We've been picking at this scab in a rather desultory fashion for a while, with such posts as "Index Funds, Political Agendas and The Public Interest" and ""Charlie Munger doesn’t think Larry Fink should be running the world." (BRK; BLK)".
We'll continue hopscotching around for a couple more months before tying it all together. So today's installments: a look back at "The Conflict Between BlackRock’s Shareholder Activism and ERISA’s Fiduciary Duties" via Columbia Law School's CLS Blue Sky blog, September 29, 2020:
The Conflict Between BlackRock’s Shareholder Activism and ERISA’s Fiduciary Duties
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. Voting is the stick that allows BlackRock to pressure companies to adopt its activist agenda....
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Here's the relevant portion of that 2019 letter:
Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards. And it will continue to accelerate as millennials – who today represent 35 percent of the workforce – express new expectations of the companies they work for, buy from, and invest in.
Attracting and retaining the best talent increasingly requires a clear expression of purpose. With unemployment improving across the globe, workers, not just shareholders, can and will have a greater say in defining a company’s purpose, priorities, and even the specifics of its business. Over the past year, we have seen some of the world’s most skilled employees stage walkouts and participate in contentious town halls, expressing their perspective on the importance of corporate purpose. This phenomenon will only grow as millennials and even younger generations occupy increasingly senior positions in business. In a recent survey by Deloitte, millennial workers were asked what the primary purpose of businesses should be – 63 percent more of them said “improving society” than said “generating profit.”
In the years to come, the sentiments of these generations will drive not only their decisions as employees but also as investors, with the world undergoing the largest transfer of wealth in history: $24 trillion from baby boomers to millennials. As wealth shifts and investing preferences change, environmental, social, and governance issues will be increasingly material to corporate valuations. This is one of the reasons why BlackRock devotes considerable resources to improving the data and analytics for measuring these factors, integrates them across our entire investment platform, and engages with the companies in which we invest on behalf of our clients to better understand your approach to them....
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If interested see also:
There is a discussion at Izabella Kaminska's Twitter account regarding the power that financial behemoths such as BlackRock gain from concentrating the dispersed power of the shareholders of, let's say, BlackRock's iShares ETF's.
Two of the types of power that concern us here are rentiership and proxy voting (there is also anti-competitive corporate behavior fostered by the ownership structure but we will leave that for another day).
On rentiership, the ETF sponsors derive not just their profits but their soft power - "Boss, boss, Larry Fink's limo just pulled up in the parking lot, and he's in your spot" - by sitting athwart the capital flows. It's not their capital but they extract value, both tangible and intangible from it.
You don't think Larry Fink moves and shakes at Davos because he is easy on the eyes do you?
He is Davos man, even moreso than Klaus Schwab, because he embodies the financial power, if not the will, of millions of individuals, distilled, and distilled again, into....Larry.
The second form of power is the legal construct that gives rise to the first. Here is BlackRock in their own words:....
