The Proxy Process

There is a complex set of rules, governed by the Securities and Exchange Commission, to qualify an issue for a shareholder vote. What’s noteworthy is that individuals – private citizens – only own about 25 percent of shares held in publicly-traded companies. The remaining shares are owned by institutions – typically mutual fund and ETF families, such as BlackRock, State Street, Vanguard, etc.

When shareholders press for companies to adopt specific measures, these institutions act as the proxy for all other shareholders and vote on these measures. The result is that these institutions can have enormous influence on company policies even though the money being invested is “owned” by people whose pension funds and savings are being managed by these large money management institutions.

Today, more than half of the total investment in stock-based funds is allocated to passively managed ETFs and index funds, which simply mirror benchmarks such as the S&P 500. Here’s why that’s significant, as explained in a 2022 report prepared by the Republican staff of the Senate Banking Committee:

A retail investor who buys an index fund does not own the stocks in the fund. Those stocks instead are owned by the fund, which means that the fund’s manager may vote those shares. Even though they buy that voting power with other people’s money, that voting power gives asset managers like the Big Three [BlackRock, Vanguard, and State Street] enormous influence (emphasis added).

Institutions are voting on behalf of tens of millions of shareholders – representing trillions of dollars in capital. Yet many fund managers are staking out positions that are at odds with the preferences of these shareholders. As noted in a study by professors at Duke, UC-Berkeley, Columbia, and New York University, “Compared to institutional investors, retail shareholders do not support environmental, social, and governance (ESG) proposals to the same degree.”