STRATEGIES
Millions of Fund Investors Are
Getting a Voice
BlackRock, State Street
and Vanguard have opened up voting on environmental, social and
management issues. It’s not true shareholder democracy, but it’s
progress.
|
Laurent Hrybyk |
Feb, 23, 2024
Index fund investing has swept the world. In December, for the
first time, U.S. investors entrusted more money to index
funds than actively managed funds, in which a manager picks stocks or
bonds for you.
There’s a good reason for the index funds’ popularity. For most
people, owning a little piece of the entire market, which you can do
at low cost with an index fund, has been more profitable than buying and selling securities,
either on their own or through a manager.
But the relentless growth of index funds has come at a cost. One
significant problem is that the most diversified funds own shares in
every publicly traded company in the market, and if you don’t like a
company, or its specific policies, you’re stuck. You couldn’t even
exercise your vote on issues you thought were important because until
recently, the fund managers insisted on doing that for you.
Well, that’s been changing in a big way.
BlackRock announced this month that it was expanding an experimental
program to give investors six flavors of policy choices — like a focus
on climate change or a preference for religious values — in votes on
corporate issues. State Street already has a similar program underway,
and Vanguard is tiptoeing into this kind of voting choice, too.
All told, the three giant fund companies have given scores of millions
of investors, with $4.6 trillion in assets, a way of expressing their
views on corporate issues. This is certainly an improvement. And it
could eventually lead to profound changes throughout corporate
America, even as it eases some ticklish problems for the big index
fund companies.
The Problems
In the view of scholars like John Coates, the
author of “The Problem of 12:
When a Few Financial Institutions Control Everything,” the growth of
index funds has had the unintended consequence of diminishing
shareholder democracy.
A handful of index fund companies, led by BlackRock, Vanguard and
State Street, have become universal owners, Mr. Coates, a Harvard Law
professor and former Securities and Exchange Commission official, said
in an interview.
“Index funds have too much power,” he said. “They are the biggest
shareholders in just about every publicly traded company. And the
trend of over-concentration of ownership is continuing.”
Until very recently, index fund executives — not the millions of
people who invest in their funds — had all the power to cast votes, or
proxies, for fund shareholders. This voting power gave fund executives
a potentially decisive voice on crucial matters, like how much a
corporate chief executive was paid or whether a company’s business is
environmentally responsible or whether it has treated its employees
properly.
Three years ago,
for example, BlackRock, State Street and Vanguard cast the pivotal
votes in a proxy battle at Exxon Mobil, the fossil fuel giant, and
helped elect three dissident members to the board of directors with
the goal of pushing the energy giant to reduce its carbon footprint.
But the fund companies have become uncomfortable in the public
spotlight. They have found themselves embroiled in the culture wars — criticized from the left
for failing to sufficiently embrace environmental concerns and from
the right for emphasizing them excessively. State Street and BlackRock, among other financial firms,
have recently backed away from full-throated commitments to battle
climate change, saying that they need to focus even more sharply on
their purely financial duties..
Given that context, it’s not entirely shocking that fund companies are
beginning to give a substantial degree of proxy voting choice to fund
shareholders — and in effect, sharing responsibility for difficult
decisions with individual and institutional investors, like pension
funds.
Whatever the fund companies’ motivation, the changes in voting choice
could shift the alignment of power in the corporate universe.
Voting Choice
What the companies are experimenting with isn’t true “pass-through
voting,” which would involve asking millions of fund shareholders how
they want to vote in thousands of specific proxy contests each year,
and then actually casting those individual votes accordingly.
Instead, the companies are offering investors something simpler and
more manageable: broad policy choices.
BlackRock, for example, announced on Feb. 13
that it was offering a “pilot” voting choice project to three million
individual investors in a plain vanilla, popular S&P 500 index fund,
the iShares Core S&P 500 ETF. (That’s short for exchange-traded fund,
an index fund that can be traded all day on a stock exchange.) Many
pension funds and other institutions that invest with BlackRock can
already cast proxy votes as they wish.
At BlackRock, $2.6 trillion, or half of the firm’s equity index
assets, are eligible for what it calls Voting Choice. “Clients with
total assets representing $598 billion are using Voting Choice as of
Dec. 29, 2023,” the company said in an email. It added, “That amounts
to about 25 percent of the total eligible assets.”
State Street has already made $1.9 trillion in assets —
more than 80 percent of its total equity index assets — eligible for
inclusion in its proxy choice program. That includes a broad range of
popular E.T.F.s., though not its biggest S&P 500 E.T.F., known as SPY.
