Are Index Funds Passive Monitors? Evidence From Mutual Fund Voting

Abstract

Index funds now hold over 50% of all U.S. equity mutual fund assets, and control over 14% of the American stock market. But, are they effective corporate monitors? We address this question by analyzing the proxy voting records of index funds, and the “Big Three” (BlackRock, Vanguard, and StateStreet) index funds, in particular. We examine 12,002,108 voting decisions from 4,183 funds on 6,958 proposals in S&P 500 firms, from January 2004 to December 2017. Across several categories of contentious management and shareholder proposals, we find that index funds are consistently less likely to vote against management, relative to active funds. However, we find that this discrepancy is explained entirely by the pro-management voting tendencies of Big Three index funds. Additionally, across both active and passive funds, we find that voting in line with management is positively related to a firm’s prior performance and the strength of its corporate governance. Our findings suggest that both active and passive funds monitor, but the Big Three’s excessive deference to management is nonetheless shifting control from investors to corporate managers.