Brian Monsen is an Assistant Professor of Accounting at The Ohio State University. This post is based on a paper by Professor Monsen, John McInnis, KPMG Centennial Professor of Accounting at The University of Texas at Austin, Laura T. Starks, George Kozmetsky Centennial Chair and Professor of Finance at The University of Texas at Austin, and Nathan D. Herrmann, a doctoral student in Accounting at The University of Texas at Austin.
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. READ MORE »
