Wall Street functions as a plutocracy, where one share—rather than one person—equals one vote, giving the richest investors more power. But fund companies are beginning to explore options to change that, reports an article in Barron’s. Vanguard Group announced at the beginning of February that it would launch a pilot program for its S&P 500 Growth, Russell 1000 and ESG US Stock ETFs that would enable individual investors to gain voting power in this spring’s proxy season.
The Vanguard program would allow shareholders to choose one out of four options of how to use the fund’s proxy votes: voting however Vanguard chooses, voting as per corporate management’s recommendations, abstaining from voting altogether, or following ESG recommendations from Vanguard advisor Glass Lewis. The choices would only apply to the funds’ 25 top holdings, giving the most control to the funds’ biggest shareholders, the article details.
The Vanguard program is similar to the program that BlackRock announced late last year for individual investors in the UK. In BlackRock’s system, shareholders would gain proxy control over every fund holding. The firm has slowly been allowing similar options for institutional investors in the U.S. and globally, and now about 95% of institutional stock index accounts are eligible to control their votes. Meanwhile, Schwab also announced a pilot program for their 1000 Index fund, 1000 Index and Ariel ESG ETFs, as has State Street Global Advisors.
Having more control over their assets is sure to be attractive to investors, but programs like these are a long time coming given the repeated criticism that indexers hold too much power at corporations. Indeed, Vanguard founder Jack Bogle stated back in 2018 that having the three biggest indexers retain so much corporate control doesn’t “serve the national interest” and others have pointed out that indexers vote over and over against ESG recommendations. Technological advances as well as stiffer competition are also factoring into the shift towards greater democratic control in proxy voting, and allowing more proxy vote customization within the ESG ETF realm will undoubtedly give those companies a more competitive edge.