Action needed to curtail ‘Big Three’ shareholder opportunism, research finds

Regulatory measures outlined to curb BlackRock, Vanguard and SSGA voting dominance

Theo Andrew

Securities and Exchange Commission

Market and regulatory intervention are needed to curb the shareholder opportunism of BlackRock, Vanguard and State Street Global Advisors (SSGA) – known as the ‘Big Three’ – who use their voting power as a marketing tool, new academic research has warned.

The report, titled Opportunism in the Shareholder Voting and Engagement of the ‘Big Three’ Investment Advisors to Index Funds, found the three asset management giants do not always vote to maximise investor portfolios but instead to attract more millennial investors as they jostle for market share of the $24trn great wealth transfer.

Since the unveiling of the ‘Fearless Girl’ statue by State Street in 2017, the report said, the ‘Big Three’ have been in “vigorous competition” to implement a millennial marketing strategy by announcing voting policies around issues such as gender diversity on boards and the environment.

“To support its millennial strategy, a member of the ‘Big Three’ may be tempted to vote in a way that increases market share, i.e., voting in a way that appeals to millennials, without much regard for how it may impact the value of a company’s stock,” Bernard Sharfman of the George Mason University wrote.

“As a result, the objective of portfolio primacy is sacrificed for the economic good of the investment adviser.”

The accelerating growth of ETFs and index funds over the past decade, while a concern for several years, has recently led to growing calls for intervention in a bid to curtail their influence over the stock markets.

It is estimated on their current trajectory, the ‘Big Three’ could own as much as 33% of shareholder votes within the next decade, up from 5% in 1998 and 20% today.

Furthermore, the paper said the asset manager’s ability to act opportunistically is enhanced through their investment stewardship team’s ability to “coordinate the voting of their fund families”.

Despite this, their stewardship teams remain woefully under-resourced. BlackRock, the largest of the three, is made up of 45 people across 85 voting markets and casts tens of thousands of votes each year.

In his annual letter to the CEOs of companies BlackRock invests in on behalf of its clients, titled The Power of Capitalism, founder, chairman and CEO Larry Fink said stakeholder capitalism is not “woke” but about delivering “long-term, durable returns for shareholders” and not a social, political or ideological agenda.

Market solutions

BlackRock has made moves to allay these fears, offering asset owners in 40% of its $4.8trn equity index funds the opportunity to vote directly with companies, instead of the firm partaking itself, with a view to extending this to individual investors through a form of pass-through voting.

While going some way to address the issue, there are fears such a move – overloading individual investors to vote on thousands of matters – could result in “rational investor apathy” and ultimately, less voting.

“This fractionalisation of voting power combined with the information overload inherent in being asked to weigh in on so many matters suggests that passthrough voting threatens to vastly increase the problem of rational apathy and lead to less voting,” it said.

However, Sharfman said this could be avoided by giving investors three simple options; to abstain from all voting; to vote according to the recommendations of the portfolio company’s board of directors or to defer to the discretion of the investment adviser.

Looming regulation

Should a market solution not be adequate to curtail the ‘Big Three’s’ opportunism, Sharfman suggests regulatory measures could be implemented.

He said the industry could look to the $10trn defined contribution pension market – of which Vanguard and BlackRock are major plays – which is regulated by the Department of Labour under the Employee Retirement Income Security Act (ERISA) of 1974.

Under the act, the fiduciary duties of the investment manager include the management of voting rights, which he argues could be extended to ETFs and mutual funds.

“The fiduciary objective in this investigation is to ensure that an investment adviser, such as one of the ‘Big Three’, is utilising shareholder voting and engagement consistent with a plan manager’s duty of loyalty under ERISA,” it said.

In his letter, Fink was adamant that BlackRock’s stewardship team is core in ensuring its fiduciary approach, but it is clear more needs to be done either via a market solution or regulation to curb the impact of the ‘Big Three’s’ growing voting power.

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