FT: Vanguard warns investors over company stake limits

US regulators have historically allowed investment funds to surpass 10% ownership caps on bank and utility shares, provided they don't seek a management role.

However, the Federal Deposit Insurance Corporation (FDIC) is considering stricter conditions for these waivers, and Republican state attorneys-general are urging the Federal Energy Regulatory Commission (FERC) to review Vanguard's ability to hold large stakes in public utilities. Vanguard's recent disclosure to the US Securities and Exchange Commission warns of growing uncertainty about obtaining these waivers. Without regulatory relief, Vanguard might need to sell affected securities and use derivatives or invest in subsidiaries for indirect exposure.

I think there are at least two aspects here:

1) The political hot issue of ESG / DEI. The Left thinks they are not doing enough, the Right thinks they are doing too much.
2) Votings rights typically reside with the ETF provider or the index fund manager. This grants a tiny number of companies huge power.

I was surprised to learn (when reading about the vote on Elon Musk's pay) that passive index fund managers vote on the shares they manage. Since their business is just tracking the index, it doesn't seem appropriate to me for them to be voting on such issues. (I'd prefer if no vote was cast for those shares.) People put their money in the likes of Vanguard funds because of the low fees, not because they want to give Vanguard such a large say in the managing of the world's big companies.

I disagree. I’d prefer Vanguard to vote against crazy or anti-shareholder measures.

basilbrush said:

I was surprised to learn (when reading about the vote on Elon Musk's pay) that passive index fund managers vote on the shares they manage. Since their business is just tracking the index, it doesn't seem appropriate to me for them to be voting on such issues. (I'd prefer if no vote was cast for those shares.) People put their money in the likes of Vanguard funds because of the low fees, not because they want to give Vanguard such a large say in the managing of the world's big companies.

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I agree. I was also surprised

Gordon Gekko said:

I disagree. I’d prefer Vanguard to vote against crazy or anti-shareholder measures.

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I don't think it's always obvious whether a proposal is crazy or anti-shareholder, such as the Elon Musk pay package that I mentioned.

Furthermore, it matters a great deal to active managers that the companies they have picked perform well, so they are incentivised to vote for what they think will benefit the company. Passive managers have much less of a stake in the performance of the individual companies, since they are just tracking the index. A very small number of people wielding a substantial portion of voting power when they do not have a lot of skin in the game doesn't sound wise to me.

basilbrush said:

I don't think it's always obvious whether a proposal is crazy or anti-shareholder, such as the Elon Musk pay package that I mentioned.

Furthermore, it matters a great deal to active managers that the companies they have picked perform well, so they are incentivised to vote for what they think will benefit the company. Passive managers have much less of a stake in the performance of the individual companies, since they are just tracking the index. A very small number of people wielding a substantial portion of voting power when they do not have a lot of skin in the game doesn't sound wise to me.

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I’m not sure I agree with that. 0.1% or 0.2% of a gargantuan number can still be a gargantuan number.

There are multiple reasons, e.g. ESG, why I have no issue with the likes of BlackRock or Vanguard voting. If they don’t, the votes of the underlying investors are lost.