Ramon Vogt: «How ETF Providers Have Influence on Companies»

The ETF industry's assets under management continue to grow. This means that providers of passive funds are increasingly obliged to exert influence on their portfolio companies in the interests of shareholders in order to promote responsible action, Ramon Vogt writes in an essay for finews.first

This article is published on finews.first, a forum for authors specialized in economic and financial topics.

Exchange traded funds (ETFs) continue to be popular. At the end of 2020, the global ETF industry managed more than $7,3 trillion - more than ever before. Since 2016 alone, global capital invested in passive financial products has more than doubled. But this is also accompanied by a growing responsibility of the industry. Corporate governance is becoming increasingly important for investors. Their own voting requests or the ongoing dialogue with the companies are popular ways to make their voices heard in the management.

This involves, for example, the extent to which a company behaves in an ecologically, socially or ethically correct manner, i.e., the importance it attaches to ESG criteria. Long-term investors, in particular, should expect companies to identify, disclose and effectively monitor ESG risks, for example. After all, companies that adequately manage the aspects contained therein through robust governance structures, policies, procedures and practices create the basis for long-term sustainable value for their shareholders. A fact that is also increasingly demonstrated in research.

«Even in highly regulated and developed markets, poor practices occur»

Conversely: companies that do not take the issue of corporate governance seriously or behave in an environmentally harmful or anti-social manner are taking risks - both in terms of their reputation and financially. This is why investors are increasingly moving towards specifically influencing companies and their boards to behave in an environmentally, socially and ethically sustainable manner.

While the majority of companies take corporate governance seriously, implementation varies from region to region and country to country. Even in highly regulated and developed markets, poor practices occur.

Investors can therefore also expect their funds or ETF providers to exert influence on companies with bad practices. After all, they are also responsible for ensuring that the companies they invest in act in the interests of shareholders. But how can ETF providers in particular, who invest purely passively, make this happen? Ultimately, by implementing a program aimed at reaching out to boards: This way, they can understand their corporate governance approaches, share best practices and directly advocate for improvements where shortcomings are evident.

«ETF providers also tend to have specific guidelines for voting behavior»

Providers such as Vanguard, for example, have installed a dedicated stewardship team responsible for voting behavior as well as engagement across all internally managed passive portfolios. The team analyses shareholder proposals and decides on a case-by-case basis whether to support or reject a proposal. It thus represents the voting rights of investors - also known as proxy voting. At Vanguard, the stewardship team votes on about 170,000 board resolutions each year and engages with hundreds of companies on a wide range of issues. The team identifies these issues using data management and research.

ETF providers also tend to have specific guidelines for voting behavior. Vanguard has identified four key factors that the expert team believes are critical to good corporate governance: The first concerns the composition and competence of the board, with independence and diversity, in particular, being key factors. The second factor is the monitoring and disclosure of strategy and risks that could negatively impact shareholder value.

«Such principles can be used to analyze whether companies are indeed positioned to oversee business strategy»

Thirdly, the stewardship team examines whether executive remuneration is aligned with shareholder interests. Finally, the fourth factor concerns the governance structures in the company that ensure shareholders' rights as well as board accountability. Such principles can be used to analyze whether companies are indeed positioned to oversee business strategy, manage material risks and ultimately deliver sustainable, long-term returns to their shareholders.

Another aspect of such stewardship programs is usually the joint exchange between the ETF provider and the company on the basic principles of corporate governance, as well as the promotion of good governance practices. Such dialogue is particularly necessary when gaps, omissions or weaknesses become apparent at companies. Companies that are willing to actively engage with investors – that seek feedback, communicate strategic plans and are transparent on risk monitoring issues – are better informed and respond more effectively to market developments and investor needs, creating another prerequisite for long-term corporate success.

«This will be critical to supporting investors' objectives»

If the stewardship team identifies a deviation from these principles - or exceptional situations or risk issues - it might have to examine more closely individual issues before a voting decision is made and consider shareholder proposals on a case-by-case basis.

High transparency is a critical factor of successful Investment Stewardship programs. For example, in addition to posting their voting policies on the website, portfolio managers can disclose voting records and provide investors with more detailed supplementary information for certain votes. For example, the annual report, the semi-annual report and many more are suitable for this. The point, then, is to provide investors with meaningful insights into the work being done on their behalf.

