26 Jul Pretending They’re Not Caught
As you may have heard, the other day, BlackRock – the Galactic Empire of stakeholder capitalism – announced that it is taking further steps to blunt the most potent criticism of its ESG-related behavior. For years, ESG critics – ourselves included – have chided BlackRock and the other large mutual/index fund managers for “usurping” the shareholder rights of their customers. By voting the proxies associated with the shares purchased with customer funds, the Big Three and others have literally been using other people’s money to achieve their preferred outcomes. Whether those outcomes are considered purely material or politically tinged, the results have nevertheless been the same: the massive passives have been using our money as leverage for their purposes.
On Monday, however, BlackRock announced that it is expanding its “proxy voting choice” program to specific retail investors, giving those investors a handful of options in determining how their proxies should be cast:
A representative for New York-based BlackRock said it plans to announce on Monday that investors in its iShares Core S&P 500 ETF (IVV.P) will be able to chose among a range of policies to determine how the fund votes their shares at corporate annual meetings….
Investors will not be able to specify votes in specific company elections. But the program meant for the 2024 proxy season still marks a significant expansion of BlackRock’s efforts to give investors control….
So…this is good news, yes? Well…no. It’s not. It is, rather, what one might call putting lipstick on a pig. Beating us to the punch, the editorial board of The Wall Street Journal wrote the following in a blistering takedown of BlackRock’s latest attempt to legitimize its politicization of capital markets:
Nearly all of BlackRock’s pre-selected voting policies are crafted by the proxy advisory duopoly of Glass Lewis and Institutional Shareholder Services, or ISS, both of which support ESG investing. These include Glass Lewis’s Climate Policy and ISS’s Socially Responsible Investment Policy. Even options that aren’t ESG-focused on their face, such as ISS’s Catholic Faith-Based Policy, support things such as emissions reductions, board diversity quotas and racial equity audits.
“BlackRock is committed to a future where every investor can have the choice to participate in the shareholder voting process,” the company’s global head of investment stewardship said. OK, but they still can’t truly choose how to vote….
Vanguard and State Street launched similar initiatives earlier this year. Vanguard’s four options included its own recommendations, a company board-aligned policy, a Glass Lewis ESG policy, and abstention.
State Street’s seven voting options, all prepared by ISS, are mostly ESG-aligned, including one based on the AFL-CIO guidelines. Another “seeks to promote support for recognized global governing bodies promoting sustainable business practices advocating for stewardship of environment, fair labor practices, non-discrimination, and the protection of human rights.”
None of this should surprise anyone. This was always going to be the case. This was always going to be the way that BlackRock and the rest structured their voting “choice” options. Their use of customer funds is exceptionally powerful, exceptionally critical to the conditions they carefully constructed to give themselves greater engagement power with corporate executives than any investors have ever had before. And they were never, ever going to give that up voluntarily.
The editorial board at the Journal suggests that this is all part of an effort by the Big Three to forestall legal trouble that they might otherwise face from Republican state attorneys general, who have been sniffing around ESG-management companies. It also suggests that this effort – as patently transparent as it is – could backfire on the big firms, increasing the AGs’ antitrust concerns.
We agree – on both counts. At the same time, we’d argue that the Journal doesn’t go far enough, isn’t cynical enough about what BlackRock and the others are doing here.
We would have had this piece done and out to you about three hours ago, if we hadn’t spent at least that long scouring the interwebs for a video of the scene from “Tequila Sunrise” in which Detective Nick Frescia (Kurt Russell) says to his former best friend and former drug dealer Dale McKussic (Mel Gibson): “I caught you. You can’t pretend you’re not caught!” Apparently, however, this is the one damn thing in the world that’s not squirreled away in some corner of cyberspace.
In any case, this is what is happening with BlackRock (and the rest). They set up a scheme whereby they were able to become the largest and most powerful influencers in the corporate world. They used that scheme to push agendas that often had nothing to do with the material conditions of publicly traded corporations and everything to do with the political predilections of the ruling class. In time, they got caught. We caught them. And now, they’re pretending they didn’t get caught. They’re pretending that they never wanted all this “responsibility” in the first place and they’re more than happy to return the previously usurped shareholder rights to their rightful owners. But that’s just not true. They’re not willing to return those rights. They’re not willing to return to being mere fiduciaries. They have too much at stake.
In his RealClear Markets column last week, our friend Scott Shepard, the Director of the Free Enterprise Project, quickly and thoroughly debunked the preposterous claim that the two dominant proxy advisory firms – ISS and Glass Lewis – are neutral players in the ESG game. The fact that BlackRock et al. would continue to pretend otherwise and would continue to offer guidance from the two as a step toward giving small investors “the choice to participate in the shareholder voting process” is as telling as it is contemptuous. The big boys know they’re not offering a real choice. Indeed, that’s the only reason they’re offering a choice at all – because they know that it won’t make a bit of difference.
We hate to seem overly cynical here, but to be honest, we’re not sure any other reaction is appropriate. The simple fact of the matter is that the ESG/stakeholder regime in the United States relies heavily on the weight brought to bear on corporations by the Big Three and other passive management giants. BlackRock and its allies are not simply trying to preclude legal action against them. They are trying to preserve a politicized investment system that has already fallen behind its global counterparts and that they believe cannot afford to fall even further behind. To Larry Fink and friends, this is everything. They can’t give it up. They won’t give it up, no matter what they say. This is so important to them that they’d spend tens of millions of dollars (at least) constructing a system that looks like it enables “choice” but does nothing of the sort. That’s a small price to pay for the maintenance of their position in this scheme.
We try very hard not to join some of our friends in the business in drawing the conclusion that public capital markets in this country are wholly and irredeemably corrupt. The actions of BlackRock and the rest sometimes make that very, very difficult to do. They’re caught. They know they’re caught. And yet, they’re just going to pretend they’re not.
If they’re allowed to get away with it, everyone will pay the price.
