Business Day

Your Mutual Fund Has Your Proxy, Like It or Not

Fair Game

By GRETCHEN MORGENSON    SEPT. 23, 2016

Do you think executive compensation is out of control or that a company should have to disclose its political contributions?

If so, you may also think that your mutual fund should vote on these and other issues in accordance with your beliefs. Good luck with that.

As investors, we are supposed to be able to sound off on corporate governance matters at the companies whose shares we own. We do so by voting on the issues when they arise at a company’s annual shareholders’ meeting.

But if you invest, as most people do, with a large fund manager, like BlackRock or the Vanguard Group, the chances are very good that your objections to common corporate practices are not getting through. That is because fund overseers vote your shares and often do so without regard to your views.

The result is a breakdown in one of the few accountability mechanisms available to individual investors in our so-called ownership society. This failure has everything to do with the fact that executive pay rises higher each year.

The voting of fund managers is infected by conflicts of interest, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. That is because these giant mutual fund operators don’t just own shares in many big American companies; they also do business with them.

“Funds often avoid challenging management on executive pay and corporate governance because they want to be included in corporate defined-contribution benefit plans,” he said in an email. “If a fund irritates a C.E.O. and the C.E.O.’s pals on the board, the fund risks losing business at several companies.”

BlackRock and Vanguard dispute this notion, saying they put their customers’ interests first in their voting. “We weigh all factors that could affect the long-term value of our clients’ assets,” Ed Sweeney, a spokesman for BlackRock, said in a statement, “including the hundreds of public pension plans, nonprofits, foundations, endowments, educational institutions and individual investors we serve.”

Every August, fund companies must disclose how they voted in the most recent proxy season. I asked Proxy Insight, a data analytics firm that tracks such votes, to tally those of BlackRock, with almost $5 trillion in assets, and Vanguard with over $3 trillion.

Here is what I learned. On matters involving executive pay, in the most recent 12 months, both fund managers overwhelmingly supported compensation practices at the companies in the Standard & Poor’s 500-stock index. BlackRock supported executive pay at 98.3 percent of those companies in the most recent year, and Vanguard voted in favor of pay practices in 98.1 percent of its votes. (Vanguard disputed this, saying it voted yes a mere 96 percent of the time.)

By the way, both companies supported the pay practices at Wells Fargo, whose executives are under fire for overseeing a pervasive program that prompted many employees to set up sham accounts to generate fees and make quotas.

As head of BlackRock’s investment stewardship unit, Michelle Edkins oversees its voting. On executive compensation, she stressed that the firm voted against pay practices or compensation committee members at 10 of the 50 companies with the highest-paid chief executives this year. She also said that BlackRock discussed compensation matters with half of those companies.

Beyond pay, BlackRock and Vanguard both supported management by voting against most proposals requiring that a company’s board be led by an independent chairman. Shareholders in favor of this idea contend that such a move would reduce management’s grip on the board and bring more accountability to corporations.

BlackRock voted nay on 95 percent of such proposals, Proxy Insight found, while Vanguard rejected 100 percent of them.

That is not particularly surprising, given that neither BlackRock nor Vanguard has an independent chairman overseeing their boards. Laurence Fink is both chairman and chief executive at BlackRock; F. William McNabb III holds both titles at Vanguard.

Officials at both companies said they voted against independent chairman proposals at companies whose boards had lead independent directors and whose roles brought necessary balance to the boardroom. BlackRock and Vanguard themselves have lead independent directors on their boards.

Nevertheless, a lead director will rarely be as powerful as an independent chairman.

The actions of BlackRock and Vanguard stand in contrast to some other big fund managers. AXA Investment Management, with $760 billion in assets, voted in favor of all independent chairman proposals in the most recent year, Proxy Insight said. And RBC Global Asset Management, with $300 billion, supported 97.5 percent of them.

Another type of proposal nixed by both BlackRock and Vanguard would require companies to disclose their political contributions and lobbying expenditures. Ms. Edkins at BlackRock characterized such proposals as micromanaging but said, “We believe it is the responsibility of the board to ensure there is a robust process around any type of spending that has a reputational impact on the firm.”

By contrast, Deutsche Bank Asset Management, with about $800 billion in assets, and Pax World Management, with $4 billion in assets, voted in favor on 95 percent of those proposals.

Neither BlackRock nor Vanguard is a stranger to lobbying. During 2015 and so far this year, the Center for Responsive Politics found, BlackRock spent $3.73 million lobbying Capitol Hill on financial regulations and Vanguard spent $3.38 million.

Deutsche Bank spent considerably less — $900,000 — and the database showed no expenditures for Pax World.

Asked about these and all their votes, both BlackRock and Vanguard cautioned that they were just one way of communicating their views to companies. Company officials said they also regularly discussed issues of concern with boards and if they got nowhere would vote nay. BlackRock voted against 5 percent of directors up for election this year at the approximately 4,000 companies whose shares it owns, Ms. Edkins said.

Vanguard abstained on almost 20 percent of shareholder proposals this year. One required companies to report on the gender pay gap among employees. Vanguard abstained on this at Alphabet, Citigroup, Danaher and eBay, among others.

In a statement, John Woerth of Vanguard said the company generally abstained from voting on social or environmental proposals that it did not believe “have a clear link to increasing shareholder value.” Vanguard will engage on topics that could affect long-term value, like climate change, he added, “to understand their processes for overseeing and managing those risks.”

One of Vanguard’s abstentions involved pay. A shareholder proposal at the Ameren Corporation, a big utility in the Midwest, would have required its top executives to hold on to a significant number of shares for two years after leaving the company. Such programs align pay with shareholders’ interests by encouraging executives to manage for the long-term.

About 50.6 percent of shares were voted against the proposal versus 35 percent in support. Had Vanguard voted its 22 million shares in favor, the proposal still would have failed. But the vote would have been close enough that Ameren’s management might have been forced to take the proposal more seriously.

Vanguard declined to comment on this abstention.

Mutual fund voting practices that perpetuate the status quo are on the agenda at a daylong symposium on Sept. 27 in Washington. The event, called “Breaking Through Power,” was convened by the Center for the Study of Responsive Law, a nonprofit founded by Ralph Nader, who has strong views on fund managers’ voting.

“Mutual funds are a top-down autocracy. How can they be expected to go after the corporations they’ve invested in when there is such conformity of abuse?” Mr. Nader asked. “If they criticize executive compensation, they have to look at their own executive compensation. If they deal with corporate disclosures they’re going to have at look at their own disclosures.”

Unfortunately, there is little that investors can do to change this dynamic.

But here is an idea. If your fund company votes the wrong way on issues you care about, register your displeasure by voting against the fund’s directors in its annual election. Maybe that will get someone’s attention.

A version of this article appears in print on September 25, 2016, on page BU1 of the New York edition with the headline: Your Fund Has Your Say, Like It or Not.

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