Can the Proxy Voting Process Become Democratic for Individual Investors?

Major passive index fund managers Vanguard Group, State Street Corp., and BlackRock should be more democratic in their approach to proxy voting, according to a new research paper.

Caleb Griffin, an assistant professor of law at Regent University in Virginia, said in a paper published this month that individual investors need to have a greater role in the proxy voting process. “Shareholder democracy should be democratic — that is, it should be controlled by the individual human investors who make up its constituents,” he wrote.

According to Griffin, the role of individual investors in the proxy voting process wasn’t a huge consideration for firms like Vanguard, BlackRock, and State Street in the early 2000s because index fund investing was still relatively rare. Today any one of these so-called “big three” firms is the single largest investor in roughly 90 percent of publicly traded companies, according to the paper.

“The risk is that they’re not only voting their individual funds the same way but the ‘big three’ also all vote the same way on each issue,” Griffin said by phone Wednesday. “There’s a risk of not only losing the voice of individual investors but also instituting a corporate governance monoculture.” 

According to Griffin’s paper, there are three ways index fund managers could get individual investors more involved in the proxy voting process. The first would be allowing individual investors to elect to have the votes that corresponded with their share ownership to be cast in line with recommendations of a designated proxy advisory firm, board member or other representative.  

The second would be to require Vanguard, BlackRock, and State Street to seek more information about the values of their investors, and to use this information to inform their decisions, the paper said.  

The third would be to offer investors a general issue-based survey that would show how they want to vote on key corporate governance issues, according to Griffin. The firms could then use this information to create voting guidelines. Griffin said by phone that this approach is his preferred method, because it would be relatively easy to implement, and because it would make it clear how investors feel about key issues, instead of more general ones like the second method. 

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“As a steward of assets for over 20 million of our clients, we engage with companies and vote on proposals for one reason: to protect our clients’ investments,” Dana Grosser, a spokesperson for Vanguard, said via email. “These engagements focus on four corporate governance pillars: the board, structure, compensation, and risk.” 

Grosser added that “Vanguard does not engage with companies to further a political or social agenda, but rather, to uphold our responsibilities as fiduciaries and protect the value of our shareholders' investments,”

A spokesperson for State Street declined to comment on the research. A spokesperson for BlackRock did not immediately respond to an email seeking comment.