“Re-index voting” refers to how index/passive investors exercise voting rights on mergers and acquisitions (M&A) proposals, even though they cannot sell or avoid securities in an index.
- Active funds can simply sell a stock if they disagree with a merger.
- Index funds cannot — they must hold and vote in the best interest of clients.
Thus, their voting process becomes a critical governance mechanism to influence corporate actions and protect long-term value.
How Index and Passive Asset Managers Handle Voting in Mergers and Acquisitions?
The process typically follows a structured internal governance workflow, separate from portfolio management.
| Stage | Key Activities | Responsible Parties |
| 1. Deal Identification & Notification | – Company announces merger/acquisition. – Custodian or proxy platform alerts asset manager. | Proxy operations / governance team |
| 2. Preliminary Assessment | – Determine if vote is required (shareholder approval). – Collect deal documents (proxy statement, fairness opinions, valuations). | Stewardship analysts / corporate governance team |
| 3. Internal Analysis | – Evaluate financial rationale, deal premium, synergies, and risks. – Assess board process, conflicts of interest, independent fairness opinions, and alternatives considered. | Stewardship or investment stewardship committee |
| 4. Consultation with Proxy Advisors | – Obtain ISS / Glass Lewis recommendations. – Benchmark against internal guidelines. | Proxy voting team (input only, not binding) |
| 5. Engagement with Company (and sometimes Counterparties) | – Meet with management or independent directors to clarify deal logic. – In some cases, engage with activists or rival bidders. | Stewardship analysts / engagement team |
| 6. Internal Decision | – Apply asset manager’s voting policy (e.g., support only if value creation is clear). – Decision reviewed by internal voting committee or head of stewardship. | Voting committee |
| 7. Vote Execution | – Votes submitted electronically via custodians (e.g., ISS ProxyExchange, Broadridge). | Proxy operations |
| 8. Post-Vote Disclosure | – Public disclosure of voting outcome and rationale. – Included in stewardship or annual governance reports. | Stewardship communications / reporting |
Key Analytical Criteria in M&A Vote Evaluation
Index fund stewardship teams often apply structured criteria, typically including:
| Dimension | Evaluation Focus | Indicators or Red Flags |
| Strategic Rationale | Does the merger create long-term value? | Lack of synergy justification; defensive motivation. |
| Valuation | Is the offer fair to minority shareholders? | Low premium, poor fairness opinions, inadequate disclosure. |
| Process and Governance | Was the board’s process independent and robust? | Conflicts of interest, weak independent committee oversight. |
| Deal Protections | Do terms allow competing offers? | Excessive termination fees, “no-shop” clauses. |
| Execution Risk | Are financing, integration, or regulatory approvals realistic? | Overly optimistic synergy assumptions. |
| ESG Alignment | Does the transaction align with long-term sustainability goals? | Material ESG or reputational risks. |
Scenarios When Board Recommendations Conflict with Proxy Advisors
In M&A and strategic transaction contexts, proxy advisors (primarily ISS and Glass Lewis) issue independent voting recommendations for shareholders based on their own policy frameworks. Boards of directors, meanwhile, issue recommendations based on their fiduciary judgment, management’s strategic view, and deal-specific considerations. Because their incentives, mandates, and analytical lenses differ, conflicts often emerge — especially in mergers, acquisitions, and contested takeovers.
