CNBC recently reported on BlackRock’s previously-announced plan to permit pass-through voting for institutional investors in its index funds.  According to the report, the plan will cover about 40% of those funds, which works out to about $1.92 trillion of assets.

It seems obvious to me that BlackRock is feeling the political/regulatory heat from its existing voting power – there’s been lots of GOP pushback on its climate policies, concerns about antitrust (including FTC proposals that would paralyze BlackRock with regulation), it gets protestors outside its offices due to its control over particular companies, all of which caused BlackRock to go on an – obviously failed – campaign to convince people that it does not hold the power it holds (as I described in my book chapter, ESG Investing, or if you can’t beat ’em, join ’em).  Pass through voting feels like BlackRock voluntarily giving up at least some of its tremendous influence in the face of that scrutiny.  Or, to put it another way, perhaps that power does not translate into financial benefits to BlackRock, at least, not enough to make it worth the regulatory costs.

I have no idea how this will play out or what this will look like, but I have so many thoughts and questions.  Here are a few, in no particular order:

1)            Is this something investors will seek out, which will give BlackRock a competitive edge? The CNBC article linked above suggests so.

2)            What are the fiduciary duties of institutions in this scenario?  The article suggests many of them already have voting policies for shares they directly own, but if they don’t, or if BlackRock’s policy expands, how do institutions make this call?  Do they decide whether the expense of determining their vote – maybe paying for a proxy advisor – is equal to the benefit?  Do they have to choose BlackRock over another fund complex because of the benefits of pass through voting?

3)            If an institution decides to cast its own votes, does it get a reduction on fees from BlackRock, since it’s no longer paying for voting services?

4)            Will clients have the option of going with BlackRock on some issues and not others?  Sean Griffith, for example, has proposed that pass through voting apply to ESG matters and not other kinds of votes, like mergers, where the fund has more expertise. 

5)            If so, will clients know in advance how BlackRock intends to vote?  Will that be nonpublic information?  There are proposals for better disclosure on mutual funds’ voting patterns; I gather clients may not always know how BlackRock is casting its votes, let alone know in advance of the vote itself, but that may be relevant information if there’s a pass-through option.

6)            Also on lending: How will BlackRock manage the share lending program, given that votes often are sacrificed for the lending fees?

7)            Speaking of disclosure of mutual fund voting, how will BlackRock disclose the pass through votes?  Can BlackRock take advantage of the informational content of those votes before they are disclosed (leave aside any active trading that BlackRock handles; as Joshua Mitts points out, even passive funds can use information to dictate their share lending programs).

8)            As the CNBC article points out, if BlackRock hands its voting power to its clients, it will lose leverage with portfolio companies and – due to the dispersed nature of its own client base – that’s leverage that will not be recaptured.  So that may mean less shareholder power overall.  Among other things, will Delaware react – by, for example, relaxing things like the Corwin doctrine?

9)            If BlackRock maintains a significant amount of voting power, it presumably will continue to have some influence in the boardroom.  Will its fiduciary duties be altered if it lobbies for governance changes that appear to be at odds with how the pass-through votes are cast?

That’s all I’ve got for starters – anything else?