Key insights
- The article raises concerns about the growing influence of index funds and their voting practices, potentially eroding shareholders' ability to impact board decisions. The author suggests that the high ownership levels of funds that typically abstain or vote with the board make it difficult for significant resolutions against board recommendations to pass. The author proposes legislative action to address this issue, but the overall impact on US equities is likely to be slightly negative due to increased regulatory uncertainty.
If you dive into the filings for most companies regarding the governance covering voting and resolution requirements, you'll generally find a high bar required to effect significant changes (typically in the supermajority level).
Most people are aware of the significant levels of ownership of shares held in trust by funds being sold as various investment products. These are particularly high in the index fund space. The typical disclosure is that they will either abstain or vote in accordance with the board's recommendations.
Just some simple calculations make it appear nearly impossible for significant resolutions counter to board recommendations to ever pass. I'm not even sure even simple majority decisions like the removal of a (or preventing a new) board member are within reach anymore. Have we crossed the point where a push for legislation is required for shares held in these trust structures to be removed from the total count requiring a supermajority? Stated a little more clearly, I'm not seeking a removal of voting rights but rather that situations allow for a block of shares that is setting a policy of not voting to be removed from the total counts? Sure, boards can introduce these rules themselves, but there's a clear mismatch of incentives in essentially asking the board whether they think they should lose the relative power they've gained.