The Welcome Pushback Against Politicized Investment Managers

Passive investing through index funds allows the average American to dominate the markets. Those funds and similar vehicles will spread risk and keep fees low. The resulting rates of return caused a seismic shift from active to passive funds.

The problem is that there has been an equally seismic shift to the investment managers of those passive funds. They are trying to remake corporate America to suit their personal politics.

In fact, it is the Big Three investment managers who now own the market. Black stones,

Vanguard and State Street control more than $20 trillion in assets. In 90% of public companies, one of the Big Three is the largest shareholder. More money means more votes: At S&P 500 companies, the Big Three get about 20% to 25% of all shareholder votes. And that voting bloc will only grow as more Americans move their savings into passive funds.

The concentration of voting power in three like-minded investment firms, with a diversity of all other voting interests, means that the Big Three can often shape the outcome of board elections. value and recommendations of shareholders.

No wonder C-suites increasingly draw cues from the three loudest voices in the room. But instead of driving long-term shareholder value, Big Three leaders like BlackRock CEO Larry Fink instead push political agendas.

Despite Mr Fink’s liberal politics, his pressure campaign has drawn criticism from many parties. Conservative critics decry the Big Three’s attempt to decide on hotly contested questions of environmental and social policy outside of politics. Rational voices on the left have also criticized the Big Three for deferring management too much on core governance issues, such as executive compensation. The deal seems to be that if management gives the Big Three what they want in E and S, they will let management do what they want in G.

This political push is far from subtle: All of the Big Three have expressed a willingness to elect corporate directors for failing to meet climate or diversity goals, and all brag about their commitments. their influential association with the C-suite between shareholder elections. As a result, says Charlie Munger of Berkshire Hathaway, “we have a bunch of new emperors and they are stock voters in index funds. . . . I think Larry Fink’s world, but I’m not sure I want him to be my emperor.”

Mr. Fink’s power needs to be in the hands of the Americans, whose money creates it, and not be diverted to China’s political agendas or interests.

Fortunately, it looks like many of our elected delegates are waking up. The West Virginia state treasurer recently fired BlackRock from the state’s investment board because of its relationship and hostile attitude toward China over fossil fuels. Top Florida officials have moved to reclaim proxy voting rights from outside fund managers over China’s entanglements and politicized investment decisions. Texas (with other states following suit) has gone so far as to demand fair financial treatment for industries that aren’t politically aligned with Mr. Fink et al – think fracking, guns and oil.

Congress is joining the conversation. This week, the Senate passed a major bill, the much-anticipated Investor Democracy Act. The Index Act requires passive investment managers to vote on the most important of the funds in line with the wishes of actual investors. This kind of reform dissipates the political power that the Big Three amassed as an incident that led to the rise of passive investing. It will spur American public companies to respond to the wishes of the ultimate investors – i.e. ordinary people.

Happily, the writing was hung on the wall. Faced with opposition, Mr Fink recently took a serious tone in his annual letter to CEOs, and BlackRock has begun expanding its “mandated voting option” to larger, constrained customers. 40% of index equity assets are under management. So why not get the job done and send the rest of the power back?

American corporations must work for their shareholders. An ideal, yes, but requiring asset managers to hand over voting rights to investors would bring it closer to reality.

Mr. Gray served as White House adviser (1989-93) and US ambassador to the European Union (2006-07). Mr. Berry served as head of policy at the US Department of Labor (2018-20) and as law secretary for the Samuel Alito Department of Justice.

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