My thoughts on this is that index funds shouldn't vote in shareholder elections, for purely selfish reasons that mirror the reasons why they don't try to evaluate stock prices.
The remaining voters are already voting in the company's best interest. Index funds don't have a comparative advantage at making voting decisions, so they shouldn't pay people to do it.
Everyone thinks they're right, even though only some of them can be. :-)
If Vanguard had an option where I could control my share of shareholder votes then I might sometimes do that. I can imagine there being the occasional shareholder vote where I have different views or values than the rest of the shareholders, even after reflecting on the fact that they're thinking the same thing.
But I don't see why I should expect Vanguard to be systematically better than other investors. The same way that I don't allow Vanguard to vote for me in political elections.
Vanguard (and other large fund companies) often uses ISS (Institutional Shareholder Services) for advice on how to vote their shares. ISS has some standing "policies" if you will about director and executive compensation and other matters that do matter to fund shareholders.
Vanguard does not obligate themselves to follow ISS recommendations, but on the whole ISS advice/recommendations are/try to be pro-shareholder.
Leaving voting only to active shareholders doesn't seem to improve shareholder representation, IMO. I'm happier to have Vanguard vote my shares than to abstain as abstaining provides an excess of power to the inside shareholders and company execs.
> Everyone thinks they're right, even though only some of them can be. :-)
No, even if everyone were right, that logic doesn't work, because interests simply aren't aligned. To make it really obvious: If Vanguard held 99% of company A while company B, a competitor of company A, held the other 1% of company A, and Vanguard abstained from voting, company B might simply vote to shut down their competitor.
The remaining voters are already voting in the company's best interest. Index funds don't have a comparative advantage at making voting decisions, so they shouldn't pay people to do it.