Posted inAnalysisESG

ANALYSIS: Is passive beating active at its own corporate governance game?

The crucible of corporate governance is shareholder general meetings, where investors get to vote for or against management proposals – including executive pay packages.

Low-cost fund giant Vanguard votes in favour of company management, rather than registering dissent at shareholder meetings, almost all the time, according to recent data from Proxy Insight.

In a recent update, Proxy Insight said Vanguard votes with management 95% of the time, making it a “very passive” investor.

The firm itself features prominent promotion of its team of corporate governance experts and the importance of stewardship on its marketing materials.

It says it has a clear duty to maximise the long-term value of investment held in its funds, and it has clear policies and frameworks for good governance.

MP John Redwood, writing in his guise as a passive-fund advocate and chief global strategist at Charles Stanley, earlier this month claimed passive funds may in fact be better stewards than active.

“A passive fund has to hold, and has every reason to want to help the company improve,” he said.

“Some active managers go short of shares, where they actually want the company to do badly. The passive manager wants all the shares in the index he seeks to replicate to do well.”

He said there were signs several passive-manager groups were keen to “influence managements and vote their holdings”.

“Investors have to remember they are co-owners of important companies. It is shareholders’ duty to monitor the management and vote on the strategy they propose,” he said.

Redwood points to a recent study by the Wharton School examining the impact of passive investing in the US stockmarket, which has a significant proportion of passive investors.

The Wharton report’s authors claimed passive funds were becoming more proactive in their shareholder meeting voting and had a “very important, yet unstudied and undocumented, influence on corporate governance”.

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