Blackrock’s restoration of proxy voting by shareholders is a step toward better corporate governance.
Blackrock's restoration of proxy voting by shareholders is a step toward better corporate governance.
B lackRock is making history with an innovative policy change: It will soon let its largest institutional clients vote on corporate proxy matters themselves. While critics note that this sea change from BlackRock voting its client’s shares is limited to a small group of well-heeled funds, the move could spark an overdue renaissance for shareholder democracy.
That would resolve a paradox that accompanied the spectacular rise of index funds since the 1990s. The wide availability of low-cost index products democratized share ownership, allowing every household unprecedented access to capital markets. But control of the resulting vote moved in the opposite direction. It is now concentrated in an elite group of insiders at BlackRock and two other funds, State Street and Vanguard, and poised to put practical control over much of corporate America in the hands of just twelve people.
Such a concentration of power makes the voting decisions of these mega-funds major news throughout every corporate proxy season. So decisive are their votes on many tough issues that the elite professionals at these funds have become corporate kingmakers. Social activists, recognizing the cohort’s outsize influence, promptly and publicly ridicule funds who don’t support favored proposals, whether on climate change, racial diversity or other hot button issues now facing corporate America. As a result, the cabal increasingly take positions on political issues of the day that may differ radically from the preferences of the fund’s investors.
Index investing is associated with other negative investment outcomes, as well. For instance, substantial research links such centralized holdings (indexes invest in every company in all industries) to weakened industry competition, including by diluting price signals and dampening the effects of economic fundamentals on stock price. Other research links indexation to negative governance, such as inferior capital deployment, weaker independent directors, and lower returns after new director appointments. It’s no wonder: Indexers are passive when it comes to buying stocks — not learning anything about a company — but active when it comes to votes — though they still may not know much.
The best way to resolve this paradox is what BlackRock has signaled interest in doing: Increasing shareholder democracy by returning voting rights to the true parties in interest, the active shareholders who are the ultimate economic beneficiaries of a company’s success or failure. After all, when American investors buy into an index fund, they get a small ownership stake in a company, but why should they then cede the corresponding voting rights that only serve to enhance the power of those who manage such funds?
The change being introduced by BlackRock is limited to about 1,000 of its largest institutional clients, who have large stakes in BlackRock. They will now be able to vote on corporate matters according to their own views and using their own procedures. Such clients can opt to do so for all or a designated portion of their investments — or continue to delegate this function to BlackRock. Whatever the clients choose, the new practice of giving the real owners their voice is an encouraging sign.
BlackRock’s commendable initiative, though limited in scope to its biggest clients, required considerable investment in technology and operations. The results of that investment will be a testing ground of how it works and point to required adjustments. That will enable other players to join the hard work of restoring voting power to the true investors behind the mega-funds. Plenty of ideas for improvement have been offered from many quarters, including the investing, tech, academic and legal communities.
Consider the innovations being made by Say Technologies, the shareholder engagement company being acquired by Robinhood, the online trading firm. Say facilitates direct communications between the underlying shareholders and corporate management, eliminating layers of intermediaries. Such dialogue and channels improve investor expectations and corporate understanding, and might help promote long-run economic returns.
Another innovation, which I created along with Richard Brand of the law firm Cadwalader, Wickersham & Taft, focuses on improving the quality of shareholder voting by passive indexers and ordinary shareholders alike. Called the voting visibility database, this automated system would capture the voting preferences and intended positions of professionally-managed funds ahead of shareholder votes. Other investors — from passive funds to retail investors — would benefit from such informed analysis in reaching their own voting decisions. The quality of shareholder voting would improve.
Such innovations promote the ideals of shareholder democracy by ensuring that those providing corporate capital get to vote on corporate proposals. Companies have long benefited from the guidance they receive from their best shareholders, those that are most focused and long-term (quality shareholders). Passive investing has been a worthy invention beneficial to millions. But passive control was an unintended negative byproduct. BlackRock’s leadership suggests we may now finally have a way to get rid of this bug.