Politically motivated shareholder activism violates the fiduciary responsibility of investment managers.
In recent years, politically motivated investors have criticized BlackRock, the largest institutional fund manager in the world, for investments they consider unsavory, such as those in fossil-fuels and weapons companies. As BlackRock CEO, Larry Fink would be a powerful ally to any activist group whose agenda he could be persuaded to support. The pressure such activist-investors can apply to public companies comes in different forms, ranging from hard power like divestment campaigns to softer techniques like clever use of the shareholder proposal process.
Looking at the latter, a small group of activist-investors have done their best to fill the corporate ballot box with politically divisive agendas in recent decades. The shareholder-proposal process was created to give those who own stock in companies more of a say in corporate governance, but it has increasingly been highjacked to press forward political agendas by “gadfly” investors.
Items that properly belong in the realm of politics, from gun rights to environmental regulation, have been the subject of these shareholder proposals in order to drive changes in company policy. These proposals typically fail to obtain majority support, a record of failure that has now led to an apparently successful effort to bully BlackRock into supporting more ideologically driven proposals.
The empirical evidence and spreadsheets traditionally used in investment portfolio analysis have given way to threats, protests and sit-ins, but now we may be seeing something different. Ahead of this year’s BlackRock annual shareholder meeting, which was held last month, Mercy Investment Services proposed a resolution calling on BlackRock to evaluate climate change in its proxy votes.
In response, as was noted by the Interfaith Center on Corporate Responsibility (ICCR) , Fink “sent a letter to companies and clients outlining their new position on climate change [this included steps such as reducing exposure to thermal coal production in BlackRock’s active portfolio].” The letter “described the climate risk companies and investors faced, noted the expectations they had for companies in which they invested and announced they would be voting against boards with unacceptable climate positions.”
The resolution was promptly withdrawn, due “to BlackRock’s willingness to discuss the concerns of shareholders regarding the company’s proxy voting record and the proxy voting policies and guiding criteria related to climate change,” Mercy explained. Additionally, ICCR noted that BlackRock had agreed “to continue a dialogue including a summer discussion focusing on 2020 votes on climate and an opportunity to provide feedback to the company.” Effectively, this functions as a commitment to vote for more climate-change proposals at companies in which BlackRock invests.
It is not exactly a brave stance to pressure other companies in exchange for being left alone, if only for a while, but it seems to have reduced the appetite for BlackRock as a political target (for now). Unfortunately for BlackRock, this strategy may arguably violate the fiduciary duty that it owes its shareholders under Delaware state law, as well as its duties to the beneficiaries of its investment funds under the Investment Advisers Act.
BlackRock faces two conflicts of interest in its decision to embrace the loud voices of these minority shareholders. First, it prioritizes the agenda of a small group of shareholder-activists ahead of the fiduciary interests of the vast majority of shareholders in BlackRock.
Most shareholders are not as vocal as Mercy Investment Services and are simply hoping for maximization of returns in their investment portfolios. I know because I led a survey of over 5,000 retail investors and retirement fund beneficiaries, and 91 percent responded that they would prefer fund managers focus on maximizing investment returns rather than pursuing social or political goals. Who can blame them for expecting that their money managers focus on managing their money, rather than using it to subsidize political initiatives?
Secondly, as an investment adviser registered with the SEC, BlackRock has a fiduciary duty of loyalty to the beneficiaries of the funds it administers. If it is instead motivated by pressure from these outside voices and succeeds in changing policy at companies in a way that reduces returns, or if it decides to divest from superior investment opportunities, it risks harming those beneficiaries.
Some argue this new policy on climate change will increase shareholder returns. If that’s true, why did it take a politically charged campaign to encourage large institutional investors, whose managers’ pay is linked to return performance, to initiate this new policy?
Climate change is a serious issue that merits debate on the national stage. That debate should take place openly, so that voters and leaders can make decisions about the right approach to take, something that ought to include discussion of the real and serious trade-offs involved.
A small cadre of politically motivated investors have hit upon a strategy that sidesteps that process and avoids that necessary—and difficult— discussion. BlackRock should not reward them.
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