Typical Scenarios of Conflict
| Scenario Type | Board Recommendation | Proxy Advisor Position | Reason for Divergence |
| 1. Low-Premium Friendly Merger | Vote FOR (board supports the deal) | Vote AGAINST | Advisors view the offer as undervaluing the company vs. peers or intrinsic value. |
| 2. Deal with Governance or Process Concerns | Vote FOR | Vote AGAINST | Advisors identify conflicts of interest (e.g., insiders negotiating), weak independent committee process, or poor disclosure. |
| 3. Hostile Takeover / Competing Bid | Vote AGAINST (board rejects acquirer) | Vote FOR | Advisors prioritize shareholder value maximization — if the hostile offer carries a substantial premium. |
| 4. Use of Anti-Takeover Defenses | Support management’s defense | Oppose defenses | Advisors object to measures that entrench management or limit shareholder choice. |
| 5. Dilutive or Overleveraged Acquisition | Vote FOR (strategic rationale) | Vote AGAINST | Advisors consider leverage excessive or dilution high relative to benefit. |
| 6. M&A Involving Related Parties or Control Shareholders | Vote FOR | Vote AGAINST | Advisors penalize related-party transactions unless fairness opinions and independent approval are robust. |
| 7. ESG-Related Strategic Shift (e.g., acquisition of fossil fuel assets) | Vote FOR | Vote AGAINST | Advisors may recommend opposition if the deal contradicts stated ESG commitments or long-term risk profiles. |
| 8. “Vote-No” Campaign Influence | Vote FOR | Vote AGAINST | Advisors influenced by activist shareholders’ analyses arguing for better alternatives. |
Examples
| A: Board supports merger at 10% premium → ISS finds peers trading at higher multiples → recommends “Against” due to low value creation. |
| B: Acquisition negotiated by CEO who will receive large change-in-control payout → Glass Lewis recommends “Against” citing conflicts. |
| C: Hostile bid offers 40% premium; board resists → ISS recommends “For”, citing failure of board to engage with bidder. |
| D: Private equity buyout with majority shareholder involvement → Advisors flag process fairness issues; recommend “Against.” |
Key Analytical Differences Between Boards and Proxy Advisors
| Factor | Boards Focus On | Proxy Advisors Focus On |
| Perspective | Strategic fit, long-term corporate trajectory | Shareholder value protection and governance quality |
| Time Horizon | Multi-year (strategic transformation) | Immediate and medium-term (transaction fairness) |
| Information Access | Inside knowledge and forecasts | Public disclosures and comparable transaction data |
| Accountability | Fiduciary duty to all shareholders | Policy-based consistency across issuers |
| Sensitivity to Optics | Lower — emphasizes strategy | Higher — emphasizes independence and transparency |
Consequences of Board–Proxy Advisor Divergence
| Impact Area | Implication |
| Voting Outcomes | Large institutional investors (esp. passive index funds) often consider both sides — can swing outcomes significantly. |
| Investor Engagement | Company must intensify outreach to explain its rationale and challenge advisor analysis. |
| Market Reaction | Conflicting recommendations can cause volatility and speculative arbitrage. |
| Reputation & Governance | Repeated conflicts may raise governance credibility concerns with institutional shareholders. |
How Companies Typically Respond
When proxy advisors recommend against the board:
- Board and IR teams hold calls with major shareholders (e.g., BlackRock, Vanguard, State Street).
- Issuing detailed letters or investor presentations clarifying valuation logic or process integrity.
- Publishing fairness opinions or independent committee reports.
- Occasionally improving the offer or deal structure before the shareholder vote
Situations Where an Asset Manager May Vote Against Management
1. Strategic Transactions (M&A, Spin-offs, Capital Changes)
Asset managers — including index funds — may oppose management when they believe the transaction destroys shareholder value or violates governance norms.
| Situation | Voting Decision | Underlying Rationale |
| Low-Premium or Value-Dilutive M&A Deal | Vote against the merger | The transaction undervalues the target or overpays for the acquirer; weak synergies or over-optimistic assumptions. |
| Conflicted Transaction / Related-Party Deal | Vote against management or directors | Perceived self-dealing or inadequate independent oversight (e.g., management buyouts, insider transactions). |
| Inadequate Sale Process | Vote against transaction | Limited market check, no fairness opinion, or opaque negotiation process. |
| Anti-Takeover Defenses | Vote against adoption of poison pill or classified board | Defenses restrict shareholder rights or entrench management. |
| Leveraged or Dilutive Acquisitions | Vote against | High leverage or share issuance that erodes existing shareholder value. |
| Unjustified Asset Sales or Spin-offs | Vote against | Poor strategic rationale, inadequate disclosure, or negative long-term value impact. |
Example:
In 2022, several institutional investors voted against management’s recommendation in the Illumina–Grail acquisition, citing governance process concerns and antitrust risk.
2. Governance Failures and Board Accountability
Voting against management (or the board) is often a signal of dissatisfaction with governance practices or board oversight.
| Situation | Voting Decision | Rationale |
| Board Lacks Independence | Vote against directors | Failure to maintain independent oversight or meet governance standards. |
| Poor Board Attendance or Oversight | Vote against re-election of directors | Perceived inattention to shareholder interests or governance responsibilities. |
| Ignoring Prior Shareholder Votes | Vote against chair or governance committee | Management ignored prior majority-supported proposals (e.g., say-on-pay, ESG disclosure). |
| Weak Shareholder Rights | Vote against management proposals | Resistance to reforms (e.g., proxy access, right to call special meetings). |
| Audit or Risk Failures | Vote against audit committee members | Repeated control failures or controversial accounting issues. |
Example:
Large asset managers have voted against audit committee chairs after repeated accounting restatements (e.g., Toshiba, Steinhoff).
