House of Mirrors: How Mirror Voting Can Alter Strategic Behavior in Corporate Governance

Abstract

In response to concerns about the rise of index investing, lawmakers have gravitated to a deceptively simple policy solution: requiring index funds to “mirror” the market when they cast proxy votes. By so doing, index funds would no longer have the ability to distort corporate governance or the competitive landscape; instead, their voting power would accrue to the “smart” money in the market. With a single pen stroke, lawmakers could therefore erase the influence of index funds in corporate governance with little collateral effect on the corporate governance ecosystem—or so they think. Our Article reveals two critical flaws in this simple picture. The first is semantic: we show that scholars, regulators, and politicians mean vastly different things when they discuss mirror voting. Indeed, the two leading (and indeed only) articles studying mirror voting describe it in different terms; their characterizations also differ from the policy proposals on offer. The second is conceptual: mirror voting is far from a neutral policy reform. Using a series of game theoretic models, we show that mirror voting policies distort collective choice as well as incentives to aggregate information about proxy votes. Thus, lawmakers should tread carefully when mandating mirror voting regimes at scale.