BlackRock Gives Up Its Votes Where Viable, but Do Institutional (40% of $4.8 Trillion to Start With) and Retail Clients Want the Vote? And What About BlackRock’s ESG Infrastructure?
Disclaimers: https://www.transactionaldelights.com/disclaimers
In some pretty big corporate governance news, BlackRock recently announced that in 2022, it will be taking its first steps to “expand the opportunity for clients to participate in proxy voting decisions where legally and operationally viable.” Through new technology and collaboration with industry partners, the voting choices will be available to institutional investors invested in their index funds, making approximately 40% of the $4.8 trillion index equity assets managed by BlackRock for their clients eligible for these new voting options.
Delegating ones vote is not entirely new, as the Corporate Counsel notes, two years ago, Vanguard delegated its votes (representing 9% of its total assets) to 25 firms, including active manager Wellington[1]. While BlackRock may be significantly more dissident friendly than Vanguard, the bigger difference in voting with respect to proxy contests is between active and passive funds. My numbers might be a little stale, but, typically, active managers like Neuberger & T. Rowe tend to vote for dissidents ~45% of the time compared to ~22-30% for passive funds like BlackRock, State Street, & Vanguard.
So, what are some of the potential outcomes of BlackRock allowing its clients invested in its index funds a voting choice? My initial thought is that the cost of proxy contests could go up if there are more beneficial owners to solicit votes for because it might be more difficult from a collective action standpoint to line up all the votes you might need, whether its for a dissident slate of nominees to the board (shareholder activism), or ESG proposals regarding the company in question. Two questions that come to my mind when thinking about this are:
A lot of the substance behind the ESG hype comes in the form of ESG shareholder proposals and BlackRock has been pretty bullish on embracing ESG principles, what does this portend for the future with BlackRock giving up its voting power?
How soon after institutional will retail get this ability?
Putting those questions slightly to the side, why might this not be as big of a deal as I think it is? Well, I'm not sure how you can entirely underplay 40% of $4.8 trillion, but, one practical point and a key question to all of this is – do BlackRock’s institutional investors actually want the vote? And furthermore, does retail (no announcement made yet on this) want the vote?
When I look at the influence that proxy advisors have (i.e., ISS/GL), the answer may lean more towards no. Why do I say that? Because quite a few Institutional Investors vote in line with ISS and GL recommendations[2] because they don't want the associated costs with due diligence on voting decisions for shareholder meetings regarding their portfolio. Accordingly, could pass-through voting mean that institutional folks that are invested in BlackRock's indices vote in line with BlackRock's recommendations? Don’t forget, BlackRock has an infrastructure of governance professionals (a mini army of sorts) – and it is unlikely that they completely abandon the ESG principles that have been fundamental to Larry Fink’s annual letters. I don't know if that is how it will turn out, but it is possible. The costs associated with doing your diligence can be high[3].
But despite that possibly occurring, optionality and the ability to vote is important in a proxy contest and a potentially key strategic advantage in the right contexts. It will be interesting to see from a macro perspective whether this is simply the appearance of BlackRock shifting its voting burdens onto its clients, or whether it is an actual shift. In certain specific contexts, though, it could make all the difference even if it is happening at the margins (let’s repeat that number one more time though – 40% of $4.8 trillion).
[1] Wellington, is the same Wellington who went public with its rejection of the BMY – Celgene deal.
[2] Andrew Droste notes that “i also think a knock-on effect of this will be glass lewis and ISS publishing (democratizing) their recommendations for the S&P 500 (or some other larger benchmark/universe), leaving the analysis and rationale behind subscription… we’ve seen it happen with ESG scores, and I think that’s the way they’ll need to go with moves like this.”
[3] Rob Kalb also made some interesting points on voting policies: “How many of those who choose to opt in already have detailed proxy voting policies? Do they take on ISS/GL by almost default? How many can/will elect to only vote on CERTAIN proposals to their policy and maybe leave BIS the remaining?”
