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Mutual funds provide a convenient way for customers to bundle stocks, eliminating the need for time-consuming investment decisions and corporate governance choices.
However, leading passive index fund providers like BlackRock, Vanguard, and State Street are urging investors to reconsider this preference.
BlackRock recently announced that the 3 million retail holders in its $305 billion S&P 500 exchange-traded fund can now decide not to follow the company’s voting recommendations. Instead, they have the option to select from seven other voting strategies, including alignment with organized labor, the Catholic Church, or the principles of the UN.
Given the massive inflow of funds into passive strategies aimed at replicating broad market returns, the big three US fund managers typically own 10 to 20 percent of most large publicly traded companies.
However, BlackRock, Vanguard, and State Street are facing challenges with their “stewardship” teams that determine voting decisions based on corporate governance values. The sheer size of their holdings has led to accusations of unaccountable power, and politically polarized views on issues like climate change have made their voting decisions targets of criticism.
In recent years, investors from Republican states have withdrawn significant sums from BlackRock due to perceived activism on ESG topics.
BlackRock claims it supports shareholder proposals regarding the disclosure of climate risks in order to understand their impact on shareholder value.
In the peak 2022 proxy season, the number of environmental and social proposals increased by 133 percent. However, BlackRock states that it only supported a quarter of these proposals, down from 43 percent the previous year, citing many of them as too “prescriptive,” such as demanding companies to stop the production or use of oil and gas.
Semi-enfranchisement of fund investors may alleviate some attention from BlackRock’s voting decisions, but the majority of investors will continue to rely on the investment titan to make calls on their behalf. Some packages are best left untouched.
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