An Analysis of ETF Voting Policies, Practices and Patterns

Posted by Andrew Tuch, co-editor, HLS Forum on Corporate Governance and Financial Regulatio, on
Wednesday, August 5, 2009
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This post is by Scott Fenn, Senior Managing Director, Proxy Governance Inc.

The Investor Responsibility Research Center Institute and PROXY Governance Inc. recently released an in-depth analysis of the proxy voting policies and recent voting records of seven of the largest exchange-traded fund (ETF) sponsors, which account for some 94% of the ETF market. Entitled “Proxy Voting by Exchange-Traded Funds: An Analysis of ETF Voting Policies, Practices and Patterns,” the study was commissioned by the non-profit IRRC Institute and conducted by PROXY Governance.

The findings indicate a considerable variation in the voting patterns and philosophies of these funds. The key research findings are as follows:

• There appear to be significant differences in the level of detail of proxy voting guidelines utilized by ETF sponsors. The ETF sponsors in the study that relied on guidelines provided by proxy advisory firms appear to have the most detailed and comprehensive, and prescriptive, guidelines. At the other end of the spectrum, Rydex has very summary guidelines that stipulate voting with management on virtually all issues.

• There is significant variation in the voting philosophies and patterns of the largest ETF sponsors, with some funds much more likely to vote against management on both shareholder and management-sponsored proposals than other funds

The three largest ETF sponsors are somewhat less likely to vote against management on shareholder and management proposals than are most of the smaller fund sponsors examined in this study. Yet, the three largest ETF sponsors, on average, appear to withhold votes from incumbent director nominees at a greater number of companies than the smaller funds, which appears to be their preferred means of expressing dissatisfaction with management or board governance rather than voting against management on specific proposals.

• The votes by the specific funds at selected 2008 annual meetings are generally consistent with the written voting policies of those funds. Case-by-case voting policies by many funds on most issues explain much of this consistency. In a few cases, however, specific votes were cast that appear to be potentially contrary to the fund’s written voting guidelines.

• Funds that rely heavily on a proxy advisory firm for voting guidelines or to make their vote decisions tend to vote against management proposals, and in favor of shareholder proposals, more frequently than those that rely on their own guidelines.

The study covers the following seven ETF sponsors – Barclays Global Investors (iShares), State Street Global Advisors (SPDRs), Vanguard Group (Vanguard ETFs), Invesco Ltd. (PowerShares), ProFunds (ProShares), Rydex Investments (RydexShares) and WisdomTree Trust (WisdomTree ETFs). (NB: Barclay’s Plc recently announced that it would sell its Barclay’s Global Investors asset management division, the single largest ETF manager, to BlackRock, Inc.)

The full report is available here and here.

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