BlackRock’s New Found Power

By, Robert J. Moss

With US$6.8 trillion in assets under management (AUM), BlackRock has become a force to be reckoned with. Scrolling through the top equity ownership of North America’s largest public corporations, BlackRock becomes a recurring name, demonstrating the immense influence the asset manager has accumulated.

Before their trillions, BlackRock was founded in 1988 by current CEO, Larry Fink, and seven others. They provide mutual fund and ETF products to institutional and retail clients. While BlackRock offers both types of products, the asset manager’s claim to fame has been pioneering ETFs for the mass market. With retail investors turned off from high management fees in mutual funds and often lackluster performance, BlackRock has capitalized on one of the most important recent trends in finance.

ETF stands for exchange traded product. These products are typically passively managed, meaning their holdings replicate an index. For example, BlackRock’s iShares Core S&P 500 Index ETF replicates the S&P 500, the top 500 publicly trade US companies by market capitalization. Since it’s passively managed, BlackRock saves on the cost of research and can charge a management expense ratio much lower than traditional, actively managed mutual funds.

It’s also important to note that BlackRock is not alone in capitalizing on the move towards ETFs. They have US$1.5 trillion in ETF AUM while Vanguard, State Street, Invesco, and Charles Schwab have US$1.0, US$0.6, $0.2, and US$0.1 trillion, respectively.

With massive inflows into their ETF products, BlackRock’s proxy votes have grown comparatively. Proxy votes are voted on by a company’s shareholders. They vote on things such as electing directors, approving executive compensation packages, approving auditors, and any special votes put forth by fellow shareholders. Typically, common shareholders receive one vote per share. The ETF manager, BlackRock in this case, owns the underlying securities in the ETF. Investors in the ETF just own that product. As a result, BlackRock’s maintains all the proxy voting rights for the underlying securities.

BlackRock has acknowledged the responsibility that comes with this power, saying they, “vote to achieve the outcome that, in our professional judgement, is in the best long-term economic interest of our clients.” Handling this responsibility is BlackRock’s Investment Stewardship team.

In 2018, Larry Fink wrote a public letter to all CEOs claiming the era of indexing required an evolution in shareholder engagement. He challenged CEOs to clearly articulate their purpose and long-term strategy while considering the societal impacts such strategy may have. Larry Fink also continued to push the need for board diversity.

BlackRock is a prime example of active ownership, using your rights as a shareholder to encourage change. They foster this change through regularly meeting with company management to engage on certain issues. Given their size and importance they can have these meetings with management. Naturally, the question is how effective are these engagements?

In their 2019 Investment Stewardship Annual Report they claimed 2,050 engagements with 1,458 companies. They recounted contacting approximately 30.0% of the companies on the Russell 1000 in 2018 because they had less than two women on their board and threatened to vote against director nomination if diversity wasn’t improved. As of 2019, BlackRock claimed only approximately 20.0% of companies on the index had less than two females on their board. While BlackRock would consider that as a win regardless, it is hard to attribute the real impact of engagements given they are private.

There is also the debate of whether this type of active ownership in passive investments goes far enough when it comes to environmental, social, and governance (ESG) issues. Some might argue investors need to go further and invest in ESG specific ETFs where the companies selected have strong ESG track records.

BlackRock argues in their 2019 Investment Stewardship Annual Report that their control of global equity markets is often exaggerated. They cited World Bank statistics that showed they only have 4.06% of global equity markets in 2019. Likewise, the top 10 managers owned 17.00%. However, there has clearly been a consolidation of ownership in equity markets evidenced by the billions of inflows into ETFs over the last decade.

While they obviously do not control global equity markets, BlackRock has real power through the access its ownership affords. The consolidation of equity markets is likely to continue and the impact of which will no doubt be a hot topic for investors, financial professionals, and policymakers in the future.

Featured image by Shirly Niv