Opt-In Stewardship: Toward an Optimal Delegation of Mutual Fund Voting Authority

63 Pages Posted: 20 Jun 2019 Last revised: 30 Jul 2019

See all articles by Sean J. Griffith

Sean J. Griffith

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Date Written: June 14, 2019

Abstract

This article offers a theory of mutual fund voting to answer when mutual funds should vote on behalf of their investors and when they should not. It argues that voting authority for mutual funds ought to depend upon: (1) whether the fund possesses a comparative information advantage, and (2) the ability of the fund to assume a common investor purpose. The strongest case for mutual fund voting is one in which high-quality information is produced and the fund is able to assume a common investor purpose. The case for mutual fund voting is weaker when low quality information is produced or where funds cannot assume a common investor purpose.

Applying this theory answers whether and how mutual funds should vote on recurring issues. Mutual funds ought to vote on "contests" — that is, proxy fights and M&A — because meaningful information is produced and because the fund can assume a common interest on the part of its investors. By the same token, funds ought not to exercise voting discretion over environmental, social and governance issues. With respect to environmental and social issues, meaningful information is not produced nor can mutual funds assume a common investor purpose. With respect to governance issues, although funds can assume a unified investor purpose, they do not have adequate information to decide the matter. As a result, mutual funds should follow the voting recommendations of unconflicted managers, as will typically be the case with regard to environmental and social proposals. However, when management is conflicted, as will often be the case with regard to governance proposals, funds should abstain from voting altogether.

This analysis provides a clear rubric for ensuring that mutual fund voting serves investor interests. However, the possibility remains that mutual funds may use voting to pursue their own interests rather than those of their investors. Regulators should therefore act to reset the default allocations of voting authority between mutual funds and their investors.

Keywords: mutual funds, voting, proxy voting, index funds, stewardship, ESG, activism, M&A, shareholder proposals, shareholder voting, rational apathy, institutional investors, environmental and social, purpose, SEC, department of labor, fiduciary duty

JEL Classification: G23, G34, K22

Suggested Citation

Griffith, Sean J., Opt-In Stewardship: Toward an Optimal Delegation of Mutual Fund Voting Authority (June 14, 2019). Texas Law Review, Forthcoming; European Corporate Governance Institute - Law Working Paper No. 463/2019. Available at SSRN: https://ssrn.com/abstract=3404298

Sean J. Griffith (Contact Author)

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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