THE BOTTOM LINE

A new BlackRock shareholder power that may tilt proxy battles of the future

PUBLISHED TUE, MAR 1 2022 9:57 AM EST  |  UPDATED TUE, MAR 1 20226:51 PM EST

Eric Rosenbaum

Laurence “Larry” Fink, chairman and chief executive officer of BlackRock Inc., pauses as he speaks during the BlackRock Asia Media Forum in Hong Kong, China. Justin Chin | Bloomberg | Getty Images

It’s annual meeting season for corporations and there is a major change occurring in the way shareholders vote this year that comes from the world’s largest money manager and most influential vote holder: BlackRock.

It is no exaggeration to say the world’s dominant fund companies can control the outcome of shareholder votes. On average, over 15% of outstanding shares in corporations are held by the top four or five asset managers including BlackRock, Vanguard and State Street Global Advisors, according to data from Broadridge Financial Solutions. For some publicly traded companies, the top three fund companies can hold as much as one-third of investor shares. As a result, most shareholder resolutions pass or fail based on how the big fund companies vote. Look no further than upstart activist Engine No. 1, which would not have pulled off its surprise win at ExxonMobil last year without the big money managers.

Yet Vanguard Group founder Jack Bogle warned towards the end of his life that one of the greatest risks the fund giants faced was a creeping monopoly-like power over shareholder votes which would attract more scrutiny from politicians and regulators. It has, from within the market as well. Berkshire Hathaway vice chairman Charlie Munger, never one to hold his tongue, recently blasted the power of index funds. This is one of the reasons that BlackRock is taking a new approach in proxy voting for some of its underlying investors this year: giving them back the votes to decide on their own. BlackRock has said that this year it will make the so-called “pass-through” voting — or what BlackRock calls “voting choice — available to approximately 40% of the $4.8 trillion in index equity assets, to start, with institutional investors in the U.S. and UK.

“Our view is the choices we make available to clients should also extend to proxy voting. We believe clients should, where possible, have more choices as to how they participate in voting their index holdings,” BlackRock said in announcing the initiative.

Pass-through voting may be on the margins in 2022 – it isn’t clear what percentage of those institutional clients will actually take advantage of the new voting power – but it is a fundamental change in the future of shareholder influence that is expected to grow, and experts say is likely extend to BlackRock competitors, including Vanguard and State Street Global Advisors, and ultimately make its way down to retail investors.

“BlackRock and its competitors can also try to use this pass-through voting service as a competitive advantage to their clients and potential clients. We will see other fund managers moving in this direction,” says Edmund Reese, chief financial officer at Broadridge Financial Solutions, which is a BlackRock technology partner on the new voting process.

From BlackRock to black box in future votes

Pass-through voting opens up a lot of questions for corporations trying to gauge the likelihood that a shareholder measure will pass against management’s stance. As the use of shareholder resolutions has grown in recent history to cover many major issues and in particular, a growing set of ESG concerns from shareholders, the power of the biggest fund companies also grew as more investors migrated to index funds and ETFs. The big asset managers all now have investment stewardship teams which prepared detailed policy positions and voting reviews and directly engagement with C-suites. This one-on-one relationship with the handful of top fund companies has often been sufficient for companies to understand which way votes are likely to go. But that will change, if slowly, if more votes are spread across multiple investors and segments of investors from the top pension funds all the way down to retirement plan participants.

Visibility into how a vote may trend will be opaque in cases where more underlying shareholders choose to use this new voting access, and that is an issue for C-suites in a proxy fight. And the more widespread vote distribution becomes, the greater the chance votes come in later than they would from the big asset managers, another potential visibility issue for corporate management teams.

It is too soon to assume that ESG investors will be the majority of asset manager clients wanting to vote shares. More institutional and retail investors are monitoring proxy issues and ESG issues, in particular, and having votes in the hands of actual share owners reduces the power of companies like BlackRock. But there may, in fact, be shareholders who are as likely to disagree as agree with how BlackRock is voting on ESG issues who want to have their voices heard.

