20 Feb MPPA: Make Passive Passive Again
Last May, the editorial board at Bloomberg published what many observers saw as an earthshaking editorial, a call for the U.S. Congress to take what was broken in the global capital markets and do its best to fix it. Specifically, the editors asked Congress to Make Passive Passive Again. They wrote:
Congress should strictly limit the role of any asset manager that’s claiming to act as a “passive” shareholder. Voting decisions should be devolved to end investors as much as possible; the rest should default to either supporting management or else be cast at the last minute as “mirror votes” that simply replicate the voting patterns of all other stockholders. Engagement with company leaders should be restricted to ensuring effective corporate governance and rigorously documented and disclosed.
Last year being an election year, and Congress being Congress, the Bloomberg editors had to know that they were asking the impossible. There was no way that a divided Congress was going to do what the editors asked. There was no way that even radical leftist populists like Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez were going to attack the Wall Street money machine during an election year, especially one in which their party held the White House. There way that Republicans were going to stick their collective finger in the eye of their presidential nominee’s friend and personal asset manager, Larry Fink. There was no way any bill regulating passive asset managers was going to make it out of committee in either house, much less wind its way through the entire process and land on President Biden’s desk. The expectation that such a thing could happen was absurd.
And yet asking was still important.
By asking – and going on record in the process – the editors at Bloomberg gave the idea that passive investors should, indeed, be passive a measure of gravitas. More to the point, especially in the current market climate, they gave the idea non-partisan legitimacy.
It’s important to remember, along these lines, that the editorial board’s boss – that is to say the guy who owns 88% of the company for which they work – is a longtime advocate of imposing strict national and supranational regulatory measures on corporations, compelling them to take overtly political positions. Michael Bloomberg is the guy who turned SASB – the Sustainability Accounting Standards Board – into a bona fide political and market operator (and helped it evolve into the International Financial Reporting Standards Foundation). He’s also the guy who owns consulting and finance operations that generate billions of dollars working with companies to advance their “sustainability” capacities. He’s the co-founder of GFANZ, the Glasgow Financial Alliance for Net-Zero. He’s the UN Special Envoy for Climate Ambition and Global Ambassador for the UN’s Race to Zero Campaign. In short, the editors of Bloomberg all work for the guy who has been pushing the same agenda on corporations as Larry “Sustainability First” Fink and the rest of the massive passive asset managers. Yet they still broke bad on the massive passives.
To be clear, I think Michael Bloomberg almost certainly has an angle he’s playing here. I just don’t know what it is. And in any case, the editorial board’s call to Make Passive Passive Again was still a big deal – especially in light of what’s happening right now in Washington and on Wall Street:
BlackRock and Vanguard have cancelled meetings with companies in the middle of shareholder battles because they fear it could violate guidance on investor activism that the US Securities and Exchange Commission issued last week.
Large asset managers typically talk with companies about voting ahead of activism campaigns and also about routine proxy ballot issues at annual shareholder meetings.
But that practice has been called into question by the SEC’s guidance, which has been widely interpreted as an attack on using environmental, social and governance factors in investing. The change imposes more onerous regulatory requirements on fund managers that may be seeking to influence corporate behaviour.
Specifically, the SEC issued guidance clarifying some of the differences between passive and active management and the forms required of asset managers, warning that those who engage in behavior intended to coerce corporate management on particular policies may be crossing the line from passive to active. “Generally,” the guidance notes, “a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more,” remains passive (and files form 13G). But “A shareholder who goes beyond such a discussion…and exerts pressure on management to implement specific measures or changes to a policy may be ‘influencing’ control over the issuer” and may, therefore, be considered an active shareholder (required to file form 13D).
In other words, “engagement” on E and S, in particular, may no longer be permissible by passive managers. If you happen to be an avowedly passive asset manager, with nearly $12 trillion in assets under management, that has, nevertheless, built its investment strategy over the last few years on engaging with corporations on E and S matters specifically, then this is kind of a big deal.
One should not operate under the assumption/delusion that this guidance is the end of the active vs. passive question on engagement. It is almost certainly only the beginning. Additionally, the fight over passive and active asset management doesn’t necessarily answer all the questions that remain regarding ESG and related practices. Still, it is an important step, one that will change much about how the massive passive firms operate – at least for the time being.
Of course, it would be a much bigger, much more permanent step if Congress had followed the Bloomberg editors’ advice, taken up the task, and not forced the SEC to handle the matter. But in an imperfect world, you take what you can get.
The members of the editorial board at Bloomberg deserve credit for putting the problems associated with the massive passives on the public agenda. Those problems are manifold, and the sooner we, as a nation, get to work on them, the better.
