[oldjokes]

Is this really a valid test anymore with 50%+ of outstanding shares being held by index funds? Who actually controls the companies when shareholders don't really exist like they used to?

What does shareholder primacy even mean anymore?

[maest]

You're right - index funds voting really hurts the process, largely because index funds don't ask their investor base how they should vote. Instead, they default to following corporate recommendations and voting down any shareholder proposals.

So really, all those shares are voted according to what corporate management wants, not to what the original retail investors want. It's distorting the power balance in a really perverse way.

It's hard to say at the moment, because the data isn't available yet, but I bet index funds voted >95% against this proposal - that's the historical average. We'll know for sure what the stats are once the fund providers disclose their voting, which happens yearly.

[mushufasa]

As you said, there's literally no formal process for retail investors to communicate to the funds.

This startup organizes retail shareholders to use their rights via petition, e.g. https://www.yourstake.org/ask/vanguard-demand-companies-disc... .

So as a verified shareholder, you can signal your support for various issues, and the startup then arranges a meeting with the fund managers if enough people support the idea.

[devit]

Why do they do that instead of abstaining?

It seems like their duty to the index fund owners is to vote like other shareholders (which is most easily achieved by abstaining) and not like management.

[maest]

They legally have to vote their shares.

Individuals are exempt for that.

It's interesting to think about index fund providers incentives:

(1) track the market (2) do it very cheaply

Voting shares is a cost center with no benefit towards the business. Fund providers don't want to spend time and money to do research on individual proposals, that would be too expensive. So they do the cheapest thing possible and default to following corporate recs.

(That's actually a simplification, what happens in practice is, they use third party proxy voting advisors, but the end results is mostly the same, except that they vote down really egregious proposals, e.g. crazy CEO pay in the context of a free falling share price)

[mushufasa]

Why not simply allow their beneficial owners to vote on what they should do?

I've building a startup for that -- you can support petitions like https://www.yourstake.org/ask/vanguard-demand-companies-disc...

[mikeash]

Can they vote half of their shares yes and half no?

[AnthonyMouse]

> Why do they do that instead of abstaining?

Suppose index funds collectively own 80% of the shares. If they don't vote or do something that causes their vote to equal the other shareholders, someone else can buy 10% of the shares and effectively have majority voting power, or even fewer than that since most likely some of the other non-index fund owners wouldn't vote either.

The problem is that you need somebody who is paying attention to be in control of the company. Putting that on management is problematic because they obviously have different interest than owners, e.g. on matters of executive compensation or whether to return profits to shareholders instead of using them to build a personal empire/reputation or funneling money to cronies through mergers and acquisitions.

[mikeash]

Index funds are passive by design. In your scenario, allowing 10% ownership to exert control seems like it’s functioning as it should. The alternative is that control is held by the advisor that the index fund listens to.

[vonmoltke]

> Suppose index funds collectively own 80% of the shares. If they don't vote or do something that causes their vote to equal the other shareholders, someone else can buy 10% of the shares and effectively have majority voting power, or even fewer than that since most likely some of the other non-index fund owners wouldn't vote either.

Instead, they vote the board recommendations, disenfranchise all the individual shareholders, and rubber stamp almost anything the board wants. I'm not sure that's any better.

[froindt]

How does abstaining count towards having quorum? Does it count equal to other votes?

[mushufasa]

Shareholder primacy is in an interesting place.

With the rise of index funds also comes the rise of the idea of a 'universal owner' solving the tragedy of the commons.[0] If you own a piece of every company, like Vanguard or BlackRock, your funds benefit when the whole economy does well. Your incentive is to advance society, not to promote any one company at the expense of the others. In that way, you internalize externalities -- like climate change. Or in this case, getting industry-wide action on privacy/security.

That said, this idea hasn't sunk in with fund managers yet. They're beginning to talk about caring about 'social purpose'[1] but still voting against it[2].

So the retail investors will have to demonstrate they care in order for anything to change, and they don't even get a vote through mutual funds.

I built this website to organize verified retail investors around petitions, in order to do that. You can support petitions like this https://www.yourstake.org/ask/vanguard-demand-companies-disc... or this https://www.yourstake.org/ask/amazoncom-inc-facial-recogniti...

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[0] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3014952

[1] https://www.blackrock.com/corporate/investor-relations/larry...

[2] https://www.cnbc.com/2019/03/18/large-fund-firms-support-for...

[est31]

> If you own a piece of every company, like Vanguard or BlackRock, your funds benefit when the whole economy does well.

Index funds only target top companies. Externalities tend to b eenefit those top companies while harming little companies as well as poor people, often not even in the same country.

[mushufasa]

Index funds are limited to public companies, which implies a certain size. That said, across a fund manager's assets are a lot of small cap and mid cap funds, which explicitly target smaller companies. In that sense, index funds do not only target the top companies.

If you mean top as in performance, that is also not the case. Index funds are based on the premise that they do not aggressively pick winners and losers within a sector, in contrast to active funds. This lets index funds hire fewer staff and charge fewer fees. Economists generally agree that over time, index funds outperform active funds on a risk-adjusted basis after accounting for fees.

[jfengel]

Unfortunately, what it probably means is "make as much money for shareholders as possible". At least, as determined by executives whose pay is going to ultimately be a fraction of that profit, and who thus have a vested interest in that interpretation as the sole interpretation.

[6gvONxR4sf7o]

Seems like this could be resolved by having index funds just abstain from voting.