The Parallel Universes of Institutional Investing and Institutional Voting

Abstract

Our paper first examines the reasons for the almost complete separation between the investment professionals at institutional investors who decide whether and when to buy or sell a company’s stock (and their counterparts at quantitative investors who design and implement the investment models), on the one hand, and the people who make voting decisions for the portfolio stocks owned by the institutional investors, on the other hand. The paper next observes the manner in which those delegated to vote portfolio stocks cope with their institution’s fiduciary duty to vote all portfolio stocks on all matters submitted to shareholders (which, depending on the diversification of an institution’s portfolio can amount literally to hundreds or thousands of votes every proxy season) in accordance with the traditional fiduciary duty of care, including the outsourcing of some or all of these duties to third party proxy advisory firms. It goes on to note that most frequently the challenge posed by the large, if not overwhelming, number of votes that need to be cast annually is met through creation and application of voting policies, based solely on concepts of corporate governance, that are applied uniformly to all corporations, regardless of the particular facts and circumstances of the different companies. The Commentary concludes by identifying some of the important implications of the parallel universes of investment decision making and voting decision making, which include: the necessity for public companies to develop communication strategies for the two very different constituencies, one that cares almost exclusively about corporate performance and the other that is concerned almost as exclusively with corporate governance practices; the desirability of establishing an inter-active and meaningful dialog among public companies and corporate governance driven voting decision makers; and, perhaps most important, the threat posed by the parallel universes to basic premises underlying corporate democracy as a foundation for the legitimacy of the modern publicly held corporation.