The approach exists in the market to a degree already. Historically, there has been a small portion of investors and institutional managers that offer a few select clients the ability to have their own view on voting, usually in the form of a specific voting policy, and proxy advisor Institutional Shareholder Services, which works with roughly 1,500 investment managers, has been expanding its offerings to accommodate what it is seeing in the market. For example, in addition to a “benchmark view,” it offers proxy guidance for perspectives including Taft-Hartley plans focused on labor, sustainability and climate policy.

To be sure, as another annual meeting season begins, ESG issues will again be high-profile among shareholder resolutions and their success at annual meetings has grown. The 2021 proxy season saw a record number of shareholder proposals on ESG – and a record level of support from shareholders, averaging 32% approval, according to a recent Conference Board review and outlook. Indeed, one data point that helps explain why Berkshire Hathaway’s Munger is voicing his concerns is that even Warren Buffett’s company has seen a significant rise in support from shareholders for ESG measures, voting against Buffett and his board’s stated position.

Companies will be analyzing the data from the 2022 season and the issues where the voting power was most often used, how it influenced voting trends, and the overall percentage of shareholders who embrace the new power as a first step in understanding how proxy voting may be permanently altered.

A new generation of retail investors

BlackRock says that over 60 million people globally invest in retirement assets that will be eligible for what it calls “voting choice,” and Broadridge Financial data suggests this trend will ultimately reach more younger Americans who are participating in the markets directly, as vehicles like ETFs become ubiquitous and zero-fee trading of equities becomes the norm.

While the meme stocks received a lot of headline attention during the pandemic, Reese says that underlying data on volume growth in equities, mutual funds and ETFs shows it will remain sustainably higher even if it comes down from a pandemic peak, which reached 26% volume growth. It expects the growth to remain in double-digits, though, and it is seeing the broader investing participating across sectors, from energy companies to financials, and from small-caps to large-caps. “It is not just ‘the meme stocks,’ though we saw growth there as well, but it is not driving the growth overall,” Reese said. 

Lorraine Kelly, governance business head at Institutional Shareholder Services (ISS), the world’s largest shareholder advisory firm, says there is a generational shift with younger investors, many of whom opened brokerage accounts during the pandemic, wanting their voice to be heard when it comes to voting and particularly as it pertains to ESG issues, and many do want to see corporations do more rather than less on ESG. 

BlackRock said in its announcement that it is “exploring all options to expand proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products.”

It indicated that regulatory and operational system changes may be required, and partnerships with proxy advisory firms and investors required. The current shareholder infrastructure, for example, isn’t designed with 100% transparency through to the underlying investor in all cases. But experts say these hurdles are far from insurmountable.

There are a few signs that retail investors are becoming more engaged with annual meetings at companies, according to Reese, and there is reason to expect that to change even more with the evolution of virtual shareholder meetings – Broadridge hosted over 2,400 virtual shareholder meetings covering over 80% of the S&P 100 last year. He says the technology access that encourages more shareholder participation is “likely here to stay in one hybrid form or another” and “will reinforce this trend.”

Today, many retail investors who receive paper ballots in the mail do no take action, but technology will be an enabling factor in terms of ease of access and action. Retail investors will ultimately be prompted to take advantage of the voting power, and through platforms including 401(k) plan participation.

“In the same way that technology may allow a shareholder to get a question heard at an annual meeting, longer-term it is possible to envision customized alerts going out to shareholders when a topic they have opted in to communications on is coming to a shareholder vote, say carbon disclosures or climate. They could be sent an alert if their alert preferences are set to do so and that will engage them in the voting process,” Reese explains.

In the 2022 proxy season, pass-through voting may remain limited to the most sophisticated investors like pension funds that already have voting councils making these kinds of decisions with other shares. It could take up to five years before this voting power is widely available, but the opportunity to expand the access exponentially does exist, and from a technological standpoint, experts says it is going to be part of the future.