Thank you for the opportunity to participate in the committee’s discussion about engaging with beneficial owners. I come to today’s discussion in two capacities. As an academic, I have researched and written extensively about mutual funds, shareholder voting and the distinctive challenges to effective retail investor participation in corporate governance. As a retail investor, I can speak from personal experience as to those challenges.

I am a chaired professor at the University of Pennsylvania Carey Law School where I have been teaching and writing about securities regulation and corporate governance since 2009. Prior to that I taught at Fordham Law School for almost 20 years. I previously practiced law at a Wall Street firm and the US Department of Justice.

Statistically we know that retail investor participation in corporate governance is extremely limited. Retail investors own almost 1/3 of publicly traded equity, yet only about 29% of retail shares are voted, compared to around 90% of shares held by institutional investors. So retail investors often own enough stock to make a difference, and the question is why don’t they participate more?

Several factors limit retail participation in corporate governance. One is information. Unlike institutional investors, retail investors generally do not have access to efficient sources of information about shareholder votes such as the reports and recommendations of proxy advisors. Although proxy statements contain extensive information, they are so long and detailed that, as a practical matter, most investors ignore them completely. Tesla’s 2024 proxy statement, while concededly an outlier, was 443 pages including appendices. Media reports provide information on certain high-profile votes like proxy contests and mergers, but that information is often the product of journalistic choices and need not include information investors might want to know.

A second constraint is time. Voting is a cumbersome process. For retail investors, it generally requires logging into their brokerage account and then logging into a separate platform such as proxy vote to vote their shares. Multiple accounts may not be integrated and may require multiple logins. Then the investor must populate each individual voting decision separately. This process must be repeated each time there is new voting period for an issuer – so it isn’t like an investor can go through this once each proxy season. There is no mechanism to prepopulate according to an investors’ general voting policies, a procedure of providing advance or standing voting instructions that institutional investors have access to and that I have recommended be extended to retail investors.[1] 

A third problem is intermediation. Even retail investors who own stock directly do so through brokerage accounts in which their shares are virtually always held in street name, which means it is the broker’s name on the account, not that of the beneficial owner. Beneficial ownership means, if an investor owns stock through an account at Merrill Lynch or Charles Schwab, even though that investor holds the economic interest in that stock, he or she cannot even get into a shareholders’ meeting without obtaining documentation from the broker verifying the investor’s ownership and authorizing him or her to attend.

Until about fifteen years ago, stock exchange rules gave brokers the authority, called discretionary voting, to vote all shares for which they did not receive voting instructions from the beneficial owner. Discretionary voting has gradually been restricted and now applies only to routine items.[2] Nonetheless, the existing system of intermediation still makes retail voting hard.

Regulation 14B (a little known component of the federal securities laws) requires that brokers forward proxy information to beneficial owners and allow them to submit voting instructions.[3] Issuers compensate brokers for this service according to a set fee schedule. But brokers have no particular incentive to make voting easy, and they don’t. That’s why there isn’t a single platform that an investor can go to with all the elections, relevant information and up-to-date technology. Rather, ProxyVote.com, which is run by Broadridge, offers a 6 or 8 word summary of an issue such as a shareholder proposal, without identifying the proponent or any other details. Significantly, that summary is not even subject to regulatory oversight. Here are some examples from this year’s Walmart annual meeting: “Racial Equity Audit” and “Health and Safety Governance .”  If, as these examples suggest might often be the case, the summary is incomplete, the customer must leave the voting platform to obtain full information on the issue from the proxy statement. There are also no requirements that the broker update information on individual accounts to indicate whether votes have been submitted or to remind the customer through push technology such as texts or emails if there are unvoted shares.

Concededly there are market participants that are innovating tools to make retail voting easier. One such player is Iconik, which has its own platform enabling investors to designate certain preferences that then can be prepopulated on the voting instructions.[4] Unfortunately this is still an information-intensive issue, and the instructions by design are forced to incorporate an objective and one-size-fits-all approach.

