The INDEX Act Is a Major Step Forward In Corporate Governance

Published in RealClear Markets. Also published in the Federalist Society.

An unsolved problem in American corporate governance is that a few big asset management firms have through their index funds grabbed dominating voting power in hundreds of corporations by voting shares which represent not a penny of their own money at risk. They have in effect said to the real investors whose own money is at risk, “I’ll just vote your shares.  I’ll vote them according to my agenda.  I don’t want to bother with what you think.”

This obviously opens the door for the exercise of hubris, as has perhaps notably been the case with BlackRock, but more importantly, it violates the essential principle that the principals, not the agents, should govern corporations. This principle is well-established and unquestioned when it comes to broker-dealers voting shares held in street name. The brokers can vote on significant matters only with instructions from the economic owners of the shares. Exactly the same clear logic and rule should apply to the managers of the passive funds which have grown so influential using other people’s money.

Now Senators Pat Toomey (R-PA), the Ranking Member of the Senate Banking Committee, and Dan Sullivan (R-Alaska), with eleven co-sponsors, have addressed the problem directly by introducing an excellent bill: The INDEX (Investor Democracy Is Expected) Act. This bill would apply the longstanding logic for broker-dealer voting to passive fund asset manager voting, which makes perfect sense. As Senator Toomey said in announcing the bill, “The INDEX Act returns voting power to the real shareholders…diminishing the consolidation of corporate voting power.” You couldn’t have a goal more basic than that.

This bill ought to be approved by overwhelming bipartisan majorities. To oppose it, any legislator would have to sign up to the following pledge: “I believe Wall Street titans should be able to vote other people’s shares without getting instructions from the real owners.” That does not sound like a political winner.

The asset management firms themselves seem to be feeling the force of the INDEX Act logic. BlackRock said it looks forward “to working with members of Congress and others on ways to help every investor—including individual investors—participate in proxy voting.” Vanguard said it “believes it is important to give investors more of a voice in how their proxies are voted.”

If enacted, as it should be, the INDEX Act will require these nice words to be put into action.