Index Funds, Active Owners: The Powerful Influence of Index Funds
Activist investors are known for vocally pressuring boards on everything from share buybacks to spin-offs, often with the goal of creating short-term gains. Their tactics, including rancorous proxy battles generate headline after headline.
What attracts considerably less attention, however, is the work of index fund managers focused on promoting long-term value. There's a nagging misperception that those who provide near-permanent capital through index funds are passive in their approach to engaging with portfolio companies and their boards. And yet research and voting histories indicate otherwise. A study from the Wharton Business School1 found that publicly traded firms with more index ownership were more likely to have "shareholder-friendly governance," including more independent directors and fewer restrictions on shareholders' rights to call special meetings. Index fund companies, researchers found, were pushing for such policies through proxy votes, bringing to bear their large voting blocks on the issues that matter to them.
Here at State Street Global Advisors' Asset Stewardship Team, we're proud to have emerged as a leader in corporate engagement and the promotion of good governance, both through our voting practices and other initiatives. Most recently, we exercised our proxy voting power by voting against directors at 400 firms that have failed to demonstrate progress in adding women to their corporate boards. We did so because we believe (and studies show) that gender diversity on boards provides a competitive advantage.
We aim to take a balanced, "carrot and stick" approach to corporate engagement, with voting as the proverbial stick.
But proxy votes aren't the only way we exert our influence. We aim to take a balanced, "carrot and stick" approach to corporate engagement, with voting as the proverbial stick. So what are our carrots? Some of our work goes on behind the scenes. With the help of proprietary screens, we screen SSGA's approximately 10,000 equity investments to determine the key issues that call for our intervention and are critical to sustaining or improving long-term performance at our portfolio companies. In private, we pursue dialogues with board directors on subjects ranging from executive compensation to climate risk. In public, we make our expectations and priorities known through thought leadership, sharing our insights on effective board leadership, sustainability, shareholder rights and more.
When possible, we join forces with other investors on issues we have in common, particularly when it comes to polices.. For instance, we have cooperated with our peer fund managers to form the Investor Stewardship Group (ISG), a collective of institutional investors and global asset managers. ISG has established a good governance framework for publicly traded firms in the US as well as a commitment to responsible ownership.
It's important to remember that the engagement that's so commonplace today wasn't quite as pronounced prior to the financial crisis. Initially, conversations were focused heavily on executive compensation. Today, conversations between shareholders and companies span the gamut of topics, from governance and strategy to sustainability. At the same time, investor expectations on who is involved in the conversations is changing too. It is becoming common for our team to meet with members of the board, our elected representatives, to share our views on material environmental, social and governance factors and the expectation that they set the tone at the top. The opportunity for index investors to be active owners is stronger today than ever before.
Though it was government regulation that revved the engine of corporate engagement, we recognize that we must keep that engine running, both through our own initiatives and through cooperative efforts like ISG that cement our roles as active owners. We may not generate headlines, but we are encouraging long-term value creation for our clients. To us, that's what matters most.
1. Passive, but Powerful: How Index Funds Exercise Their Clout. (2015, April 23). Retrieved December 05, 2017, from http://knowledge.wharton.upenn.edu/article/passive-but-powerful-how-index-funds-exercise-their-clout/
Matthew DiGuiseppe is Vice President, Head of Americas on the Asset Stewardship Team of State Street Global Advisors (SSGA).