Schwab responds to investor activism by giving fund shareholders more say in proxy voting

Pilot program marks the first time mutual fund and ETF investors have been asked their opinions on proxy matters.

Schwab Asset Management is launching a pilot program that enables fund investors to have a say in the direction of the proxy voting process.

The rollout, which initially involves three funds and leverages the fintech resources of Broadridge Financial Solutions, represents the closest thing fund shareholders have come to having a say in how fund managers vote on proxy issues.

“This is a great first step, and one that Schwab is likely in a pretty unique position to pull off, as I would suspect the vast majority of holders of these funds have Schwab accounts,” said Dave Nadig, financial futurist at VettaFi.

Industry watchers are expressing praise for Schwab’s ground-breaking efforts to give shareholders more of a voice in proxy voting and connection to their investments, but even if the pilot program is a success, it will have its limits.

“Really, we need something like this to be universal, but I believe there are issues in the ’40 Act with getting pure pass-through voting,” said Nadig. “As it stands, this is really just a preference survey targeted to shareholders, but there’s nothing suggesting that your 10,000 shares will carry more weight than my one share. Perhaps it will, but since this is just an input to the team that ultimately decides, we don’t really know their internal rubric.”

Omar Aguilar, chief executive officer and chief investment officer at Schwab Asset Management, described the program as “engaging shareholders to try to understand better how they feel about important issues related to the companies they own.”

The rollout will involve sending basic questionnaires to shareholders of the Schwab 1000 Index Fund (SNXFX), the Schwab 1000 Index ETF (SCHK) and the Schwab Ariel ESG ETF (SAEF).

Follow up questionnaires will be sent out monthly to capture feedback from new shareholders.

“We’re not passing through the proxies, we’re basically polling fund shareholders to find out how they feel on the issues,” said Aguilar.

Michael Tae, Broadridge’s president of mutual fund and retirement solutions, said the program is in response to the trend toward increasing shareholder engagement, which he attributed to “the fact there is increased technology platforms and more ways for investors to participate.”

“The idea is to get an understanding of the underlying viewpoint of shareholders related to things that might be policy specific or relate to board composition or ESG issues,” he said. “Ultimately, the responsibility for voting will still lie with Schwab.”

Vivek Ramaswamy, founder of Strive Asset Management, gives Schwab credit for moving in the right direction, but pointed out that a survey is a few steps removed from a vote.

“There’s a reason we don’t do elections of any kind through surveys,” he said. “Allowing shareholders to vote the shares themselves would be the complete solution.”

Acknowledging the logistical challenges of passing along hundreds of shareholder resolutions and proxy votes to thousands of shareholders, Ramaswamy said he likes “tonally what Schwab’s program accomplishes.”

“Proxy voting is still just the tip of the iceberg for how asset managers influence companies,” he added. “Most of it is done through shareholder engagement or stewardship.”

Along those lines, Ramaswamy’s Strive Asset Management is taking its own swipe at the way the largest asset managers control proxy voting by launching funds that promise to vote in line with a fiduciary focus on profitability.

Eric Balchunas, fund analyst at Bloomberg Intelligence, described Schwab’s effort as “an ideal solution” to concerns over shareholder representation and over proxy voting power being concentrated among a handful of fund companies that dominate the market.

“People are worried that there’s a concentration of power and this, to me, threads the needle and is a perfect solution,” he said.

However, there could still be a gap between measuring the desires of shareholders and following through when it comes to proxy voting, Balchunas added.

“Corporate governance teams could still be politically biased,” he said. “You have a small group of people controlling a lot of votes, and they will have their own views.”

And like any democratic process, there is also the issue of voter turnout.

Shareholders will be sent emails and postcards directing them to the list of about a dozen questions that will help guide how the fund companies vote on proxy issues. But Ben Johnson, director of global ETF research at Morningstar, said it is possible that only the most passionate shareholders will bother to vote.

“A lot will depend on voter turnout, but at the end of the day, it’s the responsibility of the fund managers to vote on the behalf of shareholders,” he said. “If there’s a risk, it’s that the people who participate won’t be a representative sample of fund shareholders.”

Balchunas echoed that sentiment, suggesting vote tallies could also expose unpredictable findings.

In a 2020 survey by Just Capital, the top concern facing U.S. investors was ensuring that companies pay a livable wage, followed by upholding human rights standards across the supply chain and investing in workforce training. At the bottom of the list, investors wanted companies to protect customer privacy, treat customers fairly and prioritize value creation for all stakeholders.

But even with potential imperfections, Johnson said the pilot program is “as close as fund shareholders have ever been to having their hands on the levers of the proxy voting machines.”

The platform is another example of “leveraging technology to democratize the proxy voting process,” said Nate Geraci, president of The ETF Store.

“The largest asset managers are wielding an increasing amount of power through proxy voting,” Geraci said. “This is a savvy and forward-thinking move by Schwab and may help them avoid some of the negativity experienced by other large asset managers who are being accused of pushing politically-charged ESG mandates.”