June 13, 2018
The recent success of activist shareholder resolutions on issues usually reserved for the political arena has often been touted by their promoters and the media as evidence investors are now demanding more than financial performance from the corporations they invest in.
However, an article by Scott Hirst, the Research Director at the Harvard Law School Program on Institutional Investors shows how institutional investors, such as mutual funds and pension funds, are ignoring the interests and preferences of their own investors and distorting the outcomes of these resolutions. This calls into question the idea that investors are truly still in control of how the companies they are invested in are ultimately run.
To reach this conclusion, Hirst examined the voting behavior of mutual funds, which hold the largest proportion of equity in U.S. Corporations, to see if these funds are voting in line with the interests of their investors. He found evidence to suggest they are not:
“First, votes of different mutual funds on social responsibility resolutions diverge widely, even among mutual funds that are likely to have very similar investors with very similar interests. If there is a way to vote on these resolutions that reflects the best interests of these investors, some mutual funds appear to be voting wrongly on many resolutions. Second, this article provides evidence that the way that many mutual funds vote on resolutions may differ from the views of a majority of their own investors.” (emphasis added)
Furthermore, even if a mutual fund is voting in line with the interests or preferences of most of their investors, there still exists a distortion in the outcome of the resolution because the view of the minority is ignored:
“Because funds vote “all-or-nothing’ for, against, or abstain, even where funds vote the way a majority of their investors are likely to prefer, there will be a divergence from the preferences of a minority of their investors.”
The implications of these results suggest that the original purpose of shareholder resolutions – to allow those with an interest in the company to guide management and increase value –no longer applies to retail investors:
“…if it is considered valuable for corporations to follow the wishes of their investors, then these distortions may represent a significant problem, as they result in corporations being less likely to act as their ultimate investors would prefer.”
Ultimately, distorted voting results can be an issue for both supporters and detractors of activist resolutions if the success or failure of the resolution is swayed by the centralized decision-making of institutional investors.
The rise of political resolutions passing could also have a twisted impact on policymakers, “Public officials that consider the results of resolutions as a proxy for investor preferences on these matters will receive distorted information, and may be less likely to take action themselves.”
Hirst cites the need for more reform and investigation in light of these revelations, and offers suggestions to remediate some of these problems. He recommends that mutual funds explore policies where funds would split their votes to represent the preferences of their investors. Hirst also suggests, “…the investment industry – with the encouragement of the SEC – should undertake their own analysis to determine whether their voting differs from how their investors would prefer, and whether this represents a problem.”
While the issue of proxy advisory reform is a large and tricky one to tackle, Hirst’s research and recommendations prove that this is a problem that needs addressing, and that potential solutions to this issue exist. Main street investors deserve for their voices to be heard, and Hirst’s recommendations are a step in the right direction to make that a reality.