Large asset managers increasingly control voting rights on behalf of investors, raising questions about ideological alignment in corporate governance. Pablo Montagnes, Zac Peskowitz, and Suhas Sridharan examine the gaps between public preferences and existing voting policies, proposing alternative solutions to improve shareholder representation without complicating the policy landscape.
Over the past several decades, the United States’ equity market has experienced significant concentration in ownership, with much of this concentration accruing to passive mutual funds and exchange traded funds (ETFs). This concentration allows the brokerage that manages the mutual fund or ETF to vote on corporate policy issues on behalf of an increasingly large group of shareholders.
An individual who directly owns a share in, for example, Microsoft, can vote in corporate proxy contests on matters such as who should serve on the board of directors and whether to adopt to implement a net zero emissions policy. However, an investor who owns their shares through a mutual fund or ETF automatically delegates their votes to the fund manager.
This raises concerns that the asset manager could use the voting right to advance their own interest over those of the shareholder. Although in recent years, several large brokerages have begun surveying investors on their values to align votes with voter preferences,these concerns remain and are especially important on issues where there is wide disagreement among members of society, such as social and environmental issues.Asset managers’ preferences may be systematically tilted toward one side of the ideological spectrum.
Policymakers have expressed concerns about whether asset managers are representing the preferences of investors and have introduced proposed legislation to address these concerns. Most notably the INDEX Act, introduced by Alaska Senator Dan Sullivan, would require asset managers to vote shares in line with the instruction of the beneficial owner.
Perhaps in response to these proposals, the “Big Three” asset managers (BlackRock, State Street, and Vanguard) have recently introduced voting choice policies, ostensibly designed to give shareholders more control over proxy voting. These programs allow investors to select from a relatively small menu of predefined policies developed by proxy advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis (GL), rather than voting directly on individual issues. The design of these policies prompts several critical questions: Does the menu of available options permit investors to express their preferences, or are they a form of corporate self-regulation that fails to align with individual ideologies?
In our article, we answer this question by measuring the content and policy positions of each of the current voting choice policies, fielding an original survey that examines the investing and general public’s attitudes on these issues, and then examining the extent of alignment between public preferences and the available voting choice policies.
We conducted an original survey of 3,485 U.S. adults, asking them to express their preferences on 46 corporate policies related to environmental, social, and governance issues. (In order to make the survey responses as representative of the U.S. adult public as possible we weighted the survey to match the demographic composition of the U.S. adult population). These issues ranged from climate change-related proposals to more traditional governance topics like executive compensation.
Our survey allowed us to measure variation in preferences on corporate policies across different demographic groups, including gender, race, age, political affiliation, and whether or not an individual owns stocks. We then compared the policy positions of the survey respondents to the voting choice policies offered by the asset managers. We then calculated the maximum agreement score for each individual by identifying the voting policy that achieves the highest agreement between the individual and the menu of available voting choice policies.
Our analysis revealed that the average U.S. adult could achieve a maximum agreement score of 76.7% with the available voting choice policies, with stock owners performing only slightly better at 77%. While some observers might interpret this as relatively high representation and others as relatively low, perhaps the best way to interpret the achieved level of agreement is to ask simply: can we do better? Can we increase the level of maximum agreement without changing implementation costs (namely, without increasing the complexity of the policy menu)?
To answer this question, we explore how agreement levels change after creating a new alternative policy called the “Majority Preferences Policy” that would vote in line with the majority opinion on each corporate issue based on survey responses. This simple alternative policy generated an average agreement score of 78.1%, which was higher than the scores achieved by the existing voting choice policies. Additionally, when we added this new policy to the current menu of options, the average maximum agreement score increased to 83.7%. This suggests that there is substantial room for improvement in aligning voting choice policies with investor preferences, without necessarily expanding the complexity of the policy menu.
To gain deeper insight into this misalignment, we used a structural model to estimate the ideological locations of both the survey respondents and the voting choice policies. This approach revealed significant polarization, with large segments of the public poorly represented by the existing policy options. We found that many of the available policies—particularly those that emphasize financial returns over environmental or social concerns—are located far from the ideological space occupied by the majority of respondents.
Our study shows that while voting choice policies give the appearance of increased investor agency, they often fall short of adequately representing the diverse preferences of the investing public. The relatively low maximum agreement scores, even among stockholders, indicate that these policies may not fulfill their intended purpose of enhancing shareholder representation.
By introducing additional options, such as the Majority Preferences Policy, asset managers could significantly improve the alignment between their voting policies and the preferences of their clients. As the debate over ESG issues and corporate governance intensifies, our findings highlight the importance of reforming voting choice policies to better reflect the ideological diversity of investors.
As regulators and policymakers continue to scrutinize asset managers’ stewardship of their clients’ voting rights, it is essential that these institutions take steps to improve the alignment of their voting choice policies with the preferences of the public. Our research shows that simple adjustments to the policy menu can result in meaningful improvements in investor representation, which will ultimately enhance the legitimacy of corporate governance decisions and the overall health of financial markets.
Author Disclosure: the authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
