Seven years ago, University of Michigan management professor Jerry Davis spoke at a meeting of the Labor and Employment Relations Association in Chicago, where he highlighted the growing dominance of a handful of investment firms.
One firm, in particular, had caught his attention because it seemed to have burst on the scene out of nowhere, vaulting past more familiar names like Fidelity.
The professor’s presentation slide said it all: “BlackRock–WTF?”
The talk led to a blog post suggesting, in a rather menacing tone, that “BlackRock has been quietly taking over the American economy.”
Over time, however, Davis has come to focus less on any potential dangers posed by this outsize influence and more on the extraordinary opportunity that BlackRock and a couple of its competitors have to push companies to take better care of the planet and their workers.
Today, BlackRock, State Street, and Vanguard collectively manage more than 20% of the shares of the large corporations that make up the Standard & Poor’s 500 stock index, according to figures compiled by Davis and Ross School of Business doctoral student Eun Woo Kim. And it’s entirely likely, Davis says, that they will eventually control more than 50% of these companies.
At first, “I was simply mulling, ‘What could an investor of this size–which has never existed before in U.S. history–do with their power?'” Davis recalls. “The idea of using it for good was not my first guess.” But Davis has begun to believe that corporate “policy can be driven by some force that takes the broad best interests of capital to heart” and compels companies to tackle some of our biggest social and environmental challenges.
In many respects, BlackRock, State Street, and Vanguard are ideally suited to play this role. Because the vast majority of their investments are in passively managed exchange-traded funds and index funds–as opposed to actively managed portfolios where there is constant trading in and out–they have a wide view of the world and tend to think decades into the future.
“It’s in their interest to encourage the rise of overall stability and prosperity,” says Kirsty Jenkinson, director of corporate governance for the California State Teachers’ Retirement System.
Saying the right things
Certainly, the investment giants all seem to be saying the right things. A couple of weeks ago, BlackRock CEO Larry Fink published his annual open letter to corporate executives, imploring them to “to effectively serve all . . . stakeholders over time–not only shareholders, but also employees, customers, and communities.” State Street’s CEO, Cyrus Taraporevala, recently put out his own missive on corporate culture, which noted that his firm has been zeroing in on, among other things, “environmental sustainability” and “human capital management.”
Vanguard, for its part, has found itself in the news lately following the death of founder John Bogle, who himself declared that a “corporation’s service to . . . the broader society is the ultimate goal of free-market capitalism,” and that fixating on short-term profits could “have dire consequences for company employees, for their communities, for the integrity of the products and services they provide.”
Yet whether the “Big Three,” as Davis calls them, are leaning on the companies in which they invest hard enough or fast enough is very much open to debate.
“I’m skeptical,” says Jim Lingberg, chief trust officer at Amalgamated Bank, which prides itself on its “values-based” lending and investment practices. “Talk is cheap.”
Boston Common Asset Management, which describes itself as “dedicated to the pursuit of financial return and social change,” said this month that “we hope to see BlackRock take action to back their words” as it joined 11 other organizations determined to make “meaningful progress” on global warming.
For many, one of the toughest things to reconcile is how BlackRock, State Street, and Vanguard vote on shareholder resolutions that are meant to press companies on specific environmental and societal concerns.
An analysis based on the Morningstar database of proxy voting shows that BlackRock last year supported just 8% of 40 resolutions around climate change, 22% of nine resolutions dealing with public health or product safety, and 8% of 24 resolutions promoting worker rights and welfare. Vanguard’s numbers were similar across these categories at 15%, 22%, and 0%, respectively. State Street backed 45% of the resolutions on climate change, but only 13% and 17% in the other two areas.
“Proxy voting is central to giving investor stewardship some teeth,” says Jackie Cook, who oversees Morningstar’s research into fund voting.
Given that, adds Rob Berridge, the director of shareholder engagement at Ceres, a nonprofit that seeks to foster sustainability, “I’m confused as to why” the Big Three “don’t vote for more of these. Why is there this disconnect?”
