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Index Funds Put Politics Ahead of Shareholders in the Boardroom

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When most shareholders invest in funds, they assume the decisions made by fund managers will be fiduciary in nature. That means the decisions should benefit the investors, not the fund managers, or their CEOs’ EGOs. But as fund managers like BlackRock gather more power in ESG funds, they’re becoming more active in boardrooms, pushing political agendas, not those of the shareholders. Dawn Lim and Justin Baer report in The Wall Street Journal:

Investors have flooded into index-tracking funds in the past decade in hopes of getting broader access to the market at a lower cost. One unintended consequence of the index funds’ rise has been the huge voting power these firms have accumulated as they have added assets. Funds of BlackRock, Vanguard and State Street Global Advisors collectively held nearly 20% of the S&P 500 at the end of March, according to FactSet. They are among the largest shareholders of many companies.

How they wield this power for their millions of investors—or refrain from doing so—has far-reaching effects across corporations.

Fund managers’ willingness to exert power in more-visible ways emboldened other investors to take on companies too. This year was particularly noteworthy as the Covid-19 pandemic revealed flaws in how companies navigated economic upheaval, supply-chain challenges and restive workforces. More boards failed to secure strong approval ratings.

Across Russell 3000 companies, 6% of proposals involving company-supported board candidates fell short of 80% shareholder support, according to Insightia data for the year ended June. That is the highest level of companies failing to draw this key level of support in at least four years, and up from 4.3% in 2018.

Casting “no” votes or withholding support from directors are the most direct ways to express dissent. Directors who don’t win a majority vote typically must leave. Those with less than 80% of votes are vulnerable.

“It’s a red flag for companies—and it’s shark bait for activist investors,” said Andrew Freedman, co-chair of the shareholder-activism group at the law firm Olshan Frome Wolosky LLP.

As index firms are involved in new activist battles, they face competing pressures. Activist investors, special-interest groups and politicians have pushed these funds to do more on a host of social issues, from climate change to gender rights. They are targets of public pressure campaigns and lobbying by environmentalist and progressive groups.

Some politicians have accused index firms of overreach. Two Republican senators expressed concern that BlackRock and State Street were emphasizing their chief executive officers’ “personal policy views over retirees’ financial security” when making shareholder voting decisions for the nation’s biggest 401(k)-type plan.

Action Line: Avoid ESG funds, and the big fund managers. With them, it’s you invest, and they win. Instead, invest in individual securities. If you need help, I would love to talk with you.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com