The authors used a quirk of index construction to identify shares with a 5-10% higher-than-average passive investor base. They claimed there was a pattern of firms with more passive ownership having more “shareholder-friendly” governance, including factors such as independent directors.
The research claimed passive investors wield their power by using their giant blocks of shares, which give them a significant portion of the votes in a shareholder meeting.
The report’s final flourish was to claim that firms with higher passive ownership tended to perform better.
Law professor Simon Wong of Northwestern University also recently pointed to good examples of governance by passive firms, though he had less positive conclusions.
“The challenge for index institutions is that their portfolios are typically quite large and, due to resource constraints, there often exists a “long-tail of neglected companies”,” he said.
Wealth managers also remain sceptical.
Brooks Macdonald co-founder Jon Gumpel told Portfolio Adviser that ‘activist passive’ funds would be the “ultimate contradiction in terms”.
“Essentially all that passive funds compete on is cost so trying to add in additional things to do doesn’t make sense,” he said.
“I don’t think they can do it if they want to keep their fees down.”
While the early academic evidence points to better governance and better returns at companies heavily owned by passives, the passive industry has at least a problem of perceptions when it comes to stewardship.
More high-profile, public engagement on listed-company governance debates and a readiness to vote against management seem to be the obvious places for the likes of Vanguard to start if they want to nip this reputational issue in the bud.
