August 3, 2018
Most shares of publicly traded firms are managed by institutional investors, and it is those asset managers that cast the votes on shareholder proposals, not the retail investors who ultimately own the stocks. A recent paper from Columbia Business School and the European Corporate Governance Institute (EGCI), reveals that these institutional investors have clear ideologies much in the way that political parties have ideologies. This may come as surprise to many Main Street, retail investors who think that the firms managing their money are solely responsible for investing to generate maximum returns and not playing politics with their money. Through an analysis of proxy ballot voting by several hundred institutional investors and public pension funds, the researchers were able to plot each investors’ ideology along a spectrum.
The analysis of shareholder proposal votes cast by mutual fund families, pension funds and other institutional investors in the fiscal year 2012 revealed that an ideological range exists, when it comes to voting, that spans from management disciplinarian (left) to management friendly (right). The paper finds that this alignment can more or less be extended to how political objectives are aggregated and expressed at the firm level — those on the left side of the spectrum “are best described as socially-responsible investors, those that vote most consistently in favor of pro-social and pro-environment shareholder proposals,” while those on the right “can be described as ‘money conscious’ investors, those who oppose again and again any proposal that could financially cost shareholders.”
The paper then goes on to provide examples of where specific firms, and even the proxy advisors, fall on the spectrum based on their voting behavior. The proxy advisory analysis is especially concerning for retail investors. Why should proxy advisory firms have any bias – political, ideological, or otherwise? If these powerful firms are make voting recommendations that can put millions of dollars (if not more) at stake, shouldn’t their voting recommendations be completely objective and based on factual analysis? Unfortunately, this isn’t the case, and it’s why we’re pushing for proxy advisory reform at the Main Street Investors Coalition.
Until reforms are enacted, Main Street investors should keep a careful watch over the institutional investors they give their money to, and the firms advising those investors. Much like people look at legislators’ voting records to understand how they will represent their constituents, average investors should pay close attention to the voting behavior of these institutions to understand how their ideology impact their investments.