Mutual Fund Stewardship and the Empty Voting Problem

When Roberta Karmel wrote the articles that are the subject of this symposium, she was skeptical of both the potential value of shareholder voting and the emerging involvement of institutional investors in corporate governance. In the ensuing years, both the increased role and engagement of institutional investors and the heightened importance of shareholder voting offer new reasons to take Professor Karmel’s concerns seriously. Institutional investors have taken on a broader range of issues ranging from diversity and political spending to climate change and human capital management, and their ability to influence corporate policy on these issues has become more significant.

The broadened scope of institutional engagement and influence raises new questions about the legitimacy of institutional investor engagement. Specifically, the mutual funds and other institutional investors are not principals but agents. The exercise of institutional voting power is by fund managers or governance teams, people who have “little or no economic interest in the shares that they vote,” This “empty voting” has the potential to undermine the legitimacy of the shareholder franchise. It is of particular concern when the assets committed to a broad-based index fund are voted to support initiatives that have the potential to sacrifice economic value in favor of social or societal objectives about which the shareholders invested in that index fund may not agree.

Because of the risk that empty voting will not reflect the preferences of the true economic owners, this Article argues for change. The Article identifies potential market-based solutions to increase the alignment between institutional engagement and the preferences of fund investors including greater and more transparent fund segmentation, pass-through voting, or an explicit mechanism for fund investors to communicate their preferences to asset managers. At the same time, because asset managers have private incentives to retain their current power, the Article also considers potential regulatory reforms.