Larry Fink is reinforcing BlackRock’s engagement team at a time of growing concern about passive investing © Bloomberg
Larry Fink, the chairman and chief executive of BlackRock, this week sent out his annual letter to the boards of companies in which the world’s largest asset manager has invested. This one went to heart of some thorny and important questions raised by the rampant expansion of passive investing.
His exhortation that “every company must not only deliver financial performance, but also show how it makes a positive contribution to society”, captured plenty of attention. Some hailed it as a revolutionary manifesto, but such statements are a staple of almost every Davos gathering of the global business and political elite.
More importantly, the letter sketched out a rough but intriguing framework for shareholder stewardship by BlackRock, and vowed to double the company’s 32-strong team devoted to it in the next three years. Barbara Novick, BlackRock’s influential vice-chairman and co-founder, will oversee these efforts, the letter said.
The move to beef up BlackRock’s corporate governance group comes amid mounting concerns about the rising tide of passive investing, which ploughs trillions into companies but brings little in the way of engagement with corporate executives and boards on important issues. Paul Singer of Elliott Management said passive investing was “devouring capitalism” in his own missive last year.
The industry has enjoyed phenomenal growth during the past decade but criticism follows success like night follows day. Some of the sniping can be a little shrill but concerns about the implications for corporate ownership and oversight are real and pressing.
BlackRock, Vanguard and State Street, the big three of the index-tracking investment world, collectively manage more than $14tn of assets. Much of it is in passive equity vehicles that invest in tens of thousands of companies across the world. But their teams dedicated to engaging with corporate executives and boards are arguably understaffed for the task.
Assets managed by BlackRock, Vanguard and State Street
In addition to BlackRock’s governance team, Vanguard has 23 people and State Street Global Advisors 12 dedicated to corporate engagement. There are, of course, other people that deal with these issues, but for vast and rapidly growing multitrillion-dollar pools of money it is inadequate. As Mr Fink noted in his letter, the “growth of indexing demands that we now take this function to a new level”.
This matters because passive investors are in practice permanent capital. Unlike stockpickers they cannot sell their holdings if they dislike a board’s composition or management’s policies. So their only options are to ignore their rights as shareholders or to embrace them. Given the winds of change sweeping over institutional investors, passive funds are facing pressure to tilt towards the latter.
Mr Fink’s letter hinted at this dynamic, arguing that the responsibility of asset managers these days “goes beyond casting proxy votes at annual meetings — it means investing the time and resources necessary to foster long-term value”. In other words, meaningful, continuing engagement that requires far more than a few dozen people covering thousands of companies.
Corporate executives complain that their increasingly passive shareholders often simply outsource most of their decisions to advisory companies such as Glass Lewis and Institutional Shareholder Services. The growth of these companies has been phenomenal. ISS boasts it covers 40,000 annual meetings across 117 countries every year, casting over 8m ballots.
That gives them immense heft in corporate boardrooms across America and further afield, not always to the delight of executives that deride their competence. Jamie Dimon, JPMorgan’s chief executive and chairman, in 2015 savaged investors that followed the recommendations of ISS and Glass Lewis as “irresponsible” and “lazy”.
Mr Dimon’s ire was triggered by these proxy advisory companies helping foment a pay rebellion and, quite reasonably, trying to separate the chief executive and chairmanship positions. And active investors are not always more engaged owners than their passive peers.
Take Wells Fargo. Vanguard, the second-biggest shareholder, last year voted against the re-election of three of the US bank’s directors, including its chairman, in the wake of Wells Fargo’s bogus accounts scandal — an unusually strong rebuke of the board. But Warren Buffett, Wells Fargo’s biggest shareholder, backed the entire board’s re-election.
There are other examples of how the passive investment giants are beginning to flex their muscles. Last year BlackRock and Vanguard banded together to force ExxonMobil to start reporting on the impact of global measures to contain climate change. Collectively the big three say they conducted about 3,000 corporate “engagements” last year.
However, the governance teams are arguably already too puny compared to the swelling financial heft of index investors and rising expectations of how engaged they should be. Totting up “engagements” is not the same as being an engaged owner.
Given the passive investment industry’s remarkable growth trajectory, more will need to be done to address concerns that it is not just passive but lethargic. BlackRock’s move is therefore an encouraging step.
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