COLUMN-Lazy investors unite! Vanguard confronts the 'rational apathy' challenge: Ross Kerber

By Ross Kerber

Sept 10 (Reuters) - Would-be corporate vote reformers keep running into the same problem: it's all so darn complicated for the individual investor. Maybe reformers should be careful what they wish for.

If a typical U.S. public stock issuer stages a vote on 9 ballot items at its annual meeting, shareholders in index funds like the Vanguard 500 VOO.P could face 4,500 decisions a year about how to vote items on proxy ballots at corporate annual meetings. Who could parse all that out?

A forthcoming paper by a group of business and law professors from Duke, the University of Florida and Columbia refers to this as the problem of "rational apathy," the idea that shareholders won't waste their time figuring out how to cast complicated votes with little impact.

Instead, fund companies to date handle the voting themselves. Nobody used to care but environmental and social reformers. Then, U.S. conservatives realized they could pressure companies and asset managers over how they cast these ballots.

Top managers might dodge the line of fire by using "pass-through" voting programs allowing fund investors to influence some of the proxy ballots funds cast at corporate annual meetings.

In a briefing with journalists this week, for instance, Vanguard stewardship chief John Galloway said that 82,000 individual investors used its Voting Choice program during the 12 months ended June 30, about double the number from the same period a year ago. They voted shares worth $9 billion, triple the amount last year.

That's still a drop in the bucket compared to Vanguard's 50 million investors and $11 trillion in total assets under management.

But get ready for things to take off. Galloway said Vanguard has begun working with corporate sponsors to offer voting choice to 401(k)-type retirement plan participants. He also released new figures showing investors dispersing their votes across a wider range of vote-policy choices including a new Egan-Jones policy with anti-ESG criteria.

"We can see investors emphatically demonstrating the 'choice' in Investor Choice this year," Galloway said.

PUMPING UP THE BOSSES

Reformers pushing for things like reining in CEO pay have high hopes the shift will move power away from fund managers who tend to not rock the boat since, for one thing, they earn fees managing corporate retirement accounts.

But in the draft paper, the academics write a surprising consequence of more pass-through voting could be to increase the power of boards, since individual investors tend to choose policies that support management.

They cite two close votes that played out at Tesla TSLA.O last year. Shareholders narrowly approved measures calling on the electric carmaker to cut its director terms to one year from three years, and to require only simple majority votes for certain governance shifts rather than the current two-thirds standard.

Vanguard's main stewardship team backed both measures. Of those shares participating in last year's pilot-voting program, 36% either abstained or supported management. Had that 36% applied to all of Vanguard's index equity funds, both proposals would have fallen just under the 50% threshold needed by both items, the authors found.

As proxy vote choice programs grow, "the realities of a changed ecosystem become more and more likely," the authors write.

Columbia University Law School professor Dorothy Lund, one of the authors, said in an interview there's much to be said for pass-through voting as a way to empower engaged investors who disagree with their managers' voting.

But most mutual fund investors don't really want to think about their holdings in the first place, let alone how to vote their proxies. For that reason the new voting policies could mainly empower proxy advisers, which in time could include financial online influencers - "FinFluencers" - putting their voting recommendations on TikTok.

In theory more competition would lead to better choices, Lund said. A danger, she said, is that proxy voting becomes so free-ranging that companies don't know which shareholders to listen to.

"Implementation of a truly open proxy could lead to complete fragmentation, where the issuers don't know who to speak with because nobody's really directing the vote," Lund said.