When most shareholders invest in funds, they assume the decisions made by fund managers will be fiduciary in nature. That means the decisions should benefit the investors, not the fund managers, or their CEOs’ EGOs. But as fund managers like BlackRock gather more power in ESG funds, they’re becoming more active in boardrooms, pushing political agendas, not those of the shareholders. Dawn Lim and Justin Baer report in The Wall Street Journal:
Investors have flooded into index-tracking funds in the past decade in hopes of getting broader access to the market at a lower cost. One unintended consequence of the index funds’ rise has been the huge voting power these firms have accumulated as they have added assets. Funds of BlackRock, Vanguard and State Street Global Advisors collectively held nearly 20% of the S&P 500 at the end of March, according to FactSet. They are among the largest shareholders of many companies.
How they wield this power for their millions of investors—or refrain from doing so—has far-reaching effects across corporations.
Fund managers’ willingness to exert power in more-visible ways emboldened other investors to take on companies too. This year was particularly noteworthy as the Covid-19 pandemic revealed flaws in how companies navigated economic upheaval, supply-chain challenges and restive workforces. More boards failed to secure strong approval ratings.
Across Russell 3000 companies, 6% of proposals involving company-supported board candidates fell short of 80% shareholder support, according to Insightia data for the year ended June. That is the highest level of companies failing to draw this key level of support in at least four years, and up from 4.3% in 2018.
Casting “no” votes or withholding support from directors are the most direct ways to express dissent. Directors who don’t win a majority vote typically must leave. Those with less than 80% of votes are vulnerable.
“It’s a red flag for companies—and it’s shark bait for activist investors,” said Andrew Freedman, co-chair of the shareholder-activism group at the law firm Olshan Frome Wolosky LLP.
As index firms are involved in new activist battles, they face competing pressures. Activist investors, special-interest groups and politicians have pushed these funds to do more on a host of social issues, from climate change to gender rights. They are targets of public pressure campaigns and lobbying by environmentalist and progressive groups.
Some politicians have accused index firms of overreach. Two Republican senators expressed concern that BlackRock and State Street were emphasizing their chief executive officers’ “personal policy views over retirees’ financial security” when making shareholder voting decisions for the nation’s biggest 401(k)-type plan.
Action Line: Avoid ESG funds, and the big fund managers. With them, it’s you invest, and they win. Instead, invest in individual securities. If you need help, I would love to talk with you.
