TheCorporateCounsel.net

Liz blogged last week about BlackRock’s decision to give certain institutional investors the option to vote the shares they hold through BlackRock’s index funds. She also addressed what BlackRock’s decision might mean for public companies. This “Transactional Delights” blog echoes some of Liz’s thoughts, but also raises the possibility that this change may not end up being that big of a deal. Here’s an excerpt:

So, what are some of the potential outcomes of BlackRock allowing its clients invested in its index funds a voting choice? My initial thought is that the cost of proxy contests could go up if there are more beneficial owners to solicit votes for because it might be more difficult from a collective action standpoint to line up all the votes you might need, whether its for a dissident slate of nominees to the board (shareholder activism), or ESG proposals regarding the company in question. Two questions that come to my mind when thinking about this are:

– A lot of the substance behind the ESG hype comes in the form of ESG shareholder proposals and BlackRock has been pretty bullish on embracing ESG principles, what does this portend for the future with BlackRock giving up its voting power?

– How soon after institutional will retail get this ability?

Putting those questions slightly to the side, why might this not be as big of a deal as I think it is? Well, I’m not sure how you can entirely underplay 40% of $4.8 trillion, but, one practical point and a key question to all of this is – do BlackRock’s institutional investors actually want the vote? And furthermore, does retail (no announcement made yet on this) want the vote?

The blog says that the willingness of so many institutional investors to rely on proxy advisors like ISS means that many aren’t likely to be real keen on voting the shares held in BlackRock’s index funds. While the blog doesn’t answer the question that it poses about whether retail investors want the vote, the traditional apathy of retail investors suggests that they probably aren’t all that interested either.  Of course, the blog also notes that given the size of BlackRock’s holdings, the ability of its investors to vote their shares will likely be an important strategic consideration in many proxy contests..

My guess is that BlackRock probably has reached the same conclusion about the interest of most of its index fund investors in pass-through voting. But regardless of whether index fund investors actually vote their shares, their ability to do so gives BlackRock something to point to in response to growing concerns about just how much of the world’s corporate equity it owns, and may be part of its strategy to fend off regulatory actions intended to address those concerns.

By the way, this CLS blog points out some interesting fine print in BlackRock’s announcement:

Did BlackRock bury the lede? Consider the following fine print: “BlackRock will determine eligibility criteria under this program based upon . . . financial considerations, including the decision to lend securities.” In an era of rock-bottom management fees, lending shares to short sellers is an important source of revenue for the fund industry. The message is clear: For BlackRock, shareholder empowerment only goes so far. When the price is right, BlackRock will trade away its clients’ votes for short sellers’ cash.

Check out Liz’s recent post on our “Proxy Season Blog” for more on this aspect of BlackRock’s voting policy change.

– John Jenkins