Jun 13, 2022 - Economy

The problem with shareholder democracy

Illustration of a checkmark that turns into a series of dollar signs.

Illustration: Brendan Lynch/Axios

BlackRock, the world's biggest fund manager, oversees trillions of dollars in index funds — which means that it gets a huge vote come proxy season.

  • On Monday, it announced a small amount of progress in terms of reducing that power by handing voting decisions over to institutions that invest in its funds.

Why it matters: The main winner from BlackRock's changes is Institutional Shareholder Services, or ISS, the proxy advisory service that was already the dominant power in all shareholder votes. Ironically, BlackRock's attempts to implement shareholder democracy might end up further entrenching the ISS monopoly.

By the numbers: BlackRock has $4.9 trillion in equity index funds and historically has made voting decisions for all but a small $0.4 trillion slice of that pool.

  • Its new Voting Choice product, which allows institutional investors to choose to take voting control of their shares, has expanded that slice to $0.5 trillion over the past five months.
  • BlackRock announced today it's expanding the pool of eligible investors to include more funds in the United Kingdom, Canada and Ireland.

The impact: Of the 6% of newly eligible institutional investors who signed on to Voting Choice this year, most simply switched from BlackRock's voting line to ISS's voting line.

  • Be smart: Both BlackRock and ISS vote with management most of the time. And even when they don't, they generally vote the same way. So the change will mean very little in practice, even as it increases ISS' power at the margin.

The big picture: Passive investors like BlackRock and Vanguard wield enormous power when it comes to shareholder voting. This has raised two separate sets of concerns.

  1. Because the investors own all listed companies, they might in theory be opposed to disruptive innovation that benefits a single company at the expense of many others.
  2. Because investors like BlackRock CEO Larry Fink believe in the reality of climate change, they "are using their power to advance the Left’s woke agenda."

Between the lines: Addressing such concerns via "shareholder democracy" sounds great in principle — decision-making should be devolved down to the level of the beneficial owners of the capital in question.

  • In practice, however, if a pension fund owns a BlackRock index fund, then someone with assets in that pension is unlikely to care whether it's their pension fund or BlackRock that makes voting decisions.
  • It's expensive to do due diligence on thousands of companies' proxies, and in practice only huge investors like BlackRock dedicate the necessary resources to doing so. Everybody else generally just uses ISS, or its smaller rival Glass-Lewis.

The bottom line: If and when individuals start being asked to make voting decisions, they're going to be extremely low-information voters. It's not clear that will be an improvement on the status quo.

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