One more time on voting rights
Tuesday, February 22, 2022 at 07:32AM Shareholders get two things from ownership: voting rights (control) and equity claims (dividends). Index funds, for all their virtue as portfolio tools, withhold the voting rights. That is a significant and material cost to investors.
This holds implications for indexed funds, and the implications are neither well disclosed nor widely understood. Those who understand aren't talking about it too much. Here's why: the concentration of voting rights vested in indexed funds is huge. Vanguard, BlackRock, and State Street, in that order—own roughly twenty percent of the S&P 500’s outstanding shares. Now consider that the premium for corporate control in contested mergers & acquisitions can be ~20-30%, so the aggregate value of the indexed voting block here is non-trivial. And certainly these days BlackRock and Vanguard get their calls returned pronto from corporations, regulators, & congress alike.
Times have changed from the days of John Bogle, one of the Great Ones. The scale of indexing has grown beyond imagination, and what initially was a minor ministerial simplification has become something different in scale, form, substance, power and value. As an owner of indexed funds I neither want nor need them to control the votes which my investment has purchased. It is an arrogation of my ownership rights and a taking of the economic value of those voting rights... nor as a citizen do I want the influence & power of senior management of the indexers integrated into political & regulatory processes. It is an untoward concentration of power that is beginning to flex its muscles a bit too much.
The fix is to distribute to shareholders their voting rights, make them detachable, transferable & marketable. The perfect application for blockchain. Shareholders of the index funds could then 1/ vote as they choose; 2/ sell their rights for cash; or 3/ buy more rights to prevail on a vote or turn management out.
A 'tear down this wall' moment? Perhaps. Kudos to Mr. Munger for speaking out. Given the current environment there are very few people who can address this matter. No one can lay a hand on him, and that's precisely why reform is so badly needed.
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