Values versus value
Although environmental and labor advocates often frame what they’re trying to achieve in “moral” terms, the Big Three stay away from that kind of language. Rather, they emphasize that it’s their job to fulfill their “fiduciary duty” and meet the financial needs of their clients. As State Street’s Taraporevala’s put it: “We approach these issues from the perspective of long-term investment value, not from a political or social agenda (aka ‘values’).”
It is in this context, the Big Three maintain, that they find it is more beneficial to engage in dialogue with corporate boards and executives on environmental, worker, and other social matters–at least at first–than it is to pursue a proxy vote.
Shareholder resolutions are “a blunt instrument” to address subjects that are frequently “nuanced,” says Michelle Edkins, the global head of BlackRock’s investment stewardship team.
Rakhi Kumar, head of State Street’s environmental, social, and governance investments and asset stewardship, agrees. For an index investor, she says, a relationship with a company is like “being stuck in a marriage with no option of getting a divorce.” Given that, she explains, storming into management and insisting, “Better do this–or else” usually isn’t as successful as taking a gentler tack: “Honey, we have a problem. Let’s talk.”
And talk they do. Last year, State Street engaged with some 680 of the companies in which it’s invested; Vanguard, more than 700; and BlackRock, about 1,500. Not all of these conversations are about social or environmental topics, but a lot of them are.
Even with the clout that comes from managing trillions of dollars in assets, the Big Three are careful not to be overly prescriptive. In many cases, their aim is to get corporations to be clearer in disclosing the financial risks that they foresee from, say, efforts to rein in carbon dioxide emissions from fossil fuels or from possible human-rights violations along the supply chain or from selling firearms.
“We don’t tell company leaders how to run their businesses or what business they should be in,” says Glenn Booraem, Vanguard’s investment stewardship officer.
“It’s almost schizophrenic”
Meantime, while the Big Three are urging corporations to think about the long term, many CEOs are under pressure to increase financial returns in the short term. “It’s almost schizophrenic,” Davis says. In fact, the number of companies targeted by so-called activist investors, like Carl Icahn, hit an all-time high last year. Executive pay is also tied to performance over relatively short cycles–three years, max.
In the end, those at the Big Three say, altering corporate behavior just doesn’t happen quickly. “Fundamental change in thinking and practice takes time,” says Edkins, pointing out that BlackRock typically tracks how a company is responding over a five-year period.
Not everyone is convinced, however, that being so forbearing is the way to go.
“Confidential dialogue is vitally important, but quiet conversation combined with . . . a proxy vote sends a much clearer and less ambiguous message,” says Tim Smith, the director of environmental, social, and governance shareowner engagement at Walden Asset Management, which has challenged BlackRock and Vanguard on their voting record.
Others feel the same, asserting that a proxy vote is what can persuade a corporation to seriously consider an issue in the first place. Even though nearly all shareholder resolutions are non-binding, Berridge says, gaining 30% to 40% support can be enough to “make a company want to have a dialogue about a commitment they can make in return for the filer withdrawing the proposal.”
Indeed, about a third of climate-related resolutions are withdrawn each year after such commitments and never make it onto the proxy ballot. Walden itself has filed more than 500 shareholder proposals since 1986, of which 40% were retracted after having reached what it characterizes as “constructive agreements with management.”
When a shareholder resolution gains sufficient steam, “companies really do sit up and take notice,” says Heidi Welsh, executive director of the Sustainable Investments Institute (Si2), which researches corporate responsibility. She points to how BlackRock, Vanguard, and State Street used proxy votes in 2017 to impel Exxon and Occidental Petroleum to beef up their reporting on the risks raised by climate change–despite management’s objections.
At the time, BlackRock remarked that “we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite.”
To the Big Three’s critics, that’s all well and good. But they’d prefer to see a little less patience, and for the world’s biggest money managers to start wielding their votes as much as their voice.