Most (Many? All?) of us vote in the traditional November Presidential elections every four years. Some (Most? Many?) cast our ballots in the “Mid-Term” elections every year or two, also in November. A few (Some?) of us vote in our School Board elections and/or our party caucuses/primaries. Those are the obvious, in your face, votes that we cast. What many of us don’t realize is that we are voting all the time with the investments we are making and I’m not talking about the actual investment selection being made.
Every mutual fund you hold is full of different stocks, each of which holds an “election” at least once a year, traditionally called a “proxy vote.” Some of you own individual stocks or positions and many of you get those mailings and wonder “what am I supposed to do with this???” Now imagine you are a fund manager with 100 stocks in your portfolio – you’re going to get 100 of those mailings each year. Most of these proxies will include a vote on the Board of Directors, since those terms rotate. The proxy could also include a vote on keeping, or changing, the accounting firm auditing the company’s books or something more significant like proposing a merger with another mutual fund or a shift in policy to accommodate a changing climate and increased risk to the position. And while we, as retail investors (rather than institutional investor) play a relatively small role in the changes a stock or mutual fund makes, a company like BlackRock or Vanguard (institutional investors) can play a really big role in shaping the direction of an investment. And therein lies the snag.
Let’s say you are a large index fund. Simply based on algorithms, you are going to have a honking big position in a handful of stocks. Let’s use the Vanguard Total Stock Fund as an example. Representing $28 billion in invested dollars, the fund’s top seven positions represent 20% of those assets – that’s a fairly sizeable voting bloc. All of the people who are invested in this fund have now turned their voting rights over to Mr. Gerard O’Reilly (and his team), who may, or may not, vote the way we personally would vote, particularly since institutional investors have traditionally voted along the lines of the stock’s board of directors recommendations. Let’s say the proxy includes a vote on Directors up for (re)election and let’s say there isn’t a female or BIPOC in the bunch…. Is Mr. O’Reilly going to vote to “follow the board’s recommendation,” thereby endorsing the same old, same old status quo or is he going to vote against the board’s recommendation? We’ll actually never know (unless we take a look at the Board lineup before the vote and again afterwards to see what changes take place and I think we can all agree that none of us are going to spend our time doing that….)
Stepping a level up, Vanguard, BlackRock, and State Street now hold 43% of the US equity assets held by the fund industry. That translates into pretty serious voting power be it for, or against, a particular issue, simply based on size.
Yes, I get that index funds are very inexpensive, and cost efficiency often translates into better account balances. What I’m also starting to wonder about, however, is what we might be giving up for that rock bottom cost. By one estimate, in the not-too-distant future, those three companies will control over 35% of the voting block on nearly every stock that’s being publicly traded. Given that nearly all fund managers are white men of a certain age (Vanguard’s own internal research showed only 1 in 10 named fund managers was a woman), is that who we want voting for us on issues that impact all of us? I’m still working through that one (given that my calendar of the day quotes RBG: Women belong in all places where decisions are being made….).
One of my favorite sayings is that “I vote everyday with the dollars I spend.” The reality, however, is that we vote with every dollar we invest as well.