A new BlackRock shareholder vote that may rule future proxy battles
Laurence Fink (chairman and chief executive of BlackRock Inc.) pauses during his speech at the BlackRock Asia Media Forum, Hong Kong, China.
Justin Chin | Bloomberg | Getty Images
BlackRock is the most important vote holder and money manager in the world and it’s the annual corporate meeting season.
No exaggeration is made when it says that the top five asset managers in the world can influence the results of shareholder voting. The top four to five asset managers, including myself, hold over 15% of all outstanding corporate shares. BlackRockVanguard, and State Street Global AdvisorsBroadridge Financial Solutions data shows that this is the case. Some publicly traded companies have as high as one third of shareholder shares. Most shareholder resolutions will pass or fail depending on the vote of large fund companies. Engine No. 1, an upstart activist, is the best example. Engine No. 1 wouldn’t have won its unexpected win at ExxonMobilThe big money managers were absent last year.
Jack Bogle, founder of Vanguard Group, warned that the biggest risk to the giants of fund investing was the creeping monopoly like power over shareholders votes. This would draw more attention from regulators and politicians. This has happened from the inside of the market, too. Charlie Munger from Berkshire Hathaway, vice-chairman, has recently attacked the market. the power of index funds. BlackRock will be using a different approach to proxy voting this year for some of its investors: it will give them the vote back to make their decisions. BlackRock has said that this year it will make the so-called “pass-through” voting — or what BlackRock calls “voting choice — available to approximately 40% of the $4.8 trillion in index equity assets, to start, with institutional investors in the U.S. and UK.
Our view is that clients have the right to vote proxy. BlackRock announced the initiative, stating that clients should have greater control over how they vote their index holdings.
Pass-through voting may be on the margins in 2022 – it isn’t clear what percentage of those institutional clients will actually take advantage of the new voting power – but it is a fundamental change in the future of shareholder influence that is expected to grow, and experts say is likely extend to BlackRock competitors, including Vanguard and State Street Global Advisors, and ultimately make its way down to retail investors.
BlackRock and its rivals can also use this pass through voting service to gain a competitive edge for clients or potential clients. Edmund Reese is chief financial officer of BlackRock. “We will see other fund mangers moving in that direction,” he said. Broadridge Financial SolutionsBlackRock Technology partner,.
Corporates who want to know if a shareholder vote will go against the management’s position can ask a number of questions about pass-through voting. In recent times, shareholder resolutions have become more common to deal with major issues. However, there has been a rise in ESG-related concerns among shareholders. The power of corporations trying to gauge whether a shareholder measure will pass against management’s stance also increased as investors began to migrate to ETFs or index funds. All of the major asset managers now have an investment stewardship team that prepares detailed policies and reviews voting and engages directly with top C-suites. Companies often find that this one-on-one interaction with the top fund companies is sufficient to help them understand how votes might be distributed. This will all change, though slowly. If votes are shared amongst multiple investors or segments of investors from the best pension funds down to participants in retirement plans, it may slow things down.
In cases in which more underlying shareholders elect to vote, visibility into the trend of a vote will not be possible. This is a problem for proxy fighters and C-suites. A further potential issue is the visibility of corporate management teams: the wider the distribution of votes, the more likely that the vote will come in later than it would from large asset managers.
ESG investors may soon be the largest group of clients for asset managers who want to vote shares. However, it is still too early to expect that. ESG issues and proxy issues have been more closely watched by retail and institutional investors. This makes it less likely that companies such as BlackRock will be able to control the votes of their shareholders. However, shareholders may not agree as much with BlackRock voting on ESG questions. These shareholders want to make their voices heard.
This approach is already in use to some degree. A small number of institutional managers and investors have offered their views on voting to a limited group. This has historically been the case. Institutional Shareholder Services has increased its offering to match the needs of the market. It offers proxy guidance to help with perspectives such as Taft-Hartley plans that are focused on sustainability, labor and climate policy, along with a benchmark view.
ESG matters will be high in shareholder resolutions again as the annual meeting season opens. They have also been more successful at annual meetings. The 2021 proxy season saw a record number of shareholder proposals on ESG – and a record level of support from shareholders, averaging 32% approval, according to a recent Conference Board review and outlook.
The data of the 2022 year will be analysed by companies to determine how proxy voting might be altered.
BlackRock estimates that 60 million individuals worldwide are investing in retirement assets which can be eligible to vote. Broadridge Financial data shows that this trend could eventually spread to more young Americans, who will participate in the markets directly as ETFs become standard and zero-fee trading in equities will become the norm.
Reese states that even though meme stocks got a lot attention in the aftermath of the pandemic it has shown that the volume growth rates for equities, mutual fund and ETFs will be higher than the previous peak which was 26%. However, it expects growth to be in the double-digits. It is also seeing wider investing participation across sectors from financials to energy companies and small-caps up to large-caps. Reese stated that it was not only the’meme stocks’, although they did see growth, but not enough to drive overall growth.
Lorraine Kelly (Governance Business Head at Institutional Shareholder Services – ISS), which is the biggest shareholder advisory company in the world) says there has been a generational shift. Younger investors opened brokerage accounts as part of the pandemic.
BlackRock stated in an announcement that they are “exploring all possibilities to extend proxy voting to even more investors including those who have invested in ETFs and index mutual funds.”
The report indicated that changes to the regulatory system and operating systems may be necessary, as well as partnerships with investors and proxy advisory firms. For example, the current shareholder infrastructure isn’t transparent enough to all investors in every case. These hurdles, experts agree, aren’t insurmountable.
There are a few signs that retail investors are becoming more engaged with annual meetings at companies, according to Reese, and there is reason to expect that to change even more with the evolution of virtual shareholder meetings – Broadridge hosted over 2,400 virtual shareholder meetings covering over 80% of the S&P 100 last year. According to Reese, technology that allows more participation from shareholders is likely to continue in some form or other and will “reinforce this trend.”
Many retail investors still receive their paper ballots by mail, and they don’t take any action. However, technology is a key enabler in terms of easy access to information and the ability to act. Retail investors will be encouraged to use the voting power as well as platforms like 401(k), plan participation.
Technology may enable a shareholder ask a question at an annual meeting. Longer-term, it’s possible for customized alerts to be sent to shareholders about a subject they have chosen to receive communications. For example, carbon disclosures and climate. Reese says that they could receive an alert, if their preferences allow for it. This will encourage them to participate in the voting process.
Pass-through voting will be available in the proxy season 2022, but it may not be possible for the more sophisticated investors such as pension funds. These voting councils make these types of decisions using other shares. This voting power could not be widely available for five years, although experts say it’s possible.