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Knowledge @ Wharton: Passive, But Powerful: How Index Funds Exercise Their Clout

TedTed
in Fund Discussions
FYI: Index-style investing is all the rage. Investors by the millions believe that funds do better by seeking to match the stock market rather than trying to beat it.

But what happens to companies with large blocks of shares owned by these “passive” investors? Are the mutual funds that control these shares serving as watchdogs, pressing to make the firms better through proxy votes and other activism? Or are the fund companies just sitting on the sidelines?
Regards,
Ted
http://knowledge.wharton.upenn.edu/article/passive-but-powerful-how-index-funds-exercise-their-clout/

Comments

  • STB65
    Since I think most company officers vote for measures that increase their income, I routinely vote against them with my proxies. I also presume that the independent directors, usually selected by other directors, are beholden to the board and the company, and are not truly independent, so I vote against them also. I can't imagine any company administration would select board members who would restrict management income.
    If it is true that the independent PIMCO director, who voted against Gross' $200+ bonus when he ranked in the bottom 10-20% return for bond funds, was forced off the board of directors, it only solidifies my POV.

    Seems to me, that index funds have an obligation to their shareholders to enhance their performance against the index, when it can be done cheaply. Therefore, they should vote against boards when companies underperform their peers, especially if the underperformance exceeds a pre-determined number of years. This allows activist investors, who usually enhance share-holder value, to have a greater impact.

    The Wharton study is a bit disappointing; I would have hoped for a greater impact.
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