11.03.2022

Larry Fink: Transformative Power of Choice in Proxy Voting

11.03.2022
Larry Fink: Transformative Power of Choice in Proxy Voting

Dear BlackRock clients and corporate CEOs,

Thirty-four years ago, when my seven partners and I founded BlackRock, our goal was to build an asset management firm centered on meeting the needs of our clients. We wanted to offer a range of choices – and use technology and global insights – to help clients meet their unique investment goals: whether that’s a pension plan serving teachers and firefighters or an individual investor saving for retirement and a child’s education. In the decades since, more and more people have entrusted BlackRock to manage their investments, in large part because we offer more choice than any other firm in our industry.

Today, we believe that choice can and should extend, not just to the strategies in which clients invest, but also to how clients engage in the governance of companies their money is ultimately invested in. At BlackRock, we’re doing this through what we call Voting Choice: a capability that leverages technology and innovation to give our clients – who are the true owners of the assets we manage – the option to engage much more directly in proxy voting.

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One year after its launch, I am convinced that Voting Choice has the power to transform the relationship between asset owners and companies. And, if widely adopted, it can enhance corporate governance by injecting important new voices into shareholder democracy.

We’ve seen tremendous interest from our clients since launching a year ago. Nearly half of all our index equity assets under management are now eligible for Voting Choice. This includes all the public and private pension plan assets we manage in the United States, as well as retirement plans serving more than 60 million people around the world. To date, clients representing 25% of the $1.8 trillion in eligible assets are enrolled in Voting Choice, and interest is only accelerating: The number of clients interested in enrolling has doubled since May.

It’s clear there are investors who don’t want to sit on the sidelines; they have a view on corporate governance, and they want a meaningful way to express those views. While some pension funds have long been actively involved in corporate governance, we’re working to make that easier and more efficient for a larger number of investors. We are committed to continually evolving this offering.

On the anniversary of its launch, we are expanding Voting Choice further: by extending the pool of eligible client assets that can participate, expanding the range of voting guidelines from which clients can choose, and working to bring this capability to individual investors in select mutual funds in the United Kingdom.

In recent years, I’ve written an annual letter to the CEOs of the companies in which our clients are invested to advocate, on their behalf, for governance and business practices that we believe will promote long-term shareholder value. As I’ve said in these letters, the money we manage is not our own, it belongs to our clients. The very first letter I wrote, in 2012, was devoted to explaining how and why BlackRock focused on corporate governance to enhance financial outcomes for our clients, the asset owners. I am writing today both to our clients and to corporate CEOs to explain how I believe Voting Choice can transform the dialogue on corporate governance.

The importance of stewardship

While shareholder voting rights have been a feature of modern public companies since the early 1930s, the importance of proxy voting and engagement with companies grew dramatically as more people entered the capital markets. Mutual funds made it possible for households to invest efficiently, and index funds made investing even more affordable and accessible. By 2021, nearly half of American households owned a fund.1 But for many funds, proxy voting laws, regulations, and technology have so far kept voting out of reach.

Unlike actively managed funds, which can and do sell the stock of a company they perceive as having poor corporate governance, index funds are the ultimate long-term investors. Actively managed mutual funds across the industry in the U.S. typically hold a stock for just 18 months on average. By contrast, the average time a comparable index fund holds a stock is 20 years.2

BlackRock and other asset managers have invested in stewardship teams to provide a critical bridge between asset owners (like pension plans, 401(k) plans, and individual investors) and the companies in which their money is ultimately invested. Our stewardship team engages with companies and their management teams on questions of corporate governance with a single goal: generating long-term, durable returns for our clients.

For the clients who continue to use BlackRock as their fiduciary for stewardship, we will be steadfast in our year-round focus on how companies can generate long-term profitability for their shareholders.

The potential for a new era of shareholder democracy

While many asset owners are pleased to have our stewardship team serve as a bridge between them and the companies they are invested in, others want the choice to actively participate in proxy voting. That’s partly being driven by the public debate around issues that can impact the value of companies and how different asset owners choose to navigate them.

BlackRock began working a few years ago on the operational and technical innovations, and other changes necessary to provide more clients with the opportunity to actively participate in how proxy votes are cast. Today, this option is available where the operational and legal framework makes it possible, including for the vast majority of our global institutional clients. In the U.S., we’ve been able to extend Voting Choice to certain individual investors who invest through our Aperio division. We are the only firm offering Voting Choice at this scale.

Working to bring Voting Choice to individual investors

Until now, technological, operational, and regulatory hurdles have, for the most part, allowed us to offer voting choice only to certain institutional investors like pension plans, endowments, and insurance companies.

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As I’ve said before, my hope is that in the future, every investor – ultimately including individual investors – has access to voting choice, if they want it.

That’s why I’m so pleased that BlackRock today also announced we are working with a digital investor communications platform in the UK to enable investors in select mutual funds to exercise choice in how their portion of eligible shareholder votes are cast. This is an industry first to translate individual investor views into voting instructions.

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It is an undeniable fact that technology is making it easier than ever for more people not only to access but also to play an active role in capital markets. When mobilized by technology, shareholders can significantly influence a company’s future. There is no going back. The next generation of investors will increasingly demand to be heard. Technology has the potential to transform corporate governance in ways that we cannot fully imagine.

Of course, we need to be realistic about how much time individuals – and even some institutional investors – will spend on corporate governance. Who would expect a typical individual to wade through thousands of proxy questions every year? And the reality is that, until we have advances in technology, the costs of doing so would be many multiples of the cost of the fund itself. But we do believe, for example, that all investors should be able to pick from a range of voting policies to reflect their preferences and that it should be as easy to do so as it is to buy a mutual fund or ETF on your mobile phone today.

Offering voting choice more widely to individual investors will take the combined efforts of policymakers, regulators, fund boards, asset managers and other participants in the proxy voting system. As we work to further democratize voting, we are eager to work with policymakers and regulators to explore what changes in law and regulations are required and examine how operational infrastructure may need to be adapted to support those changes. We believe that bringing more voices to the table will lead to stronger, more accessible financial markets.

We’re also pleased to see other firms joining this effort in a variety of ways. For example, one of our peers recently announced that they would begin polling individual investors on corporate governance issues to understand client preferences regarding key proxy issues. We urge others to look for ways to help investors of all types – institutional and retail – have more of a voice in our shareholder democracy.

Corporate accountability requires informed voting and engagement

We believe that voting choice can empower more asset owners to have a deeper and more direct connection to the companies they are invested in and allow company management to better understand the views of these asset owners on critical governance issues.

Our clients know that informed proxy voting decisions require investment in terms of time, people, and expertise. And, we know that our clients take their responsibility as stewards of capital very seriously. While proxy advisors have a role to play in this process, overreliance on outsourcing to proxy advisors risks distorting the relationship between asset owners and the companies they invest in.

This new ecosystem will also pose challenges for CEOs and their companies. Those of us who lead public companies will have a broader set of shareholders with whom to engage. Companies may need to develop new models of engaging with asset owners on their most important voting matters. This may take time to evolve.

Engagement between companies and their owners is one of the foundational elements of our modern system of capitalism. We can now use technology and innovation to enhance that engagement, broaden the touchpoints a company has with its owners, and bring more voices into our capitalist system. This revolution in shareholder democracy will take years to be fully realized, but it is one that, if executed correctly, can strengthen the very foundations of capitalism.

Source: BlackRock

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