A thought-provoking discussion of legal cross-currents.
From Columbia Law School's Blue Sky blog, September 29, 2020:
BlackRock, an investment adviser that primarily markets and manages index funds to millions of passive investors around the globe, has become a leading shareholder activist. Based on the extremely large amount of assets it has under management ($7.3 trillion), its importance as a shareholder activist cannot be overstated. BlackRock’s shareholder activism is reflected in its rhetoric disclosing the objectives of its activism, shareholder voting, and engagement (direct or indirect communication) with portfolio companies.
The issue that I address in a recent paper is whether the fiduciary duties of a manager of an “employee pension benefit plan” under the Employee Retirement Income Security Act of 1974 (“ERISA”) extend to BlackRock’s delegated voting authority and the shareholder activism that it empowers. The issue has been little examined in the academic literature, but the concentration of shareholder voting power in the hands of a small number of investment advisers makes it ripe for study.
BlackRock, like its major index-fund rivals Vanguard and State Street Global Advisors (the “Big Three”), has enormous proxy voting power but no underlying economic interest in the shares that it votes. This relatively new development is a result of both the large movement of assets into the index funds of a relatively small number of investment advisers and the industry practice of mutual funds and electronically traded funds (“ETFs”) to delegate voting authority to their respective investment advisers.
BlackRock has centralized this voting authority in an investment stewardship team of relatively few professionals. BlackRock has approximately 45 professionals globally, with only 21 based in the U.S., who are, on an annual basis, responsible for voting tens of thousands of proxies and engaging in various matters with the management of hundreds of publicly traded companies. Therefore, at many public companies, BlackRock’s investment stewardship team may now control the fate of a shareholder or management proposal, whether a nominated director receives a required majority of votes to remain on the board of directors, whether a proxy contest succeeds or fails, or even, through engagement with a company’s management, how that company conducts its business.
In BlackRock CEO Larry Fink’s 2019 letter to CEOs, he explained that BlackRock’s shareholder activism was primarily a way to market its investment products to millennials, a group that it believes sees the primary objective of business as the improvement of society rather than the generation of profits.
In Fink’s 2020 letter to CEOs and in a companion letter to clients, he announced how BlackRock will implement its millennial marketing strategy. First, BlackRock will dictate what a public company’s stakeholder relationships should be by requiring its portfolio companies (virtually every public company) to disclose data on “how each company serves its full set of stakeholders.” Moreover, noncompliance is not acceptable. According to Fink, “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” Second, he announced the launch of a large number of new ESG funds and a refocusing of shareholder engagement to put a greater emphasis on stakeholders who are affected by climate change and gender equality.
BlackRock’s rhetoric would mean nothing if it were not backed up by shareholder voting and engagement....
....MORE
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That Much Ballyhooed* Business Roundtable 'Higher Purpose for the Corporation'? The Rest of the Story
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Some Thoughts on Environmental, Social & Governance Investing (ESG)
It is still an open question whether ESG investing is more than marketing/packaging by asset gatherers.
And beyond that, it is still an open question whether ESG is a rational approach to achieve the stated goals of its proponents....
