October 21, 2021
A decision by the world’s largest asset manager that will allow big clients to vote in corporate elections offers a glimpse of a future in which public and Taft-Hartley pension funds could retain their vital role as capital stewards even as their direct ownership of public company stock declines.
Like other money managers, BlackRock currently casts proxy votes on behalf of investors in its funds—a practice has made it difficult for shareholders to successfully challenge policies at annual meetings, since money managers traditionally vote with corporate leadership, if at all. But starting next year, BlackRock said it will give some institutional clients in the U.S. and U.K. the option to vote for themselves or select from a menu of third-party voting policies.
BlackRock told affected clients about the change in an October 7 letter. News reports citing the letter quoted BlackRock as saying the new capability “responds to a growing interest in investment stewardship from our clients” and reflects technological advances. “These options are designed to enable you to have a greater say in proxy voting, if that is important to you,” BlackRock told the clients.
BlackRock said the expanded options would apply to about 40% of the $4.8 trillion assets held in its equity index strategies and another $750 billion in pooled fund assets, or a total of 28% of BlackRock’s $9.5 trillion in assets under management (AUM).
The change in policy comes at a time when retail and institutional investors are buying less company stock directly and more through equity funds, especially passive index vehicles that can give them a low-cost exposure to any market or sector.1 The shift in underlying stock ownership from asset owners like pension funds to asset managers like BlackRock and from active to passive equity strategies has prompted concerns about capital stewardship because, with notable exceptions, money managers tend to side with management in proxy fights.2
“This is a very big deal on multiple fronts,” said Laura H. Posner, a Cohen Milstein Partner who formerly served as Bureau Chief of the New Jersey Bureau of Securities. “Public and Taft-Hartley pension funds provide an important bulwark against corporate malfeasance because they are willing to selectively engage with the companies they own and challenge them through the proxy process, if necessary. Let’s hope this type of mechanism is adopted as a standard by all asset managers.”
The new policy appears to recognize that some large investors prefer to retain control of their proxy votes despite money managers’ vocal support of incorporating environmental, social, and governance (ESG) considerations into their investment decisions which resonates with some—not all—investors.
But even if asset managers become less reluctant to oppose management in proxy elections on ESG or other issues however, there is little evidence they will use the other tool at their disposal to influence governance of the companies whose stock they own: securities litigation. A 2019 University of Chicago Law Review article found that, over a 10-year sample period, the 10 largest US mutual fund families filed only 10 securities lawsuits over five instances of corporate misconduct.3
“The dismal litigation record that we uncover raises serious questions of whether mutual funds are acting as faithful governance intermediaries for their investors,” wrote the study’s authors. “If mutual funds could create value for investors by engaging in shareholder litigation yet are failing to do so, then they would seem to be failing in their fiduciary obligations to investors.”
With most of money managers’ income coming from fees from corporate clients, it is unlikely they will ever overcome their aversion to initiating shareholder litigation against those same companies.4 But BlackRock’s new policy on proxy voting may offer a blueprint for an eventual solution. The same technological advances that enable asset managers to determine their clients’ underlying beneficial ownership of public companies could someday be marshaled to assign litigation rights to those same clients. The result would ensure that sophisticated institutional investors, like public and Taft-Hartley pension funds, continued to hold companies accountable through the private right of action.
1. A December 2020 report by PricewaterhouseCoopers projected global AUM, which stood at $85 trillion in 2016, to grow from $110 trillion in 2020 to more than $147 trillion by 2025; passive strategies, which accounted for 17% of global AUM in 2016, will make up a quarter of AUM by 2025. “Asset and Wealth Management Revolution: The Power to Shape the Future,” PricewaterhouseCoopers, 2020, available at https://www.pwc.com/gx/en/industries/financial-services/asset-management….
2. For example, a 2017 academic study found that the three dominant index fund players—BlackRock, Vanguard, and State Street—voted regularly with management. According to the same study, the “big three” collectively constituted the largest shareholders in 40% of all companies listed on U.S. stock exchanges and a mind-boggling 88% of S&P 500 corporations—a troubling concentration of ownership and power. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=6196&con…. There have been exceptions, however. This year, for example, Vanguard, BlackRock, and State Street sided with the major proxy advisory firms and some large public pension funds to support at least two candidates for Exxon Mobil’s board of directors proposed by an activist shareholder dissatisfied with the company’s approach to ESG disclosures and risk management. In the end, three of the candidates were elected over management’s nominees. Big money managers also joined with pension funds in 2020 to reject a proposal that would have imposed forced arbitration on any investors seeking to sue Intuit for alleged securities fraud.
3. “A Mission Statement for Mutual Funds in Shareholder Litigation” by Sean J. Griffith, Professor at the Fordham University School of Law, and Dorothy S. Lund, Assistant Professor of Law at the University of Southern California, The University of Chicago Law Review, 87:1149 2020. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=6196&con…
4. To cite just one example, Griffith and Lund said that in 2017 corporate pension plans accounted for about two-thirds of BlackRock’s AUM and generate fees that totaled 83% of the company’s revenue. The authors say this “corporate client conflict” give money managers “incentives to cater to the interests of their corporate clients [that] may lead them astray from acting as faithful stewards of their investors’ capital, …” Ibid, p.1212.