The Power of Passive Investors

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Ron Scott
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The Power of Passive Investors

Post by Ron Scott » Sun Sep 02, 2018 10:48 am

An interesting one for those who think about the growing trend toward index investing:
http://theconversation.com/these-three- ... rica-77072

Combined, Vanguard, Blackrock, and State Street (The Big Three) are the largest shareholder in 90% of the companies in the S&P 500.

They hold their shares for us, the investors.

How large shareholders influence the behavior of management has always been an important issue; management pays attention! Hence the dilemma.

What, in your opinion, is the correct posture for these large investment houses to adopt in influencing management to act in ways that provide the greatest benefit to us as individual investors?

If The Big Three phone it in and just vote for management's recommendations all the time, is that is our best interest?

And don't think it doesn't get tricky! What if it were more beneficial to holders of ALL an industry's stock to kill off one company and grow the others?


Here's an excerpt:

The power of passive investors

With corporate ownership comes shareholder power.

What is undeniable is that the Big Three do exert the voting rights attached to these shares. Therefore, they have to be perceived as de facto owners by corporate executives.

These companies have, in fact, publicly declared that they seek to exert influence. William McNabb, chairman and CEO of Vanguard, said in 2015 that, “In the past, some have mistakenly assumed that our predominantly passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth.”

Interestingly, though, we found that the Big Three vote for management in about 90% of all votes at annual general meetings, while mostly voting against proposals sponsored by shareholders (such as calls for independent board chairmen).

One interpretation is that BlackRock, Vanguard and State Street are reluctant to exert their power over corporate America. Others question whether the Big Three really want this voting power, as they primarily seek to minimise costs.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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TD2626
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Re: The Power of Passive Investors

Post by TD2626 » Sun Sep 02, 2018 4:13 pm

It would be nice if individual investors in mutual funds could vote the shares that they indirectly own through mutual funds. Obviously, this would require a different structure of mutual fund, and a lot of work on the part of investors. Indeed, no individual investor would be able to vote every shareholder vote for every underlying stock when there are thousands of stocks in a total market fund.

However, maybe there could be a system where investors could vote the specific, contentious elections that they wished to vote on, and leave it to Vanguard/Blackrock to decide how to vote other items. Or, shareholders could give standing orders to "always vote with management's recommendation" or "always vote for sustainability" etc.

RadAudit
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Re: The Power of Passive Investors

Post by RadAudit » Sun Sep 02, 2018 4:43 pm

Voting by individuals via mutual funds would be pure entertainment. We on this board can't agree on the proper temperature for ale. I'd just love to see a mutual fund allowing individuals vote on a contentious corporate issue! And, with Total Stock and Total International, I'd get to vote 10,000 times a year.

I think it'd be easier to change mutual fund families, if they started voting in a way you didn't approve of.
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TD2626
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Re: The Power of Passive Investors

Post by TD2626 » Sun Sep 02, 2018 6:41 pm

RadAudit wrote:
Sun Sep 02, 2018 4:43 pm
Voting by individuals via mutual funds would be pure entertainment. We on this board can't agree on the proper temperature for ale. I'd just love to see a mutual fund allowing individuals vote on a contentious corporate issue! And, with Total Stock and Total International, I'd get to vote 10,000 times a year.

I think it'd be easier to change mutual fund families, if they started voting in a way you didn't approve of.
Although the benefits of diversification mean investment in mutual funds is far superior to individual stocks to individual investors, one downside of not investing in individual stocks is that one doesn't have the opportunity to influence corporate governance through voting over contentious corporate matters. Such a change would negate this (minor) downside of mutual funds.

Further, one issue that has been hypothesized about index funds is that they have the potential to exert too much influence over companies. Having individual investors voting instead of a committee at a very small number of companies would greatly simplify matters.

Also - note - most of the time corporate matters are non-contentious. An uncontested election to the board of directors, a shareholder proposal by a small shareholder that has no hope of passing, or approval of a merger that is clearly going to be approved. It's relatively rare for there to be a contentious matter, and when something is contested, the proxy fight can sometimes even make news: https://money.cnn.com/2017/10/10/news/c ... index.html

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