A corporate governance revolution is underway. The conventional depiction of the U.S. capital markets has focused on the presence of large institutional shareholders and their substantial influence over the economy. But in the past two years, in response to political and public pressure, the largest institutional asset managers have begun to diffuse their power by expanding “proxy voting choice” programs. In a new article, we explore how these programs could affect institutional shareholder voting and the corresponding governance and performance of public companies.

Specifically, we provide the first empirical analysis of a large asset manager’s voting-choice program, providing a detailed account of Vanguard’s use of a “menu” of policy options designed by third-party proxy advisers. To better understand Vanguard’s program across its first two years, we merge information from Vanguard’s proxy disclosure site with ISS voting analytics and Form N-PX disclosures from 2023-2024. In so doing, we provide a detailed account of the policy options provided to investors, their differences, and their relative uptake.

Although our evidence suggests that the current impact of voting choice is minimal, each of the Big Three asset managers has committed to expanding its programs and encouraging investor participation, which has the potential to be transformative in ways that scholars have not yet fully appreciated. For example, our counterfactual analysis of contentious shareholder proposals reveals that the expansion of voting choice could increase the likelihood of proposal failure. More specifically, we show that had Vanguard’s voting choice program applied to all indexed assets in 2024, two dissident proposals would have flipped from passing to failing, due to the popularity of pro-management voting policies in the pilot program.

This result is surprising: The conventional view is that the advent of pass-through voting will make it easier for shareholders to challenge management, particularly on ESG issues. However, given that most investors chose pro-management voting options in the Vanguard pilot and that most ESG proposals fail by wide margins, it is unlikely that the expansion of voting choice will substantially alter the ESG proposal landscape. Instead, the broader adoption of proxy voting choice may increase support for management and make it more difficult for activist investors to prevail in close contests – the exact opposite of what many have predicted.

Our empirical investigation also generates insights about the impact of proxy voting choice on the marketplace. It reveals that voting choice has promise, but also significant peril, for investors and corporate governance, particularly in light of a host of incentive issues facing its three key players – asset managers, investors, and proxy advisers. We highlight these issues as well as the thorny choice-architecture problems that program designers must confront. We focus particular attention on menu design and its many challenges, ranging from setting the default to populating the menu. Given the importance of third-party proxy advisers to the voting choice system, we also discuss ways to improve proxy adviser alignment with investors. One possibility would be to reform proxy adviser compensation, which typically entails a fixed fee that is paid regardless of performance. To encourage third-party providers to invest in curating high quality menus and voting appropriately, asset managers could pay on the basis of investor uptake or other measures of quality. But stronger financial incentives would also entail higher fees paid by asset managers, which could weaken their incentives to develop quality stewardship programs in-house.

Another avenue for reform could come from the Securities and Exchange Commission (SEC). For example, a straightforward way to facilitate alignment between investors and proxy advisers would be to demand ongoing disclosure of votes cast pursuant to voting choice policies, as well as critical information about proxy advisers themselves. Such information would better arm investors, asset managers, and scholars to serve as monitors of these programs over time.

This is a crucial moment for proxy voting choice. The largest asset managers have committed to expanding their programs to their entire portfolios, representing nearly 20 percent of the U.S. equity market. Their programs remain in “pilot” mode, meaning that they are actively studying and soliciting views on how best to tackle the weighty task of diffusing their power. And their choices will no doubt shape the corporate governance ecosystem for years to come.

This post comes to us from Alon Brav at Duke University’s Fuqua School of Business, Tao Li at the University of Florida’s Warrington College of Business Administration, Dorothy S. Lund at Columbia University Law School, and Zikui Pan at the University of Florida’s Warrington College of Business Administration. It is based on their recent article, “The Proxy Voting Choice Revolution,” available here.