Investment management giant BlackRock voted in 2021 in support of 149 U.S. shareholder proposals related to environmental, social, and governance issues at companies’ annual general meetings. Including four abstentions, that total represented 28.9% of all votes BlackRock cast on 516 U.S. ESG-related issues. Globally, BlackRock cast 950 votes on shareholders’ ESG-related proposals, supporting 288 (30.3%). With BlackRock owning a significant stake of many companies, these votes carry considerable weight.
Bryan Junus, chief analyst for the Corporate Citizenship Project, a corporate governance think-tank, contextualizes the power of large asset managers and the proxy advisors behind them this way:
“Imagine if Jeff Bezos, Bill Gates, and Elon Musk cast over 50% of the votes in each election. Then, imagine if all three of them listened to the same political advisor in deciding how to vote. The citizens of most countries would not want to be governed in such an unaccountable and opaque manner. Yet, that is exactly how many companies are run due to the power of large asset managers like BlackRock and proxy advisors like ISS behind them.”
During the first two quarters of 2022, BlackRock voted on 521 U.S. shareholder ESG proposals with no abstentions. BlackRock supported seven of 33 shareholder proposals in the first quarter of this year. In the second quarter (annual meeting season), BlackRock supported 82 of 488 shareholder proposals. Overall, the investment management giant supported 17.1% of U.S. shareholder proposals on ESG issues.
In its quarterly investment stewardship reports, BlackRock cites Institutional Shareholder Services as a co-supplier of data for shareholder proxy voting data. According to a report in The Economist, institutional investors with assets totaling more than $5 trillion “robovoted” in lockstep with ISS and competitor Glass Lewis in the 2020 proxy season.
That may be changing, however. BlackRock and other giant asset managers have little need for either ISS or Glass Lewis. After all, they (BlackRock, Vanguard Group, and State Street) control an average of 22% of every S&P 500-listed company (per Bloomberg) and can easily afford their own stable of ESG analysts. The Economist comments, “Smaller institutional investors may prefer to side with their bigger peers rather than the proxy firms in such matters, especially if the concentration of ownership continues to rise.”
Company managers are also fighting back. ISS recommended replacing one Twitter board member because he was also a member of six other boards. Twitter said it would ignore a shareholder vote to replace the director. The story may not end there, but it certainly is unusual so far.
“There are several ways to mitigate proxy advisors’ power. First, many Silicon Valley tech firms have written their bylaws such that founders’ shares cast votes with substantially more power than common shares owned by institutional investors. Second, many controlled-companies can straight out outvote institutional investors. However, companies, even at controlled companies, proxy advisors can still exert influence by issuing poor ESG ratings and harming their ability to obtain investment capital,” added Junus from the Corporate Citizenship Project.
“The root of the problem is the unchecked levels of control exerted by ISS over the ESG standards of corporations.”
Another complaint from company managers is that proxy advisors are neither transparent nor accurate in the recommendations or calls for regulatory action. The Economist’s report concludes:
“Clashes pitting the proxy advisers against big investors, management and regulators look poised to intensify—all the more so if, as seems likely, [annual general meetings] continue to be a venue for some investors to push their politics. Asking two opaque firms, supposedly in the name of transparency, in effect, to nominate America Inc’s boards of directors was dubious enough. Trusting them to resolve the complex trade-offs at the heart of 21st-century capitalism would be a travesty.”
In its report on second-quarter proxy voting, BlackRock said it would continue casting proxy votes on climate-related issues based on how the company evaluates the “material risks and opportunities” presented by the transition to clean energy.
But there is a limit:
“[In the 2022 U.S. proxy season], we saw a 133% increase in the number of environmental and social (E&S) shareholder proposals, many of them more prescriptive than in prior years … Further, many climate-related shareholder proposals sought to dictate the pace of companies’ energy transition plans despite continued consumer demand, with little regard to company financial performance. Other proposals failed to recognize that companies had largely already met their ask.”
The year-over-year increase in shareholder proposals was not without its downside, however:
“[It] reinforced our long-held view that that the pathway to decarbonization is difficult to predict and will not occur in a straight line. Consistent with that view, we have not supported certain climate shareholder proposals that are overly prescriptive or micro-manage how companies should decarbonize.”
To cite St. Augustine, “Lord, give me chastity and continence, but not yet.”