BlackRock’s Move to Expand Proxy Voting Choice Creates Unknowns

Douglas Chia is Founder and President of Soundboard Governance LLC and a Fellow at the Rutgers Center for Corporate Law and Governance. This post is based on his Soundboard Governance memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); 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 Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

BlackRock, the world’s largest asset manager, announced on October 7, 2021 that it will start giving certain of its institutional index equity clients the ability to instruct BlackRock how those clients would like their votes to be cast at shareholder meetings of companies in BlackRock’s index funds. This move is savvy. BlackRock can look like a good corporate governance actor furthering shareholder democracy by placing voting power back into the hands of asset owners and deflect criticism that it too often defers to management and elects not to use its massive voting power in more activist ways. The announcement has received wide praise, but the move creates a few unknowns.

Transparency

BlackRock will give its clients several choices on how to instruct their shares to be voted, including continuing to give BlackRock full discretion. However, close observers of proxy voting activity will not know which of BlackRock clients choose to take back discretion on their votes or how those clients cast those votes, even when BlackRock submits its Form N-PX filings. None of this information will become public unless BlackRock or its clients voluntarily disclose it.

Unlike asset managers, asset owners are not currently required to report their proxy votes on Form N-PX or in any other SEC filing. Some large asset owners voluntarily disclose their votes on their websites (e.g., CalPERS, NYCERS), but that is not a widespread practice.

The SEC recently proposed rules to require asset owners to file Form N-PX reports. However, even if those rules are adopted, they will require asset owners to disclose only their “say on pay” votes. Unless the final SEC rules expand the initially proposed scope of the Form N-PX reports for asset owners, there still will not be any requirements for asset owners to disclose their votes on director elections, shareholder proposals, and other proxy items.

Stakeholders who plan to pressure BlackRock to disclose client-instructed voting data face an uphill battle, as BlackRock will presumably not be able to disclose that data without the affirmative consent of its clients. Given investors generally prefer to keep their investment and voting decisions private, most BlackRock clients will probably not give BlackRock consent to disclose how they instructed BlackRock to vote or even whether they continued to rely on BlackRock’s voting discretion. This means many of BlackRock’s institutional indexed clients will be able conceal a large portion of the votes they decide on for themselves, thus making it more difficult for companies and their proxy solicitors to accurately predict how large blocks of shares held by BlackRock will be voted.

Share Lending

Lending shares under management to short sellers is big business for asset managers. For BlackRock, securities lending revenue totaled $652 million, $617 million, and $627 million for 2020, 2019, and 2018, respectively. That represents about 4.2% of BlackRock’s total GAAP revenue over those three years.

When an asset manager lends out shares, the proxy voting rights and the right to dividends and other distributions on the loaned shares transfer to the borrower until the loan is terminated and the shares are returned to the asset manager. The asset manager can recall the lent shares to get those rights back if it determines that it wants to vote them, but that may decrease the revenue the asset manager generates from securities lending activity.

By giving institutional indexed clients the choice to instruct BlackRock how to vote shares in its index funds, BlackRock will potentially have to recall larger amounts of lent shares for those shares to be voted the way its clients instruct and on more voting items. Many votes that BlackRock considers routine will be very important to some of their largest clients. This may result in BlackRock losing out on some future share lending revenue since presumably borrowers would prefer to borrow from lenders less likely to recall the shares they borrow.

And if BlackRock’s largest competitors in the share lending business follow BlackRock’s lead on client-instructed voting, query whether there may be more situations where shares of certain companies become difficult to locate, making it hard for hedge funds to borrow shares of that company to sell short or vote when most desirable.

Voting Impact

BlackRock’s move may end up not having much of an impact on proxy voting outcomes (or on BlackRock’s share lending business). Many clients will likely continue to defer to BlackRock’s discretion on proxy votes. Similar to not having to actively manage investments in individual portfolio companies, part of the attraction of investing in index funds is leaving the decisions and mechanics on hundreds of proxy votes to the asset manager, all at very low cost. While the largest asset owners have dedicated personnel to analyze and make voting decisions at individual companies, the rest cannot incur that cost. BlackRock may be giving its clients options that most will not use.

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