October 18, 2018
There are 100 million Main Street investors in the US, holding more than $16.9 trillion in stocks, making them potentially the most influential proxy voting bloc in the US. Despite this, a recent report from Broadridge and PwC provides the latest evidence that the current proxy process is stripping retail investors of their ability to use this influence to impact voting outcomes at public companies.
The clearest example of discrepancy between institutional shareholder and retail voting is the respective approaches to environmental, social, and governance (ESG) proposals. On political spending proposals, the report details that overall support was 29 percent from institutions, compared to 21 percent from retail investors while, on environmental and social proposals, that gap was even larger, at 29 percent compared to 16 percent.
The differences are even starker when proxy advisors are considered, with ISS recommending in favor of the vast majority of political spending proposals during 2018. Their influence over institutions – up to 30 percent of voting – has a knock-on effect of further excluding retail investors from the proxy voting process. Institutional investors and proxy advisors are increasingly pushing for public policy type reforms at company level, while retail investors consistently emphasize the importance of returns.
In January, a study by Spectrem Group revealed a “broad gap between how members want their funds managed and the actual approach many managers may be taking.” Specifically, the study found that:
“approximately two-thirds of members (63 percent) believe investment managers should focus their time and resources first and foremost on ensuring that investments meet or exceed both the fund’s target level and the overall market performance, while just 11 percent believe managers should use fund resources to advance worthy political and/or social causes.”
Retail investors are knowledgeable and engaged; and, if they were provided with an opportunity to oversee the voting of their 401(k)s by fund managers, it seems that support for ESG proposals would fall to levels associated with Main Street investors. Currently, they are not given such an opportunity and fund managers are free to vote in alignment with their own policy preferences – rather than seeking input from retail investors. This issue is compounded by voting participation rates, which demonstrate that institutions are more than three times as likely to cast their vote.
Retail investors, just like institutions, should be free to assess the merits of any individual proposal. However, in current proxy process structure, they are stripped of that ability and their money is used to support proposals they may not be in favor of. Whether through 401(k)s or personal investments in shares, fund managers’ focus on political and social activism rather than maximizing returns appears to be out of sync with the expectations and desires of their clients; and, is negatively impacting returns for all retail investors by increasing the burden on public companies without clearly linking it to improving performance or returns.
The absence of input from retail investors in the entire process dictates that the $16.9 trillion in stock that these individual investors hold plays an increasingly limited role in corporate governance and public company practices. Broadridge’s report is further evidence of that and is a timely reminder that greater inclusion of retail investors’ expectations and views are an important issue to be addressed at the upcoming SEC Roundtable.