It is increasingly important for ETF providers to take on the role of active owner through a robust stewardship program. The key challenge here is to align this program with their own investment approach and cost-effective product offering. Looking ahead, this will be critical to supporting investors' objectives and providing them with long-term value.

Previous contributions: Rudi Bogni, Peter Kurer, Rolf Banz, Dieter Ruloff, Werner Vogt, Walter Wittmann, Alfred Mettler, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Albert Steck, Martin Dahinden, Thomas Fedier, Alfred Mettler, Brigitte Strebel, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert Hemmi, Anton Affentranger, Yves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino Borini, Bert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. Rutsch, Dorte Bech Vizard, Adriano B. Lucatelli, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob Roth, Marco Martinelli, Thomas Sutter, Tom King, Werner Peyer, Thomas Kupfer, Peter Kurer, Arturo Bris, Frederic Papp, James Syme, Dennis Larsen, Bernd Kramer, Ralph Ebert, Armin Jans, Nicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio Quirighetti, Claire Shaw, Peter Fanconi, Alex Wolf, Dan Steinbock, Patrick Scheurle, Sandro Occhilupo, Will Ballard, Nicholas Yeo, Claude-Alain Margelisch, Jean-François Hirschel, Jens Pongratz, Samuel Gerber, Philipp Weckherlin, Anne Richards, Antoni Trenchev, Benoit Barbereau, Pascal R. Bersier, Shaul Lifshitz, Klaus Breiner, Ana Botín, Martin Gilbert, Jesper Koll, Ingo Rauser, Carlo Capaul, Claude Baumann, Markus Winkler, Konrad Hummler, Thomas Steinemann, Christina Boeck, Guillaume Compeyron, Miro Zivkovic, Alexander F. Wagner, Eric Heymann, Christoph Sax, Felix Brem, Jochen Moebert, Jacques-Aurélien Marcireau, Ursula Finsterwald, Claudia Kraaz, Michel Longhini, Stefan Blum, Zsolt Kohalmi, Karin M. Klossek, Nicolas Ramelet, Søren Bjønness, Andreas Britt, Gilles Prince, Darren Willams, Salman Ahmed, Stephane Monier, and Peter van der Welle, Ken Orchard, Christian Gast, Jeffrey Bohn, Juergen Braunstein, Jeff Voegeli, Fiona Frick, Stefan Schneider, Matthias Hunn, Andreas Vetsch, Fabiana Fedeli, Marionna Wegenstein,  Kim Fournais, Carole Millet, Ralph Ebert, Swetha Ramachandran, Brigitte Kaps, Thomas Stucki, Neil Shearing, Claude Baumann, Tom Naratil, Oliver Berger, Robert Sharps, Tobias Mueller, Florian Wicki, Jean Keller, Niels Lan Doky, Karin M. Klossek, Ralph Ebert, Johnny El Hachem, Judith Basad, Katharina Bart, Thorsten Polleit, Bernardo Brunschwiler, Peter Schmid, Karam Hinduja, Zsolt Kohalmi, Raphaël Surber, Santosh Brivio, Gérard Piasko, Mark Urquhart, Olivier Kessler, Bruno Capone, Peter Hody, Lars Jaeger, Andrew Isbester, Florin Baeriswyl, and Michael Bornhaeusser, Agnieszka Walorska, Thomas Mueller, Ebrahim Attarzadeh, Marcel Hostettler, Hui Zhang, Michael Bornhaeusser, Reto Jauch, Angela Agostini, Guy de Blonay, Tatjana Greil Castro, Jean-Baptiste Berthon, Marc Saint John Webb, Dietrich Goenemeyer, Mobeen Tahir, Didier Saint-Georges, Serge Tabachnik, Rolando Grandi, Vega Ibanez, Beat Wittmann, David Folkerts-Landau, Andreas Ita, Teodoro Cocca, Michael Welti, Mihkel Vitsur, Fabrizio Pagani, Roman Balzan, Todd Saligman, Christian Kaelin, Stuart Dunbar, Fernando Fernández, Lars Jaeger, Carina Schaurte, and Birte Orth-Freese, Gun Woo, Lamara von Albertini, and Philip Adler.