Opt-In Stewardship: Toward an Optimal Delegation of Mutual Fund Voting Authority

This article offers a theory of mutual fund voting to answer when mutual funds should vote on behalf of their investors and when they should not. It argues that voting authority for mutual funds ought to depend upon: (1) whether the fund possesses a comparative information advantage, and (2) the ability of the fund to assume a common investor purpose. The strongest case for mutual fund voting is one in which high-quality information is produced and the fund is able to assume a common investor purpose. The case for mutual fund voting is weaker when low quality information is produced or where funds cannot assume a common investor purpose. Applying this theory answers whether and how mutual funds should vote on recurring issues. Mutual funds ought to vote on contests —that is, proxy fights and M&A— because meaningful information is produced and because the fund can assume a common interest on the part of its investors. By the same token, funds ought not to exercise voting discretion over environmental, social and governance issues. With respect to environmental and social issues, meaningful information is not produced nor can mutual funds assume a common investor purpose. With respect to governance issues, although funds can assume a unified investor purpose, they do not have adequate information to decide the matter. As a result, mutual funds should follow the voting recommendations of unconflicted managers, as will typically be the case with regard to environmental and social proposals. However, when management is conflicted, as will often be the case with regard to governance proposals, funds should abstain from voting altogether. This analysis provides a clear rubric for ensuring that mutual fund voting serves investor interests. However, the possibility remains that mutual funds may use voting to pursue their own interests rather than those of their investors. Regulators should therefore act to reset the default allocations of voting authority between mutual funds and their investors