BlackRock, Larry Fink, and a New Form of Shareholder Empowerment
In a somewhat roundabout way, I would like to make the argument that Larry Fink, CEO of BlackRock, is creating a new form of shareholder empowerment. Unfortunately, I do not find this to be a positive development for corporate governance.
In a recent post on the Columbia Law School’s Blue Sky Blog, I provided a summary of my new article, “The Risks and Rewards of Shareholder Voting.” The objective of my article is to fill in the gaps in our collective understanding of shareholder voting, a topic that does not get enough attention. What I argue is that an institutional investor’s voting will generally be uninformed and, to some extent, always reflect the biases of the investor’s management. From a policy perspective, I conclude that “regulators, shareholders, and managers should always be extremely wary of any proposal to increase the use of shareholder voting as a decision-making tool.”
In a counterpoint to my post, Ken Bertsch of the Council of Institutional Investors did not directly attack my premise that a collective action problem in shareholder voting leads to uninformed shareholders, or the arguments I make regarding the inability of investor stewardship teams or proxy advisors to solve this issue and how the current enforcement of fiduciary duties does not solve the additional problem of institutional investor bias in shareholder voting. Instead, he focused on my article’s periodic reference to shareholder empowerment—the desire of certain shareholders for greater participation in corporate governance—and how my understanding of its existence is overstated.
I, of course, disagree with Bertsch’s criticism. Instead, I need look no further than Larry Fink’s 2020 letter to CEOs to demonstrate why Bertsch is wrong.
In Fink’s letter, he first puts forth his concerns about climate change and how it will affect financial decision making, both at the board and investor levels. Fair enough. He also makes the reasonable statement that “Under any scenario, the energy transition will still take decades. Despite recent rapid advances, the technology does not yet exist to cost-effectively replace many of today’s essential uses of hydrocarbons.” Also, to help move investors in this direction, which seems reasonable and will probably earn BlackRock a lot more money than focusing on the management of low-cost index funds, Fink announced that BlackRock will be reallocating its resources so that it can offer more sustainable EFTs and mutual funds.
But then Fink goes off the rails into a whole new world of shareholder empowerment. Instead of keeping the focus on what BlackRock, the company that he runs, can do to respond to climate change, he switches to what he is going to demand of every public company in which BlackRock holds delegated voting authority. That is, virtually every U.S. public company that currently trades on a U.S. stock exchange or over-the-counter.
He first wants every public company, using the standards provided by the Sustainability Accounting Standards Board, to disclose not only climate-change data but data on “how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data.” Fink does not justify the requirement of these additional non-climate-change disclosures.
Moreover, these are not just requested, but required, disclosures—with penalties for boards that do not comply. According to Fink, “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
Yes, it will be Larry Fink and his approximately 20-member U.S. investor stewardship team dictating sustainability-related disclosures (which means pretty much any corporate governance issue that one can think of, based on the new data being demanded), business practices, and underlying strategies for the 3,700 or so public companies that exist in the United States. Such a resource-constrained undertaking is truly absurd and will undermine the work of the only true loci of authority that know how to devise and implement strategies that can deal with climate change and all other corporate governance issues: the board and executive management. Unfortunately, because of its enormous voting power, BlackRock may be able to get public companies to comply, especially if one or more of the other large wealth managers with enormous voting power follows its lead. If Larry Fink’s letter to CEOs is not about shareholder empowerment—albeit in a new, more powerful, and deleterious form—then I don’t know what is.