The vast majority of retail investors who hold equities do so through mutual funds and ETFs. Intermediation creates even greater problems for these investors.  The mutual fund, not the beneficial owner, is the record holder of the shares and has the legal authority to vote them. In fact, it is not just authority, the SEC has determined that it is an obligation based on the fund manager’s fiduciary duties under the Investment Company Act and Investment Advisers Act.

A fund manager is supposed to exercise its voting power in accordance with the best interests of the mutual fund customers, but legally it isn’t clear what that means. Some fund managers have interpreted the legal obligation as requiring them to vote in accordance with maximizing the economic value of the fund, and there are a lot of politicians who are currently framing the obligation in those terms. But empirical research suggests that it is almost impossible to demonstrate a convincing link between any voting decision and economic value, especially decisions like reincorporating in Texas, eliminating a staggered board or restructuring a compensation package. Things get even harder when voting addresses values-related issues like DEI, climate change and the disclosure of corporate political activity.  There is little or no evidence that these issues have a material economic impact in either direction, meaning that an investor’s preferences are likely the product both of economic value and the investor’s own values. But intermediaries lack sufficient information about how their customers want their shares voted and, given the high levels of polarization in the country, a fund’s investors are likely to have heterogeneous preferences.

Increasingly too, fund sponsors are facing political backlash for engaging on social and political issues. This backlash in part has spurred the move toward pass-through voting.

Before I get to pass-through voting – a few alternatives

1.      Some policymakers and academics have advocated stripping mutual funds of their voting rights – this would disenfranchise the economic owners of the shares.[5] And there is little reason to believe other shareholders – direct retail, hedge funds, insiders, would be better positioned to make decisions.

2.      Greater market segmentation would allow investors to choose voting policies through their investment decisions. Some values-oriented mutual funds – a Green Fund, for example, view the decision to invest in a values-oriented way as a mandate to take particular values-related voting and engagement actions, but again that mandate is not particularly nuanced – should a Green Fund vote in favor of a racial equity audit? The problem for a market based approach is that a particular investor’s specification of values/issues requires too much nuance. In addition, the quality of specific shareholder proposals varies such that even a green investor is unlikely to want his or her fund unthinkingly to vote in favor of all of green proposals.  And is green linked to other ESG issues? How should a green fund vote on those?

3.      True pass-through voting, which has been proposed for years, would allow beneficial owners of mutual funds to vote directly. Technological developments have made this possible – we can trace each individual owner’s shares and collect their voting instructions. The promise of pass-through voting is that it would give owners of mutual fund shares a say in how their shares are voted. This would reduce the need for mutual funds to guess, to be overly conservative or to avoid voting altogether. It would also eliminate the difficulty of aggregating heterogeneous preferences into a single voting policy.

It is important to distinguish pass-through voting for institutional owners of mutual fund shares, such as public pension funds, from pass-through for retail investors. Tumelo has been active in the institutional space. BlackRock has offered pass through to many of its public pension fund customers and, as I understand it, the takeup has been significant. This is a promising development, and many institutional clients have the capacity to make pass-through voting meaningful.

But pass through voting for retail mutual fund shareholders isn’t practical. Part of the reason I spent time going over the challenges of voting for direct retail investors is to explain the logistical issues. These issues would be multiplied if mutual fund owners could vote directly. A retail investor who owns an S&P 500 fund cannot vote intelligently at 500 companies. In addition, a key reason that retail investors choose mutual funds instead of stocks is because they want to delegate investment decisions to someone else. The same is true of voting decisions. So we need an alternative.

4.      Proxy Choice or voting choice programs.  To be clear – these programs are not pass through voting. Mutual funds have taken several approaches, all of which are in the early stages. John Galloway can talk about Vanguard’s approach, which is very thoughtful and a useful first step. Here are some of the challenges:

a.      As with direct voting, proxy choice programs depend on the cooperation of broker intermediaries.  They don’t cooperate.  I own Vanguard shares that offer voting choice through Schwab. It took me 2 years to get the proxy choice instructions, and I only got them once.  I can’t even find much less change my voting instructions on the Schwab site, and I can’t do it through Vanguard because I don’t have a Vanguard account.

