When it comes to proxy voting, ETF sponsors rarely align with shareholders

Research shows index ETFs vote with management 90% of the time.

Financial advisers that are intent on helping their clients employ various forms of environmental, social and governance impacts might want to start by monitoring the proxy voting records of the exchange-traded funds they’re using to build client portfolios.

As the largest users of ETFs, advisers might not immediately make the connection between the overwhelming proxy voting potential of the $4.5 trillion ETF market and the ESG-related appetites and interests of their individual clients.

According to the latest annual report on ETF stewardship from Sage Advisory Asset Management, the 25% annual growth rate of the ETF market over the past decade has resulted in large index fund ETF managers controlling more than a quarter of the proxy votes of the average S&P 500 Index company.

Considering the growing trend by large asset managers to make high-profile pronouncements about their commitment to ESG-type issues including climate change and social equality, the hefty voting power of ETF managers might not seem like a big deal.

That is, until you consider that most proxy voting at large asset management firms is outsourced to third-party firms, and that index ETF managers tend to vote with management about 90% of the time.

To be clear, voting with management most of the time is a little misleading because, as many ETF providers will explain, a lot of proxy votes relate to routine management proposals on matters such as ratifying auditors and stock issuance.

But, according to the Sage research, there’s a disconnect between the way ETF providers are pledging their commitment to ESG factors, with 93% claiming ESG impacts their voting behavior, while still rarely voting in favor of shareholder resolutions.

According to Morningstar, over the past five years, five of the 10 largest fund families voted against more than 88% of ESG-related shareholder resolutions.

“There’s a huge trend toward voting with management and that’s not a good thing,” said Emma Harper, ESG research analyst at Sage Advisory.

While most investors and financial advisers might not give much thought to proxy voting, it is a large and sometimes overwhelming reality for fund managers.

Every year, ETF sponsors have to navigate approximately 3,000 shareholder meetings and tens of thousands of proxy votes.

And as shareholder activism gains popularity in stride various sustainable causes and campaigns, it is true that many of the shareholder proposals are trivial or far too extreme to realistically pass.

“There are some fringe proposals out there, because you can file a proposal on a lot of different topics,” said John Wilson, director of corporate engagement for Calvert Research and Management.

Wilson said Calvert, like most large fund complexes, outsources the administration of the proxy voting, “but the (voting) decision is ours.”

“I’m thinking, if you’re supporting management 90% of the time you’re probably not looking closely enough at management,” he added.

According to Harper, shareholder proposals are generally viewed by corporate management as unwelcome distractions.

“What tends to happen is if there’s a shareholder proposal the likelihood that management will want that change is low,” she said.

The Sage Advisory report is based on research into 14 major ETF sponsors that combine to represent nearly 90% of the U.S. ETF market.

The research, including a survey, examines five core areas of stewardship through the prism of 28 questions.

Sage publishes the results and grades the firms but does not identify any firms by name.


The big picture perspective shows 58% of firms earning a passing grade of C or B, with no firms earning an A grade.

“What we found is the majority of firms have fairly unified voting policies and processes for their index funds, but when we looked at socially responsible reports and other documents, they allowed active funds to vote as they preferred,” said Bob Smith, Sage Advisory president and chief executive officer.

“Fact is, active managers are given the right to vote as they see fit, where passive votes the party line with management, and 95% of the ETF market is passive products,” he added. “A proxy vote is one of the most effective ways to effect a change in policy. When you look at the size and scope and assets controlled by these firms, they have significant voting power and are potential change agents and can act on your behalf in ways that you might desire.”

The Vanguard Group, one of the few ETF sponsors that responded to a request for comment for this article, emailed a statement that “Vanguard evaluates all shareholder proposals on a case-by-case basis and will vote in the funds’ — and in our investors’ — best interests.”

The statement explained that last year alone, “Vanguard participated in nearly 900 meetings with portfolio companies, advocating on the importance of disclosing material risks and strategies, including transparency on ESG issues, that could have an impact on a company’s long-term value.”

Northern Trust Asset Management, another of the firms that participated in the Sage Advisory research, also responded with an emailed statement.

“While support for management say on pay proposals had been trending upwards over the last few years, compensation plans are likely to come under much greater scrutiny in light of the economic pressures companies are under,” the statement read in part.

“Over the past year we have also seen a rise in votes against directors for a variety of ESG topics, including board diversity and over-boarding. Early indications seem to point to the continuation of this trend, particularly in Europe where some asset managers have become even stricter on diversity,” the Northern Trust statement continued.

Bottom line is, ETF sponsors have been required to report their proxy voting records since 2004 and, as the Sage research shows, there is often a disconnect between what the company presents through public statements and marketing materials and the actual votes cast by the largest ETFs in the world.

“ETFs control 37% of daily trading volume, and when you think about their responsibility to shareholders it’s getting larger and larger,” said Sage’s Smith. “We need to think more about how well they are executing their responsibilities when it comes to proxy voting, and our research suggests there’s room for improvement.”