Asset Manager or Asset Owner – Who Votes?

Today’s world is a myriad of conflicting instructions. Should you optimize for the long term, or the short term? Should you do what’s best for the country, or the world? Should you do what’s best for shareholders, or what’s best for society? These questions appear to be showing up increasingly on Wall Street, and an article caught my eye last week that I think further builds on my view of how the world is evolving.

It used to be relatively straightforward: individuals and organizations would allocate capital to asset managers, who would then invest that capital with one clear goal: to return as much capital as possible to the original investors. Very easy to measure, and relatively easy to benchmark – but the world is getting more complicated. In the days of social responsibility, ESG, and other emerging trends, it’s not clear exactly what each shareholder wants from a fund, and it feels like a situation where the manager could be caught in a catch-22: optimize for returns, and you might break the social contract, optimize for the social contract, and you might fail on returns – indeed, it’s a quandary.

The article that caught my eye was Blackrock is giving its “big” investors the ability to vote on shareholder proposals. At first glance, this doesn’t make sense to do at scale, and doesn’t seem like a rational initiative. For an asset manager that tries to cut all costs possible in order to deliver the lowest cost funds available, you would think that this seems like a superfluous cost. That would make sense, if the only thing the firm was optimizing for was cost – but what if there are other risks they are trying to manage?

The start of the article highlights that “BlackRock has said the team overseeing voting follows strict guidelines to maximize investor returns.” If the only objective is to maximize investor returns, then surely they would continue to internalize that operation. The fact is that something must have changed – and they are likely getting pressure to optimize for things other than returns, which puts them into that quandary I mentioned earlier: it’s a lose-lose where they could be blamed for optimizing for returns or social contract at the cost of the other. You will never make everyone happy.

The solution? Let someone else make the impossible choice.

It makes sense. You, the investor, can vote how you want. That absolves BlackRock of having to make the difficult (and impossible) decision. They simply buy and hold the shares for you. If you want to optimize for the social contract, vote that way. If you want to optimize for returns, vote that way. BlackRock even went as far to say that they were “committed to exploring all options to expand proxy voting choice to even more investors” which would include individual investors in exchange-traded funds and index mutual funds. It starts to change the role of a fund like BlackRock – it’s increasingly becoming more of a trading algorithm (with respect to re-balancing) and passing on everything else, including the rights and responsibilities of a shareholder, directly to the investor.

This lines up with a broader theme that seems to be emerging: more decentralized input and decision making. I wrote about the same trend when I discussed Robinhood buying Say (to let retail investors pool their influence and get on the earnings call). I get why this is happening: funds with scale have the impossible position of representing way too many stakeholders, so they are pushing the decision out to the asset owners. Individuals, who are more actively involved in their portfolio management, and have strong views on where society should be going, are also getting more actively involved in the discussion. In some ways, that’s a good thing – involvement and interest is usually good. In other ways, I can’t help but think this is going to create an overhead and administrative tax on the industry. In terms of communication, decentralization tends to be more expensive than centralization.

As a corporation, engaging with one single asset owner is clearly easier than engaging with more. If this trend continues, corporations will have to figure out how to engage with an ever broadening shareholder base, which will create indirect and direct costs. Already, corporations are complaining about things like “free shares” being offered by brokerages like Robinhood as a benefit of signing up. They point to the additional cost of having to engage with individuals who now own only one share.

What if a corporation now had to engage with not BlackRock, but every single investor in a BlackRock fund?

The trend of BlackRock extending voting rights through to each individual fund investor feels like a similar direction – it feels like an emerging theme. I’m not sure if it will be a net positive or negative yet, but it will definitely be a change for the industry. I expect to see a new suite of tools emerging if this trend continues, specifically helping corporations engage and interact with ‘fund shareholders’ vs. full shareholders.

Lots more to come, and as always, we’re always here to answer questions,

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