The Politics of Institutional Shareholder Voting: Transparency Before Reform

On July 22, the SEC finalized a sweeping rule change to enhance the transparency around the role of proxy advisers. This follows an earlier proposal to reform the process for including shareholder proposals in a company’s proxy statement.[1] These developments may give companies more ammunition against shareholder activism, while also highlighting the lack of transparency in the relationship between shareholders and companies. Even though the new rules address proxy advisers, it sets the stage for a closer look at how asset managers handle their relationship with corporations.

Virtually every large asset manager relies on proxy advisers in deciding how to cast a ballot at shareholder meetings. That is especially true for managers of mutual funds and ETFs. While their business models are based on scale and low management costs, they still get to vote on many thousands of ballot items for the portfolio companies in their funds. The duopoly of proxy advisory services implies that just two firms – ISS and Glass Lewis – dominate how U.S. shareholders vote their stocks. This has been a concern among academics[2] and other market observers for a while.[3] While the sheer concentration of the proxy advisory business has declined, a recent study confirmed that the influence of the largest advisers is significant.[4] The SEC’s recent proxy adviser rule change was long anticipated. While there is no immediate evidence that proxy advisers misuse their influence on a large scale, there seems to be a consensus that their influence itself justifies tighter regulatory oversight and more transparency around potential conflict of interests. I find that an analogous reasoning can also be applied to the proxy voting and proxy-related engagements by the largest asset managers.

How Market Circumstances Changed

Two key developments underlie the increased focus on shareholder-company politics.

First, passive investing grew dramatically over the past 10 years. Mutual funds and ETFs usually vote the shares of each portfolio company on behalf of the investors in the funds.[5] The ongoing massive inflow of money into index funds gave rise to three “giant”[6] asset managers: Vanguard, State Street and BlackRock. These asset managers vote a quarter of all shares of large public companies.[7] This influence is especially relevant in votes on environmental, social and governance (ESG) topics. Those issues are politically more sensitive, and more often relevant to employees or retail investors than routine board elections.

Second, investment strategies using ESG factors took off with sustainability standard-setting (e.g. SASB), ESG index providers (e.g. MSCI, S&P), and the growth of many ESG index funds. The broad scope of sustainable investing went from a primarily active investment strategy, available to a select group of institutional investors (e.g. religious or educational endowment funds), to mainstream index funds.

ESG Cannot Be Isolated from Politics

These two developments led to heated regulatory debates about ESG in the context of investor protection, corporate disclosure, and proxy voting. The commodification of ESG strategies for index funds came with challenges. Institutional investors are assumed to be more conscious and selective about the sustainability elements shaping their portfolio. But retail investors have less insight into what makes a fund ESG or sustainable and so typically rely on asset managers. The three largest asset managers collectively can often decide the outcome of environmental and social proposals at shareholder meetings, given size of their funds’ assets. They speak for millions of individual index fund investors. Hence, these asset managers’ dependence on a few proxy advisers has increased with the rise of passive funds. Indeed, SEC Chairman Jay Clayton contends that the recent rule change increasing scrutiny of proxy advisers should “ensure that those who take on the responsibility of investing and voting on behalf of our Main Street investors have the accurate and decision-useful information necessary to make an informed voting decision for the benefit of those investors.”[8]

While it is useful to prevent conflicts of interests with proxy advisers, it is just part of the story. Also relevant is how asset managers vote – regardless of whether they use proxy advisers and also, because studies reveal that the largest asset managers often do not follow proxy advisers.[9] Big asset managers have large shareholder stewardship teams a strong influence on corporate leadership – notably with respect to ESG issues. BlackRock CEO Larry Fink drew attention (and raised a few eyebrows) by claiming early this year that “sustainable investing is the strongest foundation for client portfolios going forward”.[10] State Street[11] and Vanguard[12] are also speaking forcefully in favor of incorporating ESG in deciding how they vote shares. Yet, despite those commitments and their influence at shareholder meetings, analyzing actual voting data suggests that the three large asset managers display only lukewarm support for ESG shareholder activism.[13] Their inaction might not always align with their public statements.

