ETF voting rights: how do they influence companies?

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In reality, you own shares in the ETF and the ETF owns the underlying securities, which means its the ETF provider that wields the voting power. But ETFs can build a significant block vote from the investing inflows of many small investors enabling them to actively influence companies despite their passive reputation.

Voting rights protect shareholder value

Voting usually takes place at company general meetings. Rights vary but typically shareholders vote on decisions with immediate consequences for their interests such as dividend payouts, stock splits, mergers and acquisitions. Shareholders may also have the right to vote on executive pay. Long-term shareholders, such as passive investors, have a special interest in shaping management decisions that can impact company performance over the long run. This includes voting on board structure and social responsibility issues such as the fair treatment of employees and environmental sustainability. This procedure is also called "stewardship". A number of laws have been drafted under this term. International fund companies likewise publish their reports on votes at general meetings under this expression.

ETF voting power varies

Voting power varies relative to the size of a shareholder’s ownership, activism and the rights of shareholders as provided for in a company’s constitution and its country’s corporate law. ETF influence is also dependent on a few factors peculiar to the fund’s structure:

• Synthetic ETF providers do not actually own the shares of the companies they track. Therefore they don’t vote on the companies that matter to their investors’ returns.
• Physically replicating ETFs do usually own the shares of the companies they track and so enjoy voting rights. The exception occurs when an ETF uses an optimised methodology. In this case, the ETF doesn’t hold shares in every company in the index. Companies are dropped where they are too small to make a real difference, and/or trading is too costly. Naturally, no shares in a company means no votes.

An ETF provider’s voting power may also be diminished if it lends securities to lower costs. The rights follow the share, so an ETF can’t count on votes from shares out on loan. As rapid as the growth in European ETFs has been in recent years, they aren’t big enough to hold a majority stake in companies. The largest ETFs could tip the balance in some situations but as ETFs control less than 4% of global market capitalisation, cost-conscious managers must carefully weigh up whether exercising a small vote is worth the expense. For smaller stocks in emerging markets, the transmission of votes is a challenge. Add to this the cost of exercising voting rights through specialised providers (so-called "proxy voters") and you have a highly competitive ETF market.

Many ETF providers use voting rights

The handling of ETF voting rights is still developing in Europe but the growing demand for Socially Responsible Investing (SRI) shows that investors are interested in ethical investing strategies. Most ETF providers have published voting policies and they usually include an ESG (Environmental, Social, Governance) dimension. Even if the study is already 3 years old: In September 2020, justETF, therefore, surveyed the 15 largest ETF providers who together manage around €600 billion in equity ETFs. The results show that, contrary to frequent criticism, ETF providers are handling the voting rights from ETF holdings in a responsible manner. Only one small provider stated that it did not exercise voting rights at all. 12 providers, who managed €530 billion in their equity ETFs at the time of the survey, exercise voting rights across the entire range of equity ETFs - with no exceptions. The exercise of rights is not limited to sustainable ETFs. 8 providers indicated that voting rights are exercised for the majority of shares, 5 providers even stated this for all shares in the ETFs. Almost all providers reported that sustainability criteria are taken into account when voting.

ETF provider voting policies

BlackRock, the owner of the market leader iShares ETFs, is the largest fund company in the world. It leverages that influence by pooling its votes in the hands of a dedicated team that engages with companies in line with BlackRock’s stated policies. The voting policy of BlackRock, the iShares mother, is considered exemplary. The fund manager also documents this publicly in a report of the results. Links to the providers' reports are provided in a table below the article. Vanguard, the second-largest fund company in the world and another US titan, works in a very similar way. Medium-sized ETF providers often delegate their voting rights to proxy voting agencies (also known as proxy advisory firms). This saves the ETF’s management from the expense of expending resources to develop a voting position on every individual company in the index – a cost that would inevitably impact OCFs. Instead, the ETF provider issues guidelines to the proxy voting agency which is responsible for researching the issues, casting votes or advising the provider on voting decisions. Deutsche Bank’s asset management arm DWS (Die Wertpapier Spezialisten) is an example of a provider that uses proxy voting agencies. DWS also clubs together the votes of its ETF and active funds to create a more influential block vote. Voting results are published on the DWS website. In this context, 8 out of 14 ETF providers stated that voting decisions are made in-house. This group represents more than half of the assets represented. For four providers, representing another third of equity ETF assets, the substantive decision is made by the parent company. These are iShares, Credit Suisse, Deka ETFs and BNP Paribas Easy. At SPDR, decisions are made together with the parent company. Our conclusion: ETF providers exercise the voting rights of physical equity ETFs extensively and even take sustainability criteria into account. In doing so, ETF providers do vote against management proposals and are therefore an important correction factor. Voting results can be found at most providers. The growing popularity of ETFs ensures that these votes are becoming increasingly important.

Links to the voting reports of the ETF providers (mostly in English)