Investor Ideology

Enrichetta Ravina is Visiting Assistant Professor of Finance at Northwestern University Kellogg School of Management. This post is based on a recent paper authored by Professor Ravina; Patrick Bolton, David Zalaznick Professor of Business and Professor of Economics at Columbia Business School; Tao Li, Assistant Professor of Finance at University of Florida Warrington College of Business; and Howard Rosenthal, Professor of Politics at New York University.

Understanding the determinants of institutional investor voting has become increasingly important as they own a larger share of the economy. They, not retail investors, cast the determining votes on most proxy ballots, and consequently shape a wide range of corporate governance, social and economic issues.

In our paper, Investor Ideology, publicly available on SSRN, we estimate the ideology of several hundred mutual fund families and public pension funds by examining their proxy voting records in publicly listed Russell 3000 firms. We follow a “political” approach based on the W-NOMINATE spatial model pioneered by Poole and Rosenthal to study voting in Congress. The model takes institutional investors’ votes on proposals up for a shareholder vote to estimate their ideal points along one, or possibly two, most salient policy dimensions. This political approach, which has also been adopted by Bubb and Catan in simultaneous and independent work, is in contrast to the economic and financial approaches taken in the existing proxy voting literature, which mostly focus on financial and agency considerations. We can thus allow for a broad “ideological” interpretation of the diverse ideal points of the multiple institutional asset managers and owners that goes beyond pure shareholder value considerations.

Our results highlight significant ideological differences across institutional investors, and a lack of shareholder unanimity. We find that institutional investors’ ideology can be mapped onto a left-right dimension, just as legislators’ ideologies can be represented along a left-right spectrum. The far-left investors are socially responsible investors, who support a more social and environmental orientation as well as tighter limits on executive compensation. For example, consistent with its voting record, Domini Social Investments describes its investment philosophy as follows: “We believe that all investments have social and environmental implications. We apply social, environmental and governance standards to all of our investments, believing they help identify opportunities to provide strong financial rewards to our fund shareholders while also helping to create a more just and sustainable economic system.” The far-right investors are “greedy” investors, those opposed to proposals that could financially cost shareholders. Among them, Leuthold Weeden Capital Management “stresses quantitative measures of value combined with recognition of fundamental and technical trends, [and pursues] A policy of disciplined, unemotional, and strategic investing, backed by solid and comprehensive research.” With one exception, funds on the far right do not mention anything about ethical, environmental, or social concerns.

The second salient observation is that management is close to the far right. We take management recommendations in support of or against shareholder proposals as votes by a generic “management” voter. Management’s position on the far right mostly indicates the near systematic opposition of management to shareholder proposals. The extremists on the right of management are in unison with management in opposing (other) shareholders’ proposals.

Third, the proxy adviser Institutional Shareholder Services (ISS) plays a role similar to a political party, coordinating the votes of over 35 funds families, and sitting center-left. A second adviser, Glass Lewis, has fewer followers, and is center-right. A significant fraction of both institutional investors and pension funds are in between ISS and Glass Lewis, an indication that they sometimes side with one or the other when the two advisers’ recommendations differ.

The fourth observation is that the large passive asset managers BlackRock and Vanguard have different ideal points than the proxy advisers. Both asset managers have communicated that while they rely on the recommendations of ISS and Glass Lewis to guide their votes, they do not slavishly follow these recommendations. Interestingly, their ideal points are to the right of the proxy advisers, suggesting they are both less concerned about environmental and social issues and that they tend to side more with management.

Our results also differ somewhat from the literature on proxy voting in that we do not find that large institutions vote with management. While Vanguard and BlackRock do not blindly follow ISS and are closer to management, there are 32 investors, mostly small, to the right of both. And other large investors, such as Fidelity, are to the left.

Finally, most pension funds are on the left and show greater concerns for environmental and social issues, possibly because of their duty to vote in line with their members’ preferences. A larger group of pension funds are on the center left together with Fidelity, Prudential and Invesco. All pension funds, with the exception of the pension fund of Indiana, are to the left of Vanguard and BlackRock.

It is important to emphasize that the W-NOMINATE scaling method is agnostic as to where ideology comes from and what it represents. The one-dimensional representation of investor ideology is a statistical representation, which best explains their voting behavior. The interpretation of the dimension we found is somewhat indeterminate, much as is the meaning of “liberal” and “conservative” in politics.

We also analyze the distribution of proposals’ midpoints, the position on the ideology line separating the voters predicted to vote “For” a proposal from those predicted to vote “Against.” Unlike Congress, where the midpoints are around 0.65, many midpoints in our setting are at the extremes, especially on the left. In addition, the distribution of midpoints varies by proposal type. The mid-points for the social proposals have a bi-modal distribution, with some on the far left, meaning that the far-left funds vote against everybody else on them, and another big group just left of the center. The mid-points for the Governance and Compensation proposals are concentrated on the far left of the distribution, while the ones of the Financial and Investment Policy are concentrated to the right and center-right. The modal financial proposals cut between BlackRock and Management; the modal social proposals cut between ISS and Glass Lewis; and the modal management proposals cut between far-left investors and everyone else.

The proposals that have estimated midpoints between -0.9 and -0.4 are perfectly classified. They have at least 80 voters and are all “Say-on-Pay” votes that became mandatory with the Dodd-Frank Act. Those voting against these proposals are on the left. Their opposition may incorporate considerations of inequality that blend with their votes on “social” proposals. The proposals whose midpoints are between ISS and Glass Lewis deal with a variety of topics including stock retention and political contributions. The proposals that divide BlackRock from management all involve corporate governance issues. Five are to declassify the Board of Directors. A sixth is to require a majority vote for election to the board, and a seventh to reduce the supermajority vote requirement.

Whether these ideological differences are a reflection of the differences in ideology of their client bases we cannot say. It is not even clear that clients are aware that the funds they invest in have systematic ideological biases.

The full paper is available for download here.

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