Visibility Before Regulatory Reform

It is too early to discount the three large asset managers as passive stewards managing passive funds. Due to the mandatory annual disclosure of fund votes introduced in 2004 by Regulation N-PX, index fund managers do attach more weight to their voting decisions.[14] Importantly, asset managers are bound by fiduciary rules and obligated to act in their clients’ best interests. The Department of Labor (DOL) recently proposed a rule to discourage the inclusion of ESG strategies in pension funds.[15] In essence, the DOL seeks to confirm that a fiduciary should select investments “based solely on their pecuniary factors and not on the basis of any non-pecuniary factor” such as ESG metrics or ESG index funds.

The DOL’s position is controversial.[16] In any case, if the DOL rule is adopted and pension funds were to exclude ESG investment strategies, the voting by index funds on ESG-related topics would become all the more relevant. Voting is where asset managers take a position on societal matters – whether they support ESG activists or corporate management.

The point is not to introduce more politics in boardrooms. As SEC Commissioner Elad Roisman stated a few weeks ago, ESG topics can be “subjective and constantly evolving,” which underlies the SEC’s reluctance to expand ESG disclosure requirements.[17] As the new SEC rule curbs the influence of proxy advisers, I recognize the need for transparency in how the most powerful investors (asset managers) vote on ESG topics – their votes represent millions of people. Rather than advocating for regulatory intervention, it would be helpful to provide investors with better access to already public data. The goal would be to help fund investors and other stakeholders take a good look and judge for themselves how their assets are managed – and voted.


[1] SEC proposal to amend Exchange Act Rule 14a-8 (November 5, 2019),

[2] The two largest US proxy advisory firms are Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis). See for example Chester Spatt (July 4, 2019), Proxy Advisory Firms, Governance, Market Failure, and Regulation, Milken Institute Report. Available at:; Tuch, Andrew F., Proxy Advisor Influence in a Comparative Light (May 7, 2019). 99 Boston University Law Review 1459 (2019), Available at:

[3] See for example the NYSE pushing for reform of proxy advisor regulation:,manage%20their%20conflicts%20of%20interest.

[4] Shu, Chong, Proxy Advice Industry and Its Growing Influence (May 30, 2020). USC Marshall School of Business Research Paper, Available at SSRN: or

[5] As follows from the Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Securities Act Release No. 8188, Exchange Act Release No. 47,304, Investment Company Act Release No. 25,922, 68 Fed. Reg. 6564 (Jan. 31, 2003).

[6] Bebchuk, Lucian A. and Hirst, Scott, The Specter of the Giant Three (May 9, 2019). Boston University Law Review, Vol. 99, 2019, pp. 721-741. Available at: or

[7] Bebchuk, Lucian A. and Hirst, Scott, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (May 31, 2019). Columbia Law Review, Vol. 119, December 2019, pp. 2029-2146. Available at SSRN: or

[8] SEC Adopts Rule Amendments to Provide Investors Using Proxy Voting Advice More Transparent, Accurate and Complete Information, Press Release,

[9] Peter Iliev, Michelle Lowry, Are Mutual Funds Active Voters?, The Review of Financial Studies, Volume 28, Issue 2, February 2015, Pages 446–485. Available at:


[11] SSGA, Proxy Voting and Engagement Guidelines: North America (March 2020), available at:

[12] Vanguard funds Summary of the proxy voting policy for U.S. portfolio companies (April 2020), available at:

[13] Griffin, Caleb, Environmental & Social Voting at Index Funds (February 14, 2020). Available at SSRN: or

[14] Chester Spatt (July 4, 2019), Proxy Advisory Firms, Governance, Market Failure, and Regulation, Milken Insttitute Report. Available at:

[15] DOL (June 30, 2020), Financial Factors in Selecting Plan Investments, available at:; the Proposed Rule amends regulations under section 404(a) of ERISA.

[16] While taking a positive view on ESG investment funds, Martin Lipton sees one bright side to the DOL proposal: “the new rules may spur further demand for comparable, decision-useful ESG data to help satisfy the burden imposed by the DOL to justify the inclusion of ESG factors in private-sector retirement plans”.

[17] SEC Commissioner Elad Roisman (July 7, 2020), Keynote Speech at the Society for Corporate Governance National Conference. Available at:

This post comes to us from Isabel Verkes, co-founder of The Fund Checker – an open-source tool to check how large index funds voted on ESG shareholder proposals (accessible here).