Investment stewardship refers to shareholder engagement with public companies, including voting and other direct communications between investors and public companies. This report focuses on investment stewardship by investment advisers on behalf of mutual funds and ETFs with a focus on index funds. We begin by reviewing the existing regulatory requirements and the voluntary investment stewardship practices by certain investment advisers. We then review the empirical literature that relates to the effects of investment stewardship on firm performance and corporate governance. Finally, we review proposals to reform voting by index funds and conclude by setting forth reforms that would enhance the transparency of non-voting engagement by investment advisers.
This report is divided into five sections:
Section 1 provides a very brief introduction to mutual funds and exchange-traded funds (“ETFs”) and presents data showing their importance as shareholders of public companies. It also summarizes the regulatory framework governing mutual funds and ETFs (regulated as “investment companies” under the Investment Company Act of 1940 (the “Company Act”)) and the firms that manage these funds (regulated as “investment advisers” under the Investment Advisers Act of 1940 (“Advisers Act”)).
Section 2 describes the existing legal and regulatory requirements regarding investment adviser and investment company voting and engagement. Investment advisers have fiduciary duties of care and loyalty to clients, including the investment companies that they man-age, that require investment advisers to exercise reasonable care to ensure that votes are cast in the best interest of their clients. In connection with these duties, investment advisers must develop voting policies, describe these policies to clients, and make voting policies and voting records available to clients. Investment companies are required to publicly disclose voting policies and voting records. We then compare U.S. requirements with rules in the European Union, Hong Kong and Japan.
Section 3 describes the voluntary investment stewardship practices of BlackRock, Van-guard and State Street, whose mutual funds and ETFs are the three largest holders of many U.S. public companies. With respect to voting, we find that these investment advisers voluntarily disclose highly detailed voting guidelines and consolidated voting statistics. With respect to non-voting engagement, including meetings with public companies, we find that these investment advisers disclose their engagement priorities and efforts undertaken to advance them. Such disclosures allow investors to evaluate whether investment advisers’ investment stewardship policies are consistent with investor priorities.
Section 4 reviews the empirical literature as it relates to investment stewardship by investment companies. First, we consider studies that evaluate the frequency with which investment companies oppose management proposals and support shareholder proposals. Second, we consider studies that evaluate whether holdings by investment companies are positively correlated with improved performance of public companies. Third, we review studies that assess whether holdings by investment companies are correlated with positive measures of corporate governance at public companies. In doing so, we also consider empirical studies that are focused exclusively on index funds as a subset of investment companies.
In Section 5, we evaluate proposals to reform voting by index funds. We begin by evaluating proposals that would require index funds to allow for “pass through voting,” whereby the millions of individual shareholders in index funds would provide instructions on how to vote. Second, we consider proposals that would require that index funds “poll” their share-holders to determine their voting decisions. Third, we evaluate proposals that would effectively eliminate index funds’ authority to vote their shares. We conclude by recommending enhanced transparency of non-voting engagement practices by investment advisers.
The full report can be found here.