2022: Should index funds be prohibited from voting the shares they control?

BECKY QUICK: You know, Charlie just mentioned index funds in passing, so let’s go to this question from Matt Figel. His question is related to the growth of passive investing through index funds and ETFs. He says, “Passive investment vehicles now control upwards of 50% of the United States stock market.”

BECKY QUICK: “The actual owners of these passive investment vehicles decided passive investing makes the most sense for them, yet, in doing so, passive investors have empowered the large index funds to become the biggest activists in the market. These passive managers now enjoy enormous, and, I would argue undue influence over corporate governance. Do Warren or Charlie see any benefit or logic to a rule that would prohibit passive investment vehicle managers from voting the shares they control for their passive investment clients?”

CHARLIE MUNGER: Well, I’ll take that. I think the guy’s right. I think the thing is out of control and counterproductive. And I don’t think it’s good for the country to have three passive investors, bright young men from Harvard or what all, telling them what proper governance of corporations is. It’s not a good development. (Applause) And I think indexing, if it gets to 90%, then it won’t work very well at all. But at the moment, it’s worked fine.

WARREN BUFFETT: Yeah. Well, the one thing you can count on too is that if it does look like it’s going to — if the public opinion shifts over to the idea that it really is a good idea to let three people decide the fate of every company in corporate America, the three people — and they won’t collaborate or do anything.

It’s not that they’re evil people the least. I mean, they’re just doing what you and I would do. They would figure they don’t care that much about voting. What we do care about is keeping (Laughs) a lot of assets under management. But so we’ll figure out something that ends up reflecting public opinion, and then politicians won’t get mad at us. And our only threat, really, is the politicians get mad at us, and regulators in some ways. So we’ll head it off.

And I would predict fairly confidently that if American public doesn’t like the idea of three people controlling things, the three people — and their organizations and everything, but the three, what they want to do is they want to get bigger. (Laughs)

And they wouldn’t be where they are in life if they hadn’t wanted to get bigger. Those things don’t happen by accident. That doesn’t mean that it’s the only thing they want. They want their investors to get good results and everything. But they are certainly not going to follow a policy which is going to cause a backlash that causes them to be a lot smaller there.

They can figure out their self-interest. And it just so happens that in this case, it would achieve the right result, which is that they would not control America, but they’ll do what’s good for themselves. And what they have to do, what’s politically acceptable.

The only thing that really can mess up what is a very good deal for them is to have Congress change the rules. And, you know, the rules were — the Investment Company Act of 1940 really changed how people behaved, and it’s governed things in a big way for a very long time.

And anybody that takes on the federal government loses. You know? And if you’re talking about trying to do that sort of thing — and they don’t need to do it. They just say, “Well, we’ll give up voting, or we’ll vote our shares as the rest of the people do.”

And of course if you vote your shares as the rest of the people do, then if the index fund’s at 90% of the country, you could take over a company by somebody else buying 3% or 4%, because you just automatically get the funds to follow your very small little percentage.

You’ll see it all play out. I mean it’s a big case, but it’s not an unusual case.