End of Week Notes
Making it easier for end investors to vote their proxies
Active ownership is a key to addressing systemic risks
BlackRock announced this week that it is providing its institutional clients greater choice in how they can vote their proxies. Today, clients with separate accounts can handle their own voting or have BlackRock do it based on the decisions of BlackRock’s Investment Stewardship team. That team also votes the shares of all of BlackRock’s funds, including pooled institutional funds.
Now, separate-account clients may also choose from a menu of third-party proxy voting policies and have BlackRock cast their votes based on the selected policy, or may choose to direct BlackRock on how to cast their votes on specific resolutions.
For institutional fundholders, BlackRock will now allow them to cast their votes on their own, or have BlackRock cast their votes based on a selected third-party proxy voting poclicy.
Both fundholders and separate-account clients will still have the option to designate that their votes be cast by the Investment Stewardship team.
It’s a good client-centric move for BlackRock to make. While its own team supported some key shareholder resolutions this year and voted in favor of the alternative slate of directors at Exxon Mobil, BlackRock supports shareholder resolutions at a lower rate than most funds do.
I took a look at Morningstar proxy-voting data on the 2021 proxy season and found that BlackRock and iShares funds supported around 20% of the shareholder resolutions voted in the 2021 proxy season. That’s well below the average for traditional funds and sustainable funds.
Among all U.S. domiciled equity funds (includes U.S. stylebox categories and non-U.S. equity categories), traditional funds supported 43.6% of the shareholder resolutions they voted. Sustainable funds, by contrast, supported 59.1% of resolutions they voted. (I only included funds that voted on 20 or more shareholder resolutions in these calculations.)
On management-sponsored resolutions, a similar pattern: BlackRock/iShares funds supported management around 97% of the time. Traditional funds supported management 93.6% of the time; sustainable funds 87.3%.
Individual investors who only invest in funds don’t have a shareholder stake and thus have to rely on their fund managers to cast proxy votes. That’s why it’s a good idea to take a look at how your funds vote. Until recently, that’s been easier said than done, due to the archiac system by which funds are required to report their votes to the SEC. But a new SEC proposal would vastly improve that system, making it easier to figure out how your funds vote and to compare funds’ voting behavior. See last week’s Notes:
For individuals who do own stocks directly, many don’t bother to cast proxy votes. One study showed that individual investors vote their shares at only about half the rate of institutional investors. In a Morningstar.com article this week, my colleague Lauren Stolberg discussed several new services designed to make it easier for individuals to vote:
Investors addressing systemic risks
Active ownership is becoming more important as investors realize the need to address systemic risks that cannot be diversified away in portfolios—think climate change, biodiversity loss, inequality, the weakening of democratic norms. As Paul Polman and Andrew Winston write in their new book, Net Positive: How Courageous Companies Thrive By Giving More Than They Take:
Our current economic system has two fundamental weaknesses: it’s based on unlimited growth on a finite planet, and it benefits a small number of people, not everyone.
These are problems that, if left unchecked, will lead to massive systemic failure. For people, including those of future generations, that means a reduced quality of life measured in terms of health, safety, and economic opportunity. It also means investments will generate lower returns over the long run.
To address systemic risk, investors can engage with companies in which they own shares, using their ownership rights to urge companies to shift to more sustainable business models that serve all stakeholders and to help address systemic problems the world faces today. In so doing, investors are attempting to both protect their long-term investments and improve the world. Companies that make the shift from a shareholder- to a stakeholder-focused busiess model can move towards long-term sustainability for the benefit of all their stakeholders, including long-term shareholders, while helping reduce systemic risks.
The impact of active ownership
This is done through active ownership, a range of activities including direct engagements between shareholders and company management, proposing shareholder resolutions to be voted on at company annual general meetings, proxy voting, participating in broader investor coalitions targeting specific issues or industries, and advocating for public policies that address systemic problems.
For the most part, active ownership is a set of practices undertaken by institutional asset owners and asset managers. Both have long-term time horizons, which make them especially vulnerable to systemic risks. As a result, we are seeing more-active active ownership practices.
Proxy voting, in particular, is rapidly changing. What was not too long ago a largely opaque process given little attention except for occasional battles to oust management, has become much more transparent today in light of greater investor interest in addressing systemic risks.
Asset managers derive their proxy voting influence from mutual fund investors, who are not direct shareholders of the companies in a fund’s portfolio. The asset manager is. In years past, asset managers hesitated to vote against company management, preferring not to embarrass or antagonize them, possibly because they might want or already have other relationships with the company (retirement plans, corporate investments, investment banking services, etc.).
The rise of systemic risks has changed all that, with sustainable investors playing a central role. In last year’s proxy season, ESG-related shareholder resolutions were supported at record levels, including 36 resolutions that received majority support. In many cases the large number of votes cast by asset managers like BlackRock put resolutions into majority territory.
Sustainable funds and their asset managers play a key role in proposing resolutions in the first place, something larger asset managers generally refuse to do, and in providing a base of support for the resolutions, as shown above.
