Are you concerned about climate change, or about social issues such as corporate board diversity? Can you as a shareholder have your preferences communicated to company management and perhaps impact corporate policy on these issues? For the majority of individual investors, the short answer is “no.”
That’s because most individual investors own mutual funds. But the structure of the mutual fund makes it difficult to reflect shareholder objectives and values related to environmental, social, and governance (ESG) issues.
The growth in individual shareholder ownership ironically has created a huge gap in corporate governance and accountability. The ownership of Corporate America lies largely with employees through 401(k) plans and other retirement vehicles, except these same employee-owners cannot and do not have proxy voting rights — these are exercised by the fund providers.
Given the size of retail assets that fund managers control — collectively close to $10 trillion — there is a valid concern about their voting practices not reflecting the preferences of the millions of investors in their funds. A typical fund has to vote on hundreds of proxies each year, most of them routine. The voting process is centralized and fairly automated, with default guidelines regarding how the shares are voted. The fund manager conducts analysis only on issues that materially impact a company’s financial or operating performance, and then casts a vote.
Having managed mutual funds for a long time and voted hundreds of proxies globally, I believe there is a simple and direct way to reflect shareholder ESG preferences in the voting of proxies: Through the fund prospectus. Read More