BlackRock in charge beats nobody in charge

A sign for BlackRock Inc hangs above their building in New York U.S., July 16, 2018. REUTERS/Lucas Jackson/File Photo

Register now for FREE unlimited access to Reuters.com

NEW YORK, June 13 (Reuters Breakingviews) – Voting at company meetings can be a right, a privilege, a burden, or an annoyance. For BlackRock (BLK.N), it is all four. Last year, the giant asset manager started to give up some of its influence over how U.S. companies behave, by offering select customers control over the votes that come with company shares it holds on their behalf. Chief Executive Larry Fink now says he wants to give “every investor,” including individual ones, a chance to take part in the democratic process. The problem is most of them don’t want to.

BlackRock launched its “voting choice” program in October, yet owners of just 25% of eligible assets have chosen to take some degree of control over how votes are cast, the firm said on Monday. Only 5% of U.S. pension fund clients by number are now voting their shares directly rather than letting Fink’s firm do it for them. In total, BlackRock has ceded voting control over $530 billion of a total $10 trillion of assets under management.

It’s in Fink’s interest to get those numbers up. True, the ability to vote on behalf of shareholders in exchange-traded and index funds has brought BlackRock and its peers considerable power. The firm’s support helped activist fund Engine No. 1 install three board members at oil producer ExxonMobil (XOM.N) last year, for example. The biggest three index-fund managers, which own almost 20% of McDonald’s (MCD.N), helped the fast-food chain swat away an animal welfare-related boardroom challenge from investor Carl Icahn in May. But while the legal right to vote belongs to BlackRock, the capital, and the risk, ultimately belongs to its clients.

Register now for FREE unlimited access to Reuters.com

Carrying a big stick when it comes to shareholder votes puts index-fund managers in an increasingly uncomfortable position. Investor proposals on divisive topics like climate, diversity, racial justice and political lobbying are coming up more often at company meetings, forcing asset managers to express views on issues only indirectly connected to shareholder value. That trend will continue: the Securities and Exchange Commission last year tweaked its guidance over shareholder motions to make it harder for companies to stop proposals with a “broad societal impact” from coming to a vote.

Already, Fink has signaled that he doesn’t want to be a political football. Blackrock made sustainability its standard for investing in 2020, but now the firm complains that shareholder proposals have got “more prescriptive,” and that companies shouldn’t be “climate police.” The protesting may come too late, because BlackRock, Vanguard and State Street (STT.N) have already made enemies on both sides of the political aisle. A bill from 12 Republican senators unveiled last month would, if passed into law, force passive fund managers to stop voting based on their own discretion.

The catch is that if index providers don’t tell companies what to do, it’s not clear who will. Big institutions such as national pension funds often have their own stewardship teams that draw up policies on issues like climate change, or the gender and racial diversity of directors on corporate boards. But smaller firms can’t as easily afford those outlays and are likely to outsource such analysis to specialist “proxy” firms like Institutional Shareholder Services or Glass Lewis. That replaces one form of democratic delegation with another.

As for the goal of handing power back to individual investors, there’s scant evidence they want it. Roughly 30% of retail shareholders vote at meetings, according to Broadridge, an investor communications firm that handles most U.S. companies’ interactions with small shareholders via brokers and intermediaries. Even the launch of smartphone voting over the years – Broadridge uses facial recognition technology to save users from inputting lengthy identification codes – hasn’t much changed that number.

This poses the question: why don’t so-called retail investors vote? It’s probably because they recognize that often their efforts are meaningless. Look at social network Twitter (TWTR.N), which has decided to retain board member Egon Durban even though shareholders didn’t support his re-election last month. Meanwhile, votes on issues like executive pay are usually non-binding, which is why JPMorgan (JPM.N) boss Jamie Dimon gets to keep an $84 million compensation package that investors explicitly rejected at the company’s annual meeting this year. Investors who object to the outcome are likely to simply sell their shares.

It’s possible that if retail investors really did have more power – say, if asset managers let their customers easily and digitally vote shares held via index-tracking funds – they would see the value in using it. That day is a long way off because regulators and technology have yet to catch up. Fink says he’s working on the problem, and Vanguard claims it has a similar goal too. In the meantime, the second-best arrangement prevails. If the alternative is that votes are wasted, BlackRock is as good a steward as any.

Follow @johnsfoley on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

BlackRock said on June 13 that clients owning $530 billion of investments have opted to participate in its “voting choice” initiative, equivalent to 25% of assets eligible for the program. Those who take part can opt to make decisions about the governance of companies in which BlackRock holds shares on their behalf.

BlackRock, which has $10 trillion of assets under management, launched the scheme in October 2021, mostly limiting it to large institutions that invest in equity index funds and separately managed accounts, where a client puts their investments in a vehicle that BlackRock manages.

Index-fund managers, which also include firms like State Street and Vanguard, are generally entitled to vote on behalf of customers who buy their funds, which they do using principles drawn up by so-called stewardship committees.

A group of 12 Republican senators on May 18 launched a bill called the Investor Democracy Is Expected Act, which would require investment advisors of passively managed funds to vote the way investors wish, and not at the manager’s own discretion. A Senate hearing is scheduled for June 14.

Register now for FREE unlimited access to Reuters.com

Editing by Peter Thal Larsen and Amanda Gomez

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Read More

Yuri Paris