Future of Institutional Share Voting: Three Paradigms

Abstract

Our previous paper “The Parallel Universes of Institutional Investing and Institutional Voting” noted the current reality of an almost complete separation between the investment professionals at institutional investors who decide whether and when to buy or sell a company’s stock, on the one hand, and the people who make voting decisions for the portfolio stocks owned by the institutional investors, on the other hand. Our new paper beings where our Parallel Universes paper left off. It notes that, notwithstanding its economic utility, the parallel universes paradigm raises significant practical and legal issues, not the least of which is whether the paradigm successfully meets the fiduciary duties of institutional investment advisors. Our new paper then posits two other paradigms for institutional share voting, each of which would avoid the conceptual and practical weaknesses of the current parallel universes paradigm. The first alternative paradigm would recognize that most shareholders do not want to be involved in voting on all matters and rather than attempting to coerce them into voting, a preferable alternative might be to recast shareholder democracy with less frequent elections, longer staggered terms for directors and elimination of much, if not all, of the economically unimportant voting that characterizes the annual proxy season. The second alternative and more realistic paradigm would obviate the distinction between the investing and voting functions and insist that the investment decision makers participate in, and have the last word on, all portfolio share voting. The paper concludes by arguing that each of these two alternative paradigms would lead to corporate governance structures that are far more responsive to the needs of portfolio company boards and management and that restore a far more practical and realistic view of corporate governance to the public company community.