Harvard expert warns of potential ‘harm’ to index investing, as Republican bill takes on ‘woke fund managers’

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Senators and legal experts fought Tuesday over the merits of a Republican bill that seeks to reduce the voting power of the three index-investing giants: BlackRock, Vanguard and State Street.

Alaska Republican Sen. Dan Sullivan introduced the Investor Democracy Expectations Act (INDEX) last month, and so far a dozen more senators from his party have signed on as co-sponsors of the measure.

Legislation would require that investment advisors of passively managed funds with more than 1% of the voting shares of a public company cast their vote in accordance with the fund’s investor instructions, in instead of voting on the company’s issues as the advisor wishes.

“The push for this legislation was due to my continued frustrations with many of the largest U.S. banks and insurance companies that adopted policies to begin jeopardizing the development of oil and gas investment in Alaska, “Sullivan said as he spoke at a Senate Banking Committee hearing on the index fund voting process.

“Why were they doing this? Well, I found that these financial institutions do this in part because of pressure from their largest shareholders: the three major investment advisors and their index funds.

Sullivan and his colleagues were praised last week in a Wall Street Journal article written by an executive of a small asset manager and the treasurer of the Republican state of West Virginia. This opinion piece said lawmakers have identified a real problem, namely “woke up fund managers”, but argued that their solution would not be effective, saying “it is up to the market to fix it”. .

Senate Banking Committee Chairman Democratic Sen. Sherrod Brown of Ohio also sounded skeptical while presiding over Tuesday’s hearing.

“It’s an idea that sounds democratic, but it doesn’t take into account the cost or the complexity or the large number of votes involved. For popular and widely established index funds, that could mean reaching hundreds of thousands of customers and tens of thousands of corporate votes each year, ”Brown said.

A law and economics professor at Harvard Law School offered a similar warning as he stated at the hearing.

“Let’s make sure we don’t dramatically hinder the ability of index funds to do what they’ve been doing. Unfortunately, I think the bill – while well-intentioned and an intuitive response to governance challenges – in fact, it will hurt and get relatively few benefits to make up for it, “said Harvard expert John Coates.

Coates argued that the costs of the bill’s approach “would make index funds less attractive and, in general, impede their ability to continue doing what they have been doing.”

But a different expert witness, Caleb Griffin, a law professor at the University of Arkansas, argued that allowing individual investors to set their own voting instructions “preserves the economies of scale of the big three while “It addresses the root of the problem, which is concentrated voting power.” in the hands of a small and incomprehensible group “.

“These are expenses that the funds have begun to take on voluntarily,” Griffin also said.

“BlackRock BLK,
it currently offers it to about 40% of its index clients, really institutions. But to say that increasing it is by no means possible, I think, is a bit unrealistic, since they have created it for the institutions and are, in my discussions with them, currently in the process of building it for trade. retailer. clients.”

Opinion: BlackRock, Vanguard and other index fund giants do politics with delegation votes. They should focus on the benefits.

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