Following the massacre at Marjory Stoneman Douglas High School in Florida, Ed Sweeney, a spokesman for BlackRock, confirmed that the world’s largest asset manager would be looking to talk to gun manufacturers ‘to understand their response’ to the shootings.
However, he then went on to explain that BlackRock could not divest such stocks from its passive funds while they remained in the indices being tracked. The firm will instead ‘focus on engaging with the company and understanding how they are responding to society’s expectations of them.’
But what of society’s expectations of the passive investment giants themselves?
The pressure on the likes of BlackRock to use their shareholder power more ethically is not new or exclusive to guns. For example, a month after the Sandy Hook shooting in 2012, Bill de Blasio published a ‘Dirty Dozen’ list, naming and shaming the largest investors in the gun industry. BlackRock came in at number two. And over the past year, passive managers have shown that they can be responsive to this sort of public pressure, including forcing ExxonMobil to become more transparent about climate change.
Of course, these are both liberal causes. So could the rise of passive investing also advance progressive policies in boardrooms and at AGMs?
At the Vanguard
New research by Columbia University’s Patrick Bolton, the University of Florida’s Tao Li, Northwestern University’s Enrichetta Ravina and New York University’s Howard Rosenthal suggests that the reality is not so simple. Indeed, some of the best-known passive providers have tended to lean to the center-right when exercising their shareholder powers.
Bolton and his colleagues took a technique commonly applied to politics – Nominate, which maps legislators’ votes – and used it to assess voting on shareholder and management proposals, excluding director elections, at Russell 3000 constituents.
One limitation of the study was that it restricted its focus to the fiscal year 2012, with almost 5,000 proposals across more than 2,600 shareholder meetings. The authors acknowledged that voting trends may have changed since then, and they are planning a future analysis spanning a longer time period.
With that caveat in mind, Bolton and his colleagues began with the two main proxy advisors to passive funds – Institutional Shareholder Services (ISS) and Glass Lewis.
ISS recommended voting for 73.8% of the shareholder proposals in the review period. The proposals that received the most ISS support were related to the issues of compensation, governance and diversity. Meanwhile, Glass Lewis advocated voting on just 51.6% of shareholder proposals, with a focus on those concerning governance and animal rights. For context, corporate management backed just 1.8% of the shareholder proposals, and the figure for mutual funds as a whole was 46.4%.
When it came to management proposals, ISS was in favor 85.7% of the time and Glass Lewis 82.3%. Mutual funds were again friendlier than either proxies to management, voting in line with the company’s board 87.3% of the time.
Putting all of this together, Bolton and his colleagues characterized ISS as being center-left and Glass Lewis as center-right, relative to the stance of corporate management on the far right.
Turning to BlackRock and Vanguard, the academics noted that while both firms may draw on ISS and Glass Lewis, neither is ‘slavishly’ committed to adhering to their advice. In fact, Bolton and his colleagues discovered that both BlackRock and Vanguard tended to vote to the right of the proxy advisors, ‘which suggests that they are both less concerned about environmental and social issues and that they tend to side more with management.’
Is social investing socialist?
Bolton and his colleagues also investigated the voting patterns of active funds, which offered something of a sense check. This revealed that organizations such as Domini Social Investments fell on the far left, while to the right sat businesses such as Leuthold Weeden Capital Management and Needham Asset Management. This is as you might expect: Domini specializes in responsible investing, while Leuthold Weeden is quantitative and Needham emphasizes ‘tax-efficient capital appreciation and preservation.’ Although neither is necessarily right-wing in the political sense, both approaches are more corporatist than that of Domini.
BlackRock and Vanguard, then, appear to be more like these capitalists than some ethical investors may wish. And while Bolton and his colleagues concentrate only on 2012, another paper published in February echoes their results.
Ryan Bubb and Emiliano Catan, both of New York University, looked at funds’ voting records between 2010 and 2015. They found three distinct ‘parties’ of investor: the ‘Managerialist Party,’ which follows corporate boards’ recommendations, and the ‘Shareholder Intervention’ and ‘Shareholder Veto’ parties, which respectively engage management proactively and oppose management proposals. BlackRock and Vanguard both fell into the Managerialist category.
In short, the passive titans have not yet used their weight to push corporate management around. However, clients should remember that if that were to change, it would make these firms much more activist – in more than one sense.