Proxy voting alignment with client values will drive competition between index funds. Most index funds have low fees and earn close to the same rate of return for their investors. How can they differentiate themselves? SEC Commissioner Rob Jackson Jr. implies competition should be driven, at least in part, by funds aligning their proxy votes with the values of their customers. For that to happen, the SEC must update its proxy reporting rules to make it easier for investors to determine how funds have voted on proxy issues.
Proxy Voting Alignment
Most investors do not know where to find proxy voting information for the funds they invest in or how to analyze it. Even if they are experts, it is almost impossible to make meaningful comparisons without subscribing a service, such Proxy Insight, that compiles votes into a searchable database. CNBC reports,
The Securities and Exchange Commission is contemplating a new rule that would represent a fundamental rethink of the way funds disclose key information to investors, and, as technology advances, how information is released to them, as well. (How does that index fund address social issues? SEC official seeks transparency)
As CNBC has previously reported,
Those proxy voting records of big fund companies on issues — including climate change, human rights, gun control and CEO pay — are a key metric to measure their social responsibility. On issues such as climate change, they’ve proven to be more talk than action.
Greater transparency would likely lead funds to better align what they do with what they say.
Alignment: What is Needed
According to Commissioner Jackson,
We should be showing how votes are cast with Americans’ dollars at the point of sale, When you sit down with a broker and they put you in a fund, that investor ought to know how the money voted.
The N-PX are not well-structured disclosures. Votes need to be disclosed at the individual fund level, ballot by ballot, and proxy by proxy.
From a technology perspective, no one needs more time. The data is already sitting in a database at the time a vote is cast. Right now we have the disruptive technology.
This is something more and more care about and will want to ask their financial advisor about when choosing between funds. Newly or increasingly enlightened investors want this kind of data … not only because it affects the value of their investments but their values.
Jackson’s term at the SEC expires on June 5th. Although he could extend his term for another 18 months — until the end of 2020 — unless replaced before that date, reports are that he will return to New York University’s (NYU) law school for the fall semester. I understand, although I have not verified, he is already listed in the fall course catalog. If so, will another Commissioner champion a revision in SEC rules to drive competition around proxy voting alignment with investor preferences?
Proxy Voting Alignment: How it Will Drive Competition
To see how proxy voting alignment could drive competition in the future, read Gender-Diversity: Who Votes Fearlessly? and Morningstar Direct Uncovers ESG Hypocrites. For more in-depth on the issue, read my draft Petition for Real-Time Disclosure of Proxy Votes.