Large asset managers such as BlackRock, State Street Global Advisors (SSGA) and Vanguard favour clients when voting at resolutions in what is an evident conflict of interest, according to a new report by non-profit organisation As You Sow.
The report, titled Uncovering Conflict of Interests: Proxy Voting Data Reveals Bias for Asset Managers to Favor Clients, found asset managers vote with management of their clients at a higher rate versus companies they do not have dealings with.
As You Sow analysed millions of proxy votes sourced from Insightia between January 2015 to June 2020 alongside Department of Labor 5500 disclosures of compensation received for advising and administering corporate retirement plans.
In particular, the report revealed BlackRock was three times more likely to vote with shareholders when no business ties were present on climate-related proposals, voting with shareholders 9.5% with no relations versus 3.1% when commercial relations were present.
Meanwhile, SSGA had the highest level of bias among the large asset managers by voting with shareholders 23% of the time when business ties are present versus 37% when no relations were.
Furthermore, the four asset managers analysed – BlackRock, SSGA, Vanguard and T. Rowe Price – received $489m in compensation across 932 corporations where they also voted proxies on behalf of shareholders which the firm said was a direct “conflict of interest”.
Chart 1: Years favouring management recommendations with commercial relations (January 2015–June 2020)
Source: As You Sow
Andrew Behar, CEO of As You Sow, stressed: “Bottom line, proxy voting by major asset managers favours their clients — a clear conflict of interest. These powerful asset managers, which own large stakes in every company, have traditionally voted with management.
“These votes have frequently been the difference between winning a majority vote on critical, material issues like climate change.
“We understand that it must be hard to vote against a CEO pay package if a major corporate retirement plan contract is at issue. Strong firewalls between these departments must be established.”
As a result, the report offered a number of solutions for asset managers to address this issue including disclosure requirements, recusing proxy votes when there is a conflict, as well as new technologies and policies.
In particular, it highlighted five steps for asset managers to take including:
- Disclose any existing business and contractual relationships when casting votes
- Delegate votes that may involve conflicting interests to a neutral third party
- Recuse proxy votes when there is a conflict of interest
- Describe all voting policies in sufficient detail and make them clearly transparent to investors
- Discuss existing policies with and solicit input from underlying clients for voting policies
It also called for increased regulation to remove conflicts of interest for asset managers such as the EMPOWERS Act, backed by US senator Tammy Baldwin which would allow workers to elect representative trustees to manage their retirement plans and set voting guidelines that investment managers would be required to follow.
“The EMPOWERS Act is just one example of several potential legislative solutions that can be enacted to remove fund manager proxy voting conflicts and to ensure proxies are rightfully voted with retirement plan participants interests forefront and centre,” Behar explained.