About $250 million worth of fund assets held by individuals, as well
as about 10 percent of institutional assets, are being voted according
to six different policies, Lori Heinel, chief investment officer at State Street
Global Advisors, said in an interview. “We don’t consider what we’re
doing an experiment. We’re in the market. It’s available.”
Vanguard, which started the first commercially available index fund,
is proceeding more
slowly. Six of its funds, with $100 billion in assets, are included in
what the company does call an experiment. They are its S&P 500 Growth,
Vanguard Russell 1000, ESG U.S. Stock ETF, Mega Cap and Vanguard
Dividend Appreciation index fund. This is just a start, the company
said in an email.
“We are using our pilot to gather client feedback, refine our
approach, and optimize the investor experience as we expand to more
funds,” Vanguard said. It says it offers four choices, but two are
more like non-choices: Don’t vote at all, or let Vanguard vote for
you.
How It Works
What this all means in practical terms is that if you are an eligible
shareholder, you can continue to have a fund company make voting
decisions for you (or, at Vanguard, withhold your vote). But you now
have other options.
If you choose, your votes will be cast based on recommendations from a
shareholder advisory service that aligns with a specific policy.
These are the options at BlackRock. Three are advised by Institutional Shareholder
Services:
-
Socially Responsible
Investment (SRI) Policy.
It’s explicitly for investors who require companies to behave “in
a socially and environmentally responsible manner.”
-
Catholic Faith-Based Policy.
It also generally requires “socially and environmentally
responsible” behavior. But last year, according to BlackRock, this
policy opposed an
unsuccessful proposal at Coca-Cola asking
the company to report on how state abortion restrictions could
affect its business.
-
Global Board-Aligned Policy.
It is what most corporate boards would prefer, with votes
“generally aligning” with board recommendations on “environmental
and social matters.”
Three policies come from Glass Lewis:
-
Benchmark Policy.
It includes classic good governance principles. Many proxy votes
aren’t binding, but with this policy, boards should act as though
they are, responding to shareholder wishes.
-
Climate Policy.
It holds boards to strict environmental standards. The policy also
addresses gender diversity: “If less than 30 percent of the board
is female, the Climate Policy will vote against the entire
incumbent male nominating committee members for large- and mid-cap
companies.”
-
Corporate
Governance-Focused Policy.
It emphasizes “the fiduciary responsibility to drive long-term,
economic shareholder value.”
How these policies play out in practical voting isn’t always clear. On many issues,
they will certainly produce different outcomes. A proxy vote last
year, asking Exxon Mobil to report how workers and communities with
plant closings are affected by the transition from fossil fuel, is a
case in point.
In an email, BlackRock said, Exxon management, BlackRock’s own
policymakers and the Board Aligned policy all opposed the resolution.
But the Catholic Faith-Based Policy, the socially responsible
investing policy and the Glass Lewis benchmark policy all supported
it.
Unlike the proxy battle at Exxon in 2021, this one failed. BlackRock is
the third largest shareholder in Exxon, according to FactSet. The only
entities with larger stakes are Vanguard and State Street.
This splintering of the immense BlackRock vote may be what Larry Fink,
the founder and chief executive of the asset manager, intended when he
said, in a letter to the
company’s shareholders last year: “There are many people with opinions
about how we should manage our clients’ money. But the money doesn’t
belong to these people. It’s not ours either. It belongs to our clients,
and our responsibility and our duty is to them.”
State Street’s policy choices are similar to BlackRock’s. Vanguard’s
two program choices include a “board-aligned policy” and an E.S.G., or
climate, policy.
Looking Ahead
How the voting programs will affect votes this corporate proxy season,
which is just beginning, is an important question. Lindsey Stewart,
director of investment stewardship research at Morningstar, tracks
fund company voting patterns closely. He says he can’t tell whether
they made much of a difference last year.
Professor Coates says the current voting choice programs are complex,
and they may not attract a lot of interest unless the companies find
ways of focusing on the most pressing issues each year. He cited
perennial battles over labor issues at Starbucks, or major climate
issues at fossil fuel companies, or disputes over reproductive rights,
as areas that fund companies might highlight. Translating the voting
policies into actual votes is important, he said, and needs to be done
clearly, ahead of proxy voting.
“I view this as progress, but it’s far from perfect,” Professor Coates
said.
Now, at least, there are better prospects for fund shareholders, who
were consigned to silence, to at last have a voice.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the
economy.
A version of
this article appears in print on Feb. 25, 2024, Section BU, Page 3 of the New
York edition with the headline: Millions of Fund Investors Are Getting a Voice.
.
© 2024 The
New York Times Company
