processes. Passive investing The fact that many retail investors have passive, diversified portfolios also inhibits individuals from participating in corporate governance. Passive investing is a strategy where an investor allocates capital to all the components of an investment index, such as the S&P 500. Rather than identify favorable investments through fundamental research or technical analysis, passive investors simply track the performance of an index or benchmark, often by utilizing investment vehicles such as ETFs or mutual funds. Diversification Furthermore, diversification can reduce portfolio concentration, resulting in smaller individual positions to spread out risk. These factors may reduce shareholder awareness and familiarity regarding their portfolio companies, leading to lower engagement. Poor investor relations Companies which do not actively engage with their investor base may also have lower levels of participation. Firms which provide detailed materials through a variety of channels are more likely to foster an informed community of shareholders, who may be more inclined to engage in corporate governance. Dual-class shares Additional factors specific to individual companies, such as dual-class voting structures, can disenfranchise certain shareholders by diluting their voting power. These structures may be present at controlled companies, where minority shareholders are powerless to gain control by definition. As a result, those investors may become disengaged with the voting process. Effects Low engagement from shareholders can harm corporate governance, leading to lower valuations and inefficient utilization of company resources. In extreme cases where investor participation is severely low in company meetings, quorum may not be reached and voting matters may have to be postponed for future resolution. In moderate cases, reduced involvement from shareholders can allow directors and executives to extract personal benefits from the corporation, particularly through compensation plans and related-party transactions. These developments can detract from the notion of shareholder democracy, where a corporation is run as a semi-democratic institution. Similar to the political context, declining voter participation can jeopardize public confidence in the governance system. References Corporate governance Behavioral finance