Last year, I blogged about BlackRock’s proposal to permit pass through voting for institutional investors in its funds. Well, it began that program and now – undoubtedly due to the anti-ESG backlash – BlackRock and other large asset managers, like Vanguard, are experimenting with extending the program to retail investors. The way BlackRock’s program works – and it seems like it’s not that different from Vanguard’s – is that investors in certain funds can choose from among several types of general voting policies, and ballots will be cast in accordance with that policy, in proportion to the investor’s pro rata share of the fund. The policies include BlackRock’s own stewardship policy, and several that are offered by ISS and Glass-Lewis, that they already offer their own clients. I.e., clients of ISS and Glass-Lewis can choose a “tilt” to their voting and ISS/Glass-Lewis will then make voting recommendations in accordance with that preferred tilt; BlackRock investors in its iShares S&P 500 ETF can now choose to follow those policies, as well.
You can see the list of available voting policies at BlackRock’s website. And you can click through to ISS and Glass-Lewis for more detail on the policies; BlackRock also offers a detailed comparison here.
I have a lot of questions about the mechanics of all of this – I mean, it’s one thing if ISS/Glass-Lewis offers these choices in private arrangements with institutions who have hired them, but is this really enough disclosure for a retail investor to understand how votes will be cast? If they chose the Climate Voting Policy, will they find out after-the-fact exactly how their votes came out on specific matters like say-on-pay? Are these policies only going to make a difference in the context of precatory shareholder proposals, or will they matter for the binding stuff? Also – and this I mentioned in my post about institutional pass-through voting, but it’s also a concern that’s been raised by Jill Fisch – if BlackRock disperses votes in this way, will it lose leverage with companies, thus diminishing shareholder power overall? Etc etc.
But actually what fascinates me most are the slates themselves. BlackRock is the one casting the ballots, even if it is taking feedback from fund investors as to how to do so; therefore, it believes that it remains obligated to comply with fiduciary duties in its voting behavior. As a result, BlackRock will not give investors a voting policy option that BlackRock believes would violate its duty to act in the best interests of the fund. Yet included in the voting policy choices are several socially responsible options, including, for example, ISS’s Catholic policy, and its Socially Responsible Investment (SRI) Policy, and Glass-Lewis’s Catholic policy. These options seem designed to balance wealth maximization against other goals. For example, here is ISS’s Catholic policy:
ISS’ Catholic Advisory Services division recognizes that faith-based and other socially responsible investors have dual objectives: financial and social. Religious and socially responsible investors invest for economic gain, as do all investors, but they also require that companies in which they invest conduct their business in a socially and environmentally responsible manner.
The dual objectives carry through to proxy voting activity, after the security selection process is completed. In voting their shares, faith-based socially responsible institutional shareholders are concerned not only with sustainable economic returns to shareholders and good corporate governance, but also with the ethical behavior of corporations and the social and environmental impact of their actions. Catholic Advisory Services has, therefore, developed faith-based proxy voting guidelines for Catholic and other Christian religious institutions that are consistent with the objectives of socially responsible shareholders as well as the teachings of Catholicism and Christianity as a whole…
On matters of corporate governance, executive compensation, and corporate structure, these faith-based proxy voting guidelines are based on a commitment to create and preserve economic value and to advance principles of best practice corporate governance and shareholder rights, consistent with responsibilities to society and the environment as a whole.
Here is ISS’s SRI policy:
ISS’ Social Advisory Services division recognizes that socially responsible investors have dual objectives: financial and social. Socially responsible investors invest for economic gain, as do all investors, but they also require that the companies in which they invest conduct their business in a socially and environmentally responsible manner.
These dual objectives carry through to socially responsible investors’ proxy voting activity once the security selection process is completed. In voting their shares, socially responsible institutional shareholders are concerned not only with sustainable economic returns to shareholders and good corporate governance but also with the ethical behavior of corporations and the social and environmental impact of their actions.
Social Advisory Services has, therefore, developed proxy voting guidelines that are consistent with the dual objectives of socially responsible shareholders….
On matters of corporate governance, executive compensation, and corporate structure, Social Advisory Services guidelines are based on a commitment to create and preserve economic value and to advance principles of good corporate governance consistent with responsibilities to society as a whole.
And here’s Glass-Lewis’s Catholic policy:
Glass Lewis recognizes that Catholic and other religious institutions are concerned not only with economic returns but with the overall social impact of the companies in which they invest. To this end, Glass Lewis has created the thematic Catholic Policy Guidelines, which is based largely on the principles set forth by the United States Conference of Catholic Bishops (www.usccb.org), and that is directly relevant to the unique fiduciary responsibilities of religious investors. The Catholic Policy was designed for religious investor clients or as a supplemental voting policy for funds designed for religious institutions…
All that’s clearly fine for the institutions that choose to hire ISS and Glass-Lewis, but it’s interesting that BlackRock also does not think it’s a problem for its S&P 500 ETF, which has lots of different investor types with different goals.
And it’s true, technically, the SEC has said that investment company advisors, like all fiduciaries, have a duty to promote their clients’ best interests, not specifically to maximize value. See, e.g., the SEC’s 1980 Staff Report on Corporate Accountability. So, theoretically, the “fund” best interest could include following beneficiary preference rather than maximizing wealth. But the SEC has also tended conflate “best interest” with “wealth maximization.” See, e.g., Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies. And if these delegated votes turn out to be meaningful – a real question, but let’s assume they are for now – then I wonder what happens when institutions, like private pension funds, who do have a duty to maximize financial value, are co-investors in a fund where a slice of the votes are going for nonwealth maximizing choices. And would that affect whether such funds could be included in a 401(k) menu?
To be sure, this may all be angels-on-pinheads because even if retail or other fund investors choose the socially-responsible options in significant numbers, it’s still not clear to me that there will be differences enough to actually redirect the behavior of portfolio companies. But I suppose there could be some impact, if only by muting more wealth-maximizing choices of co-investors in the same fund. What if there is a real disagreement, for example, on whether to amend the charter to exculpate corporate officers for violations of the duty of care? It’s an interesting thing to think about.