BlackRock: investor votes are no revolution in shareholder democracy

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Mutual funds let customers bundle stocks, thus avoiding time-consuming investment decisions. Bundling also means investors can avoid taking time over corporate governance decisions.

Purveyors of passive index funds such as BlackRock, Vanguard and State Street are asking them to reconsider that preference.

On Monday, BlackRock said the 3mn retail holders in its $305bn S&P 500 exchange traded fund could choose not to follow its line on company votes. Holders can choose from a menu of seven other voting strategies. These include alignments with organised labour, the Catholic church or the principles of the UN. 

Trillions of dollars have flowed into passive strategies that seek to replicate broad market returns. This means the big three US fund managers typically own 10 to 20 per cent of most large, public companies.

BlackRock, Vanguard and State Street maintain “stewardship” teams which decide how to vote in line with house corporate governance values. But this is proving awkward. Sheet size prompts accusations of unaccountable power. Political polarisation over subjects such as climate change means voting decisions themselves come under attack.

Investors based in Republican states have in recent years pulled large sums from BlackRock over perceived activism on ESG topics.

BlackRock says it supported shareholder proposals on disclosure of climate risks in hopes of understanding the impact on shareholder value.

In the peak 2022 proxy season, environmental and social proposals jumped 133 per cent. BlackRock says it only supported a quarter of these, down from 43 per cent the previous year. It claims many of the ideas proved too “prescriptive”, for example calling for companies to cease the production or use of oil and gas. 

Semi-enfranchisement of fund investors will deflect less attention from BlackRock’s voting than it hopes. Most investors will continue to let the investment titan make calls for them. Some packages are best left intact.