This paper by Professors Jonathan Macey and Nathan Atkinson – “Mirroring The Market: Passive Voting And Outcome Non-Neutrality” – argues that current mirror-voting proposals are not truly neutral. Uniform mirroring inadvertently lowers voting thresholds and subsidizes quorums. The authors propose context-dependent mirroring – and, in some cases, deliberate non-participation as the only means for passive funds to deliver genuine outcome neutrality.
1. The Problem: Passive Funds Have Too Much Voting Power: The paper argues that large passive asset managers (BlackRock, Vanguard, State Street) increasingly determine corporate voting outcomes despite lacking incentives to become informed about firm-specific issues. Policymakers have embraced ‘mirror voting’ – having passive funds vote proportionally to active investors – as a proposed solution.
2. Uniform Mirror Voting Is Not Neutral: The authors contend that the prevailing version of mirror voting is mathematically flawed. By mirroring only the ratio of votes cast, current proposals ignore the legal significance of abstentions and non-participation. This causes passive voting to alter outcomes rather than merely replicate active investor preferences.
3. The “Denominator Trap” Changes Election Results: Corporate votes use different standards – votes cast, majority of shares present, and majority of outstanding shares. Uniform mirroring ignores these differing denominators, causing active investor silence to be converted into effective support and lowering approval thresholds for corporate actions, including mergers and charter amendments.
4. The “Quorum Subsidy” Artificially Validates Meetings: Because submitting any proxy counts shares as present for quorum purposes, passive funds can unintentionally rescue meetings that active investors failed to support. In extreme cases, a proposal supported by only one active shareholder could pass because passive shares create quorum and amplify that single vote.
5. Uniform Mirroring Can Reverse Outcomes: The paper demonstrates numerically that proposals which would fail in an active-only world may pass once passive shares are mirrored. This occurs under both “present-majority” and “absolute-outstanding” voting standards, meaning uniform mirroring systematically favors change and weakens statutory protections intended to preserve the status quo.
6. The Authors Propose “Context-Dependent Mirroring”: Instead of one universal formula, passive funds should tailor voting to the specific legal standard governing each proposal. Passive shares would mirror not only votes but also abstentions and absences, preserving the outcome that active investors alone would have produced.
7. Context-Dependent Mirroring Restores Neutrality: Under this approach, passive funds dynamically adjust their allocations to reflect the legally relevant denominator. This preserves outcomes for both ordinary proposals and fundamental transactions and avoids transforming shareholder apathy into support.
8. Proxy Plumbing Creates Practical Obstacles: Modern proxy infrastructure requires votes to be submitted before final voting patterns are known. Since mirroring relies on estimates rather than real-time information, even sophisticated mirroring policies remain imperfect. Existing systems are designed for participation, not conditional neutrality.
9. Universal Participation and True Neutrality May Be Incompatible: The authors argue that there are circumstances where passive funds cannot achieve outcome neutrality if they are required to vote all shares. Because merely participating affects quorum and outcomes, true neutrality may require intentionally withholding shares from the proxy system.
10. Fiduciary Duty May Sometimes Require Not Voting: Contrary to the traditional “always vote” paradigm under the Investment Advisers Act, the paper suggests that informed non-participation may better satisfy fiduciary duties when voting itself becomes an intervention. Thus, the duty of care may occasionally require passive funds to abstain entirely from the proxy process.