3. Executive Compensation
A frequent area of opposition, especially when pay and performance diverge.
| Situation | Voting Decision | Rationale |
| Pay Misaligned with Performance | Vote against say-on-pay | Total shareholder return underperforms peers while CEO pay rises. |
| Excessive Severance / Golden Parachutes | Vote against compensation plan | Outsize termination benefits not linked to performance. |
| Lack of Disclosure or Poor Metrics | Vote against compensation committee | Ambiguous performance metrics; non-GAAP manipulation. |
| One-Time Awards / Retention Bonuses | Vote against | Boards granting large discretionary bonuses unrelated to long-term goals. |
Example:
In 2021, several large institutional investors (including BlackRock) voted against say-on-pay proposals at U.S. companies like Starbucks and AT&T due to pay–performance misalignment.
4. Environmental, Social, and Sustainability Failures
Asset managers increasingly vote against management where ESG oversight is lacking.
| Situation | Voting Decision | Rationale |
| Climate Risk Oversight Failures | Vote against board chair or risk committee | No credible transition plan or poor climate disclosure. |
| Human Capital or Diversity Lapses | Vote against nominating committee | Lack of diversity targets or inadequate workforce disclosure. |
| Human Rights or Reputational Risks | Vote against management | Material controversies (e.g., supply chain labor issues, data privacy violations). |
| Failure to Address Shareholder ESG Proposals | Vote against board members | Ignoring prior supported ESG resolutions. |
Example:
In 2023, LGIM and Norges Bank opposed several U.S. boards for inadequate climate risk governance after repeated engagement efforts failed.
5. Shareholder Rights and Capital Allocation
| Situation | Voting Decision | Rationale |
| Excessive Share Issuance Without Justification | Vote against capital authorization | Dilution risk without clear value creation. |
| Dual-Class Share Structures | Vote against directors | Unequal voting rights undermining minority shareholders. |
| Opposition to Shareholder Proposals on Governance Reform | Vote against board | Refusal to adopt reasonable reforms (e.g., independent chair). |
| Excess Cash Hoarding / Poor Capital Discipline | Vote against management | Inefficient use of capital; refusal to return cash via dividends or buybacks. |
Example:
Some institutional investors voted against Alphabet Inc.’s board due to persistent dual-class structure and lack of shareholder voting power parity.
How Major Institutional Investors Vote and Why
Asset managers’ voting behavior reflects their:
- Investment style (active vs. passive),
- Stewardship philosophy,
- Regional governance culture, and
- Client expectations (ESG mandates, fiduciary duty, etc.).
While most claim to act independently, clear patterns have emerged.
How Voting Behavior Differs
| Type | Characteristics | Voting Tendencies |
| Passive Index Managers | Hold entire indices; cannot sell shares. Focus on governance and engagement to influence companies. | Generally support management, but will oppose when governance, process, or ESG standards are breached. |
| Active Managers | Can buy/sell; often focus on performance and valuation. | More case-by-case, willing to vote against management if transactions are value-destructive. |
| ESG / Thematic Investors | Focus on sustainability and long-term impact. | Tend to vote more critically, especially on environmental or social issues. |
| Hedge / Event-Driven Funds | Focused on short-term outcomes, especially in M&A. | Vote tactically to maximize deal value; may oppose management in contested bids. |
Voting Tendencies by Issue Type
| Issue Type | Typical Behavior of Major Asset Managers | Commentary |
| M&As | Tend to support unless the process or valuation is clearly flawed. | Passive managers emphasize fairness and governance; active managers emphasize value creation. |
| Board Elections | Generally supportive unless independence or diversity standards unmet. | Many large firms have zero-tolerance policies for lack of female directors. |
| Executive Compensation | Common area of opposition (10–30% against votes). | “Pay-for-performance” alignment is key. |
| Shareholder Rights Proposals | Mixed: U.S. firms more conservative; European firms more supportive. | LGIM and NBIM often back governance reform proposals (e.g., independent chair). |
| Climate / ESG Resolutions | Increasingly supportive among Europeans; selective among U.S. firms. | Trend toward climate risk accountability (e.g., Scope 3 emissions disclosure). |