Proposal Would Empower Individual Investors Over Index Fund Managers

Through published articles and testimony before the U.S. Senate Banking Committee, University of Arkansas law professor Caleb Griffin has proposed a new approach to corporate governance that empowers the individual investor over so-called index funds, the largest shareholders in — and, by proxy, the most powerful voting blocs in the governance of — most public companies.

“American corporate governance evolved in a different era, for a type of investor who is no longer typical today,” said Griffin, assistant professor and author of “Humanizing Corporate Governance,” to be published in the Florida Law Review. “Roughly half of Americans own investment funds, but legal and structural impediments prevent them from fully participating in corporate democracy.”

Caleb Griffin

For the past several years, Griffin has focused on index funds. As the largest group of shareholders in most public companies, index funds have quickly become dominant players in the corporate governance ecosystem. As such, they have tremendous power over CEOs, boards of directors and other corporate actors.

Griffin has proposed instituting what he calls “pass-through voting” for indexed assets, which gives individual investors the opportunity to participate in shareholder voting. This method would transfer voting power to actual investment owners rather than managers of index funds.

Several of the world’s largest asset managers have proactively adopted Griffin’s pass-through voting recommendations, which he outlined in testimony before the Senate Banking Committee in the summer of 2022. For example, BlackRock, the world’s largest asset manager, committed to adopting pass-through voting for all assets they manage, meaning trillions of dollars in assets can now be voted based on input from their beneficial owners.

Other large asset managers have recently commited to voluntarily expanding pass-through voting for investors. Griffin has also been in contact with multiple financial-technology startups that are working on developing software to enable smaller asset managers to implement pass-through voting proposals.

“If these companies honor their commitments, it is likely that pass-through voting will influence the management of a substantial portion of global investments, amounting to several trillion dollars,” Griffin said.

In the forthcoming article, Griffin challenges the assumption that investors are “rationally apathetic,” meaning most of them have so little at stake that it is economically irrational for them to vote in corporate elections. He argues that rational apathy is not fixed and is instead a function of the costs and benefits of voting. He argues that by increasing the impact of voting, while also reducing the barriers and complexity to it, fewer shareholders will be apathetic.

His research has validated this theory. Relying on hand-collected data, he found that human investors have strong, surprisingly positive views on numerous topics impacting corporations.

“Adopting the pass-through voting proposal would change the outcome of numerous significant corporate votes and chart a path toward meaningful change by harnessing the voice of human investors,” Griffin said.