The trend toward indexing could weaken governance at public companies, according to speakers Monday at Financial Advisor magazine’s Inside Alternatives conference in Denver.

“It’s a big issue today. ETFs and index funds 97 percent of the time vote for management” on proxies, and “what that’s done is create a hidden dilution,” said David Winters, chief executive and portfolio manager of the Wintergreen Fund, during a panel discussion at the conference.

Wintergreen estimates that the dilution caused by company incentive plans and buybacks used to fund them costs shareholders of the S&P 500 4.3 percent per year in lost returns.

“All of us have to be more active in voting proxies,” Winters said.

The lack of active proxy contests is “a really big issue,” agreed Jerome Dodson, chief executive of Parnassus Investments. “If you don’t have active shareholders, you’re losing something in terms of active governance.”

And “something that really does bother me, and should bother all responsible investors, is the inequitable distribution of wealth in society,” Dodson added. “So I think it’s really important to look at executive compensation [and it’s] important for society as well.”

“CEO salaries have [exploded] while others’ compensation has remained flat,” Winters said. “That creates all kinds of issues and distortions.”

At some point, investors might rebel against the concentration of the big growth stocks in indexes, and favor more active management and a value tilt -- as well as take more responsibility for what’s going on in the boardroom.

“Indexing has been one of the most positive developments in decades [and] we’re in this phase where there’s a lot of money shifting into it, [but] I think stock picking will have more of an influence going forward,” said Jeffrey Davis, chief investment officer at LMCG Investments.

Winters, a value investor, thinks once the era of indexing ends, shareholders will act more like owners and pay more attention to governance.

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