musk who said in April: “Passive has gone too far. Decisions are being made on behalf of actual shareholders that are contrary to their interests.”

In July, the issue of passive power entered the political stage, with Democrat heavyweight Bernie Sanders remarking that “three firms are major shareholders in more than 96% of S&P 500 companies. Obscene”.

In a context where criticism of the size and influence of passive funds has come into focus – and where the average ownership of S&P 500 companies by index trackers has doubled to 21.2% in just seven years – it appears Vanguard’s new pilot scheme indicates an inevitable direction of travel for the industry.

Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, commented: “Vanguard plans to give its 30 million retail investors more say in how their shares are voted in a 2023 pilot program. We called for this and are fans of this because it helps solve a legitimate 'worry' regarding the passive rise: concentration of voting power.”

Balchunas noted Vanguard is currently the largest owner of 69% of companies in the S&P 500 – versus 7% for BlackRock – with an average stake of 8%. They are also among the top three owners of an eye-watering 98% of US large cap companies.

Vanguard’s decision to trial voting with retail investors could well involve more logistical complexity than offering voting rights to institutional clients alone, however, it makes sense given the firm’s support base is largely found among long-term, private investors.

BlackRock, on the other hand, started offering its ‘Voting Choice’ programme to institutional investors making up 47% of the previously $4.9trn in assets housed in its index equity funds.

The scheme initially launched last October for US and UK investors but was extended to Canadian and Irish pooled funds earlier this year, after investors managing $120bn expressed their voting preferences within the programme’s first five months.

On Thursday, BlackRock CEO Larry Fink penned a letter to clients and other CEOs about the “transformative power” of investor-led voting and its ability to enhance corporate governance.

Fink described “tremendous interest” from clients in Voting Choice and added the number interested in enrolling in the scheme had doubled since May.

“It is clear there are investors who do not want to sit on the sidelines; they have a view on corporate governance, and they want a meaningful way to express those views,” Fink said. “While some pension funds have long been actively involved in corporate governance, we are working to make that easier and more efficient for a larger number of investors.

“My hope is that in the future, every investor – ultimately including individual investors – has access to Voting Choice, if they want it.”

Less than a day after Vanguard launched its proxy voting trial for retail clients, BlackRock announced it would extend the pool of eligible client assets that can participate in its scheme, as well as expanding the range of voting guidelines clients can choose from and even working towards voting capabilities for individual investors “in select mutual funds in the UK”. 

It appears the main contest in the world of large passive is the race to engage. How this infrastructure is implemented – and who by – will be a key focus in the coming years.

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