More on the Trend Toward Institutional Investors Becoming More Activist

By Cydney Posner

This article from Reuters  describes the shift by fund manager, the Vanguard Group, toward greater activism, as evidenced by its opposition to the election of board members in a number of high profile proxy contests this year. Although Vanguard continued to support 95% of directors overall in the 2013 proxy season (up from 94% in 2012), funds run by Vanguard opposed five of seven directors targeted by the AFL-CIO. That number compares to its support for six directors at other companies that the labor group had opposed between 2010 and 2012. The fund manager also opposed several other directors, whom they previously had supported, in proxy contests this year. This change reflects the trend for "institutional investors, which in the past often followed management's wishes or outsourced proxy voting responsibilities, [to] increasingly exercise[e] more influence." (See my article of 8/21/13 for a discussion of institutional shareholders lining up with activists, particularly activist hedge funds.)

Vanguard's head of proxy voting attributed the change to simply "the passage of an additional year of both behavior and engagement," which caused them to the fund manager to reach "a different voting conclusion." He reportedly "speaks with hundreds of executives every year to press Vanguard's views behind the scenes. He said he often tells them that as an index fund manager, ‘We're going to be practically permanent shareholders. We're not going away.'"

The article notes that the votes of managers such as Vanguard can have an enormous impact; Vanguard has "$1.4 trillion of equity assets, for instance, [and]is the top institutional investor" in many market-leading companies. According to one commentator, "'You can't take [passive managers] for granted…. Also, index funds can turn activist because they cannot simply sell shares of companies with which they are unhappy and take what [the deputy director of CIC] called ‘the Wall Street Walk.'" [I.e., "If you can't sell your shares, you look for other ways to hold portfolio companies accountable.'" A law professor cited in the article said that "Vanguard's votes are in line with a new consensus among institutional investors that voting against directors puts more pressure on companies than does voting for specific shareholder proposals. ‘It's becoming conventional wisdom that's the best way to get the board's attention.'"

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