Decentralizing Voting Power

Most publicly traded shares in the U.S. are owned by institutions rather than individuals, particularly by the “Big Three” asset managers—Vanguard, BlackRock, and State Street. Accordingly, these institutions have substantial influence in corporate governance through proxy voting. Most large fund families have a centralized stewardship group that makes voting decisions for all funds in the family. Recently, however, these institutions have faced intense public scrutiny, political pressure, and shareholder disagreement regarding their voting decisions. A common theme has been a call for decentralization away from the stewardship group model. For example, the INDEX Act was recently re-introduced in the U.S. Senate and would require passively managed investment funds to “pass-through” voting rights to their beneficial owners. This post is based on our paper, Decentralizing Voting Power (available on SSRN), where we study whether decentralizing a fund’s stewardship structure materially changes voting. We do this by exploiting a novel setting where, for a subset of its funds, Vanguard shifted voting authority away from its centralized stewardship group to the funds’ external investment advisers. We find that decentralized voters are significantly more likely to oppose management on both management proposals and shareholder proposals.

The Setting

In 2019, Vanguard shifted voting authority from its stewardship group to the external investment advisers for 31% of its equity funds (see discussion in this previous forum post). This shift only affected proxy voting authority—these funds’ managers and strategies all remained the same. Because Vanguard’s policy only affected a subset of its funds, we continue to observe voting by Vanguard’s stewardship group in the 69% of funds that were unaffected by this policy, providing an ideal benchmark. This setting also allows us to hold constant the specific firm, meeting, and proposal being voted on across funds. By comparing voting patterns before and after decentralization, our analyses speak to the effects of voting decentralization, both at Vanguard as one of the world’s largest institutional investors and other vote decentralization efforts.

Main Findings

We find that the decentralized voters more frequently vote against firm management recommendations, relative to the Vanguard stewardship group. The effect is present for both management- and shareholder-sponsored proposals, but it is largest for shareholder proposals. In particular, decentralized voters are 21.5% more likely than Vanguard’s stewardship group to oppose management on shareholder proposals. While meaningful differences between decentralized voters and the stewardship team exist across most proposal categories, the most prominent difference is that decentralized voters show more support for shareholder ESG proposals. If decentralized voters share beneficial owners’ preferences, this evidence is contrary to the narrative that the Big Three voting groups “push” ESG ideology against investor preferences. In other words, our findings suggest that decentralizing voting power from the Big Three’s stewardship groups could actually lead to increased support for ESG-related and other shareholder-sponsored proposals.

The Role of Proxy Advisers

One possible explanation for our findings is that decentralized voters simply vote based on proxy advisors’ recommendations, effectively transferring voting authority from one monolith to another. While a minority of the decentralized voters (15%) appear to “outsource” their voting to proxy advisors, on average, they are no more likely to follow the benchmark recommendations of either ISS or Glass Lewis than is the Vanguard stewardship group. This evidence suggests that decentralized voters make their own decisions. Although we don’t find that decentralized voters are more likely to align with a proxy advisor on-average, we do observe variation in their voting strategies. Specifically, we find that decentralized voters with more concentrated holdings are less likely to align with proxy-advisor recommendations, likely because they face lower monitoring and engagement costs and greater benefits from active voting relative to voters with less concentrated holdings.

Contentious Votes

Earlier studies have used “contentious” votes (where firm management and one or both of the proxy advisors make opposing recommendations) to assess monitoring. We follow this approach and find that decentralized voters are 21% less likely than the Vanguard stewardship group to support management on contentious proposals, suggesting that, on average, decentralized voters are active voters who monitor management. This result aligns with the broader pattern of increased independence from management recommendations under decentralization.

Implications

To the best of our knowledge, we are the first to examine the effects of within-fund variation in voting authority. We find that decentralizing voting authority from a stewardship group to an external investment adviser leads to important changes in voting patterns. Specifically, decentralized voters are less likely to follow management recommendations, more likely to support shareholder proposals (including and especially ESG proposals), and most do not seem to rely on a proxy advisor. We also document that prior to this policy change BlackRock and Vanguard’s voting records are remarkably similar, and State Street’s is only marginally different, which mitigates the concern that our results are unique to Vanguard.

These results provide timely foreshadowing on the potential effects of pass-through voting programs, which several of the largest fund families have recently introduced. Our evidence concerns decentralizing voting authority to fund investment advisers (i.e., a party arguably closer to many funds’ beneficial owners), and is relevant to institutional mutual fund shareholders, who play a major role in existing and proposed pass-through voting programs. Beyond suggesting that institutional pass-through voters may be, on average, more oppositional to management and more supportive of shareholder proposals, the results imply that among pass-through voters with broad holdings and high monitoring costs, reliance on proxy advisors may increase. This increasing reliance may be amplified by the structure of recent voting choice programs offered by the large asset managers, whereby shareholders pick a proxy advisor recommendation package rather than voting on each shareholder proposal.