Boris Khentov is SVP of operations at Betterment, overseeing investing, trading and custody. He sits on Finra's Fintech Committee. He previously worked as a lawyer at Cleary Gottlieb and as a software engineer.
On Wednesday, Exxon Mobil Corp. shareholders will vote in one of the most consequential proxy battles in modern U.S. corporate history. Dissident investors are seeking to invert the energy giant’s identity by demanding it embrace a future without oil.
Index funds have enough votes to swing the results, yet investors may not know how most fund managers voted for months – maybe not until next year when they’re required to make their annual disclosures.
As these funds’ positions take on greater significance across corporate America — and in investors’ portfolios — that lag becomes more problematic. Current disclosure requirements don’t provide enough transparency into fund managers’ voting practices. BlackRock Inc., one of the largest managers of index funds, today announced it would cast its vote largely with the insurgents — key information for investors who care how their money is working to influence companies’ behavior.
But that voluntary disclosure in a high-profile dispute has been the exception. Investors are entitled to uniform disclosure of information for all votes, not just the highest profile ones, and for all funds they hold, irrespective of issuer. To ensure that happens, the Securities and Exchange Commission should act quickly to update their rules and mandate real-time disclosures of proxy votes for all fund managers.
The need for faster disclosure is growing as more investors align their investment decisions with their own priorities — in the case of Exxon, their climate change priorities. Yet index fund managers, including the so-called Big Three, BlackRock, Vanguard Group and State Street Corp., are given a year to disclose how they voted, even as they collectively preside over $15 trillion of the public’s investments.
Some of that money is managed by people like me. I’ve led operations at Betterment, one of the new crop of automated investment advisers known as “robo advisers,” since 2013. We use index funds as building blocks in portfolios for more than 650,000 clients, and most of their roughly $30 billion sits in funds managed by the Big Three. (Vanguard has started its own digital advisory service, making it a competitor to Betterment.)
In a March speech, then-acting SEC Chair Allison Herren Lee made several suggestions to modernize the rules, including “timelier disclosure.” That’s the one that matters most, but only if it compels funds to report votes in real time. Immediacy is critical because news cycles move at internet speed, as do our investing apps.
With a tap on their phone, investors should be able to see whether the index funds in their 401(k) voted in line with their preferences, and with another tap, switch to ones that did. This is what accountability would look like.
And it’s not going to happen without an SEC rule change. Thus far, the Big Three have sought mostly to remain neutral in big proxy fights and have moved slowly to address calls for better disclosure. While the companies have begun to voluntarily report their votes every quarter, the disclosures are inconsistent in the information they include and how they deliver it, making it impossible to aggregate specific voting data for investors.
There are no serious obstacles that would prevent index fund companies from providing real-time disclosure of votes in a simple, standardized format, but there are several good reasons the SEC should require it:
- It’s not overly burdensome. These institutions trade billions daily on high-tech platforms that measure latency in milliseconds. Real-time data on votes would provide a material step-up in transparency without asking for information that isn’t already being disclosed;
- It’s apolitical. Reporting how you voted is value-neutral accountability;
- It’s pro-innovation. Once the data becomes available, provided that it’s in a format ingestible by software, enterprising programmers will begin weaving it into platforms already used by millions, as well as new ones whose success will be decided by the market.
Fund managers are already feeling pressure to act. In a recent Morningstarreport, 61% of those surveyed said that sustainability should be factored into how funds in their 401(k)s vote on their behalf. But in last year’s ranking of fund manager support for resolutions relevant to climate change, BlackRock and Vanguard came in last, voting in favor of just 12% and 15% of such resolutions, respectively.
Based on voting math, the biggest fund managers appear to have already begun siding with activists to overrule management on some lower-profile climate-related issues. But in other cases, as with Exxon, the desired impact can come only by replacing management.
Other stakeholders have recognized this. The influential proxy adviser Institutional Shareholder Services endorsed seating three dissident directors, as have prominent shareholders including the Church of England, and major U.S. pension funds like the California State Teachers’ Retirement System and California Public Employees’ Retirement System. Now BlackRock has announced it will vote in line with the ISS recommendation.
But it’s the entire Big Three, with their 20% stake, that will decide the outcome. Investors shouldn’t have to get by on the occasional voluntary disclosure while waiting for complete data to arrive in 2022 — which is what current SEC disclosure rules allow.
No matter who prevails in the battle for Exxon, there will be more votes like it. We should embrace the promise of index fund managers shifting toward a more active role in climate-related engagements, while managing investor risks with thoughtful regulation.
This article originally appeared on Bloomberg.