b.      An additional lawyer of intermediation exists in the case of retirement plans, which is where most Americans hold their mutual funds. In a 401(k) plan, individual contracts will determine whether the retirement plan custodian or the mutual fund manager votes the shares. Even if the fund manager votes, the retirement plan controls whether voting information actually reaches the plan members. In more than 35 years of working for Universities, I’ve never received a single communication regarding how the shares held in my 401(k) plans are voted.

c.       Voting choice programs currently offer their customers limited choice sets.  At present Vanguard currently offers five choices – vote with management, delegate to Vanguard, vote with ISS’s ESG policy, vote according to an anti-ESG policy or abstain. This isn’t a very nuanced set of choices. In addition, how does an investor find out what these policies are? How does the investor predict how the asset manager (or ISS) will vote on a specific issue? (again, think Tesla’s reincorporation in Texas)

 As ISS explains “We note there may be cases in which the final vote recommendation at a particular company varies from the voting guidelines due to the fact that we closely examine the merits of each proposal and consider relevant information and company-specific circumstances in arriving at our decisions.”

Some commentators have argued for a greater number of choice sets,[6] but that simply multiples the information problem. Currently for example, ISS offers its institutional clients the following choices:

            Benchmark policy

            Taft-Hartley policy

            Socially responsible policy

            Catholic Faith based policy

            Climate policy

            Sustainability policy

            Board-aligned policy

            And public fund policy

I am not aware of any source that identifies the issues on which those funds vote differently and explains why.[7] How is a retail investor supposed to choose among them?

d.      Vanguard’s early data on its voting choice program indicates that a substantial percentage of its customers affirmatively choose to delegate their voting power to Vanguard. What significance should we attach to this decision? The idea that many investors are willing to defer to the fund manager’s expertise is in part what motivates the alternative to pass-through voting that Jeff Schwartz and I have suggested, called informed intermediation, which I will discuss in a moment.

e.      Another concern is that proxy choice programs rely heavily on proxy advisory firms.  BlackRock, which offers slightly more choices than Vanguard – six at last count, offers 3 from ISS and 3 from Glass Lewis.  So retail investors get to delegate their votes to proxy advisors.  Virtually since their inception, however proxy advisors have received significant scrutiny over the quality of their recommendations, and institutional investors have been criticized for relying on them.  How then is it okay that retail shareholders can’t get the recommendations but can blindly delegate to them?

f.        Finally, any mechanism that removes control of the fund’s voting power from the manager, whether it is pass-through voting or voting choice, would reduce the effectiveness of fund engagement and interactions with management. This engagement has dramatically increased the responsiveness of management to shareholder interests, reduced agency costs, and improved the quality of corporate governance.

5.      The alternative to pass through voting or a proxy choice alternative is what Jeff Schwartz and I term informed intermediation.[8] Our proposal would leave ultimate voting authority in the hands of the fund managers but would require them to engage with and solicit input from their customers. Managers can then formulate voting policies that are informed by their customers preferences but that are still context and issue specific. Fund managers have the resources and expertise to vote intelligently and to incorporate this input.

I welcome your questions.

1 Jill. E. Fisch, Standing Voting Instruction: Empowering the Excluded Retail Investor, 102 Minn. L. Rev. 11 (2017).(go back)

2  See id. at 56-57.(go back)

3  17 C.F.R. § 240.14b-1.(go back)

4  https://www.iconikapp.com/.(go back)

5  See, e.g., Dorothy S. Lund, The Case Aainst Passive Shareholder Voting, 43 J. CORP. L. 493 (2018).(go back)

6  See, e.g., Caleb Griffin, Open Proxy, 99 Tulane L. Rev. 247 (2024).(go back)

7  See Jeff Sommer, Millions of Fund Investors Are Getting a Voice, N.Y. Times, Feb. 23, 2204, https://www.nytimes.com/2024/02/23/business/vanguard-blackrock-state-street-investing-voting.html (go back)

8  Jill E. Fisch & Jeff Schwartz, Corporate Democracy and the Intermediary Voting Dilemma, 102 TEX. L. REV. 1 (2023).(go back)