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The Secret Power Behind Top U.S. Firms: Index Funds

Barclays Global Investors is a San Francisco-based subsidiary of Barclays, a $60 billion international financial-services group based in London. BGI manages $1 trillion in assets in 2,000 funds, about 70% of which is held in funds that mimic the return of broad market indexes such as the S&P 500, the Russell 1000 and the Russell 2000. Hudacko said BGI has a proxy committee that determines how to vote on governance issues on behalf of its pension plan or iShares shareholders, but does not canvas those shareholders for their opinions.

The recent vote in Philadelphia on the chairmanship of Disney offers unusual insight. You had an imperial chief executive, a board of directors that has been asleep at the switch, big blocks of shareholders captive to management and voting rules that do not permit a "no" vote -- only a "withheld" vote.

And now we learn that the largest shareholder, Barclays, does not even feel obligated to tell its own clients how it voted. The situation reveals that shareholders' rights are a thin veneer on top of business as usual.

Outsourcing Corporate Governance

If the trend toward shifting investment funds from expensive, actively managed accounts to inexpensive, "passively" managed accounts continues, in a relatively short time the four large indexers could own (on behalf of their clients) more than 30% of most major U.S. companies. That would give a small group of proxy voters unprecedented power in shaping American corporate life. And when you consider the increasing role played by the aggressive team at Barclays, you could almost suggest that the trend toward indexing has led Americans to blindly, unexpectedly outsource a large measure of its corporate governance to the British.

Yet, nationalistic pride aside, that might not be such a bad thing.

Stephen M. Davis, publisher of an international corporate governance report called Global Proxy Watch, said Barclays actually has a better-than-average record on corporate governance. "They are very proactive and have extensive guidelines to manage conflicts of interest," he said.

Few major funds have ever disclosed to their shareholders how they vote their shares in proxy battles. And this culture of keeping votes private between the fund and the company has been a major contributor to corporate misbehavior. Fidelity has long professed to have high standards on corporate governance, but it has never revealed its proxy votes to show how it held to those standards. And Vanguard, which also has articulated high standards for the governance of companies in which it invests, has likewise fought disclosure rules tooth and nail.

Starting in August of this year, the indexers will no longer be able to hide their votes, as a Securities and Exchange Commission rule will go into effect requiring all fund managers to reveal both their proxy-vote policies as well as their actual proxy votes cast. Hudacko said Barclays plans to set up a page at its Web site in August declaring its proxy positions.
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