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Comment by darawk | Hacker News Reader

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

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> The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

This is somewhat addressed in the article. One of the criticisms is that index founds don't do enough, resulting in more power to the CEO and less oversight. Giving voting power to individual owners would reduce engagement even further, giving even more power to the CEO. There might be some ways to improve this (let investors transfer voting power to e.g. non-profit organisation who vote for them) it's unclear if this would not simply shift the problem

Sounds like a self correcting problem easily solved by a little profit motive. As index funds gain ownership, the cost for an active investor to buy enough stock to vote whoever they want into control of companies decreases as the number of active voters decreases. Once that gets low enough and the CEO is deemed running a company badly enough, some active investor will buy enough stock to vote in better management and if successful, will rake in a healthy profit for doing so as it'll result in excess returns.

This is de facto already somewhat the case - most index funds lend out their shares to earn some additional income, and so they can't vote those shares.

However, this becomes a bigger issue as index funds gain additional scale. As shares owned by index funds further surpasses the number of shares demanded for borrowing, index funds will be left with more shares to vote.

This will likely reduce shorting costs and increase total shares sold short somewhat, but likely not enough to compensate for the additional index fund ownership (i.e., index funds will net still have more shares for voting).

That doesn't solve the big part of the problem which is the co-ownership of competing companies. A blackrock manager voting for you or you voting doesn't change anything. Through the fund, you co-own multiple competing companies, therefore you won't vote for policies that would increase competition between those companies.

Ya you're right. I guess the correct solution then is to prevent index funds from voting entirely. If you own a company as a part of a passive vehicle, your vote doesn't count.

I would say this does solve the problem. If you have enough money for your vote to matter, then you can just own all the stocks in an index yourself and get to vote. This is now even more practical as trade costs have recently been cut to zero for all major brokerages.

The average index fund owner is also not likely be spending time looking over the voting possibilities of 500 companies and aligning votes to decrease competition between them, even if that was possible. They just wouldn't vote on issues. The problem is that three funds can decided to vote on policies that reduce competition between companies and that they are big enough for the votes to matter.

Transferring votes to the underlying owners of the fund would in reality likely just cause those votes not to be cast. It is similar to just saying that the funds can't vote, but doesn't disenfranchise people who really want to vote and still gives all those shares the index funds own possible power.

I feel like the anti-competitive concerns about index funds are another example of people having concerns about everything and its opposite and not seeing that implies the problem is misidentified.

We're all worried about companies doing things to compete that are not in the interest of society, right? Less competition equals less (fewer?) externalities. Why even have companies in the first place if competition is simply always a good thing? Why was Eddie Lampert's clashing departments at Sears (supposedly) a disaster?

I built a site for people to do this

www.yourstake.org

Fantastic.

How do you get the fund to vote on the investors behalf ?

You don't. If you give a fund manager your money they are fiduciaries to you and the entire fund. They have to vote in a way that maximizes value for everyone.

I remember trying to build just this solution about a dozen years ago - the SWIFT integration was achievable but the main stumbling block was it seemed like a marketplace buildout - you needed to get everyone persuaded it was a good idea before it takes off.

Things may have changed

Something like create a super-voting share class for active investors and regular stock for the index funds?

https://en.wikipedia.org/wiki/Super-voting_stock

An interesting idea, but not appropriate in this instance. Super-voting stock are basically a polite way of retaining control while not appearing to own a majority of shares.

They don't preserve the right incentive structure and remove escape valves the regular stock holders should enjoy. I thought the original idea here is to let the index investors direct the fund how to vote with their portion of the index's stock. A pretty neat idea that de-fangs much of the incentive risk if the index fund management goes rogue or an activist investor tries something.

A tangent to your idea - if implemented in Japan the BOJ would be forced to vote all of its shares from ETF holdings.

I'd have to vote in thousands of different proxies, seems unwieldy.

Solutions to complex problems are rarely simple or obvious.

More precisely, it might be simple but not easy: it’ll be quite difficult an operation to collect votes from the tens of thousands of shareholders of the funds, and votes are happening all the time on a global scale.

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