A Catch 22 for Asset Managers

Jasmin Sethi is the CEO of Sethi Clarity Advisers LLC. This post is based on her Sethi Clarity memorandum. Related research from the Program on Corporate Governance includes The Specter of the Giant Three (discussed on the Forum here) by Lucian Bebchuk and Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

Asset managers have been caught in a difficult spot for several years. Some, including me, have pushed them to use their growing voting power to benefit social impact causes. Other experts have decried managers’ power and blamed them for anticompetitive outcomes and even increasing inequality.

The big three—BlackRock, State Street, and Vanguard—are victims of their own size. As they have increased their assets under management, they have also increased their voting power as typically they vote the shares for the money they manage (though not always for separate accounts but they do for mutual funds and exchange-traded fund (ETF) shares. With voting power, some would argue, comes responsibility. Those who argue for greater responsibility want asset managers to be more active on issues relating to climate change, gender diversity, and social issues, like equal pay. Indeed, State Street was recently criticized because its gender diversity index, traded as SHE, did not actually vote in favor of gender-based shareholder resolutions. In this particular case, competition amongst asset managers on values was demonstrated, with Pax World Funds having been found to vote most often in favor of gender resolutions on its gender funds. Moreover, this values-oriented approach tended to lead to better returns: funds classified by Morningstar as ESG/sustainable performed better than average in their category.

On the other hand, there are those who would take the vote away from large asset managers. Professor Eric Posner of University of Chicago Law School has advocated to either break up the large managers or take away their vote. Still others have made nebulous arguments that the Big Three have led to increases in the concentration of power and the rise in inequality.

It seems that the problem for The Big Three is a seeming increase in power and an inadequate transparency around their activities. It’s unclear whether power has been exercised because the Big Three have never brought any shareholder resolutions. While the Big Three provide more information about voting and engagement than their smaller competitors, given their size, this is insufficient. More transparency will only help to illuminate what power they actually have and how they exercise it.

The lack of transparency regarding engagement and meetings between shareholders and management has led to rampant speculation about the effects of these meetings, likely exaggerating their importance. To date no one has shown any compelling evidence regarding impacts on anticompetitive outcomes or inequality. The benefits, however, of having strong voices on the side of ESG issues cannot be underestimated.

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