In its proxy voting in 2004 and 2005, Fidelity’s Spartan 500 Index Fund withheld support for company directors in only 1.2% of cases. Meanwhile, the Vanguard 500 Index Fund, which invests in the same 500 stocks, withheld support 10.7% of the time. The voting pattern isn’t an anomaly—according to governance experts, many mutual funds consistently back a company’s board nominees, while others are more likely to oppose them.
Why?
A new study from economist Michael Ostrovsky and Harvard University doctoral candidate Gregor Matvos offers a theory that reveals the complex, conflict-ridden relationship between companies and institutional investors. It also puts the lie to the idea of proxy voting as an orderly simulacrum of democracy.
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In analyzing more than 3 million votes by 3,600 mutual funds from 2003 to 2005, the researchers found that certain investors tended to support a company's proposed slate, while others were more likely to oppose it. And when funds did withhold votes for a company’s board nominee, they usually acted in concert with other dissident investors. In other words, they sought safety in numbers.
“Suppose I dislike a director but I know he’ll be voted for by everyone else," says Ostrovsky in Stanford Business School’s May Knowledgeabase newsletter. "I can withhold my vote, but I’ll be sticking my neck out by doing so. Essentially, because that information is now public, I’m showing the management of that company that I’m, in some sense, ‘against’ them.”
For money managers, the punishment for that can include corporate leaders withholding key information they need for trading or even denying them future pension or investment banking business, Ostrovsky adds. As a result, before opposing a board member, even the decrepit one dozing in the corner on that pile of back-dated stock options, investors often try to discern how other fundies will vote. Voting, like investing, in herds avoids being singled out for rude treatment. Meanwhile, once a handful of fund managers openly challenge management, others feel more comfortable doing it, opening the door for other investors to take a stand.
On second thought, that does sound like democracy. —Alain Sherter
See Stanford Graduate School of Business Knowledgebase newsletter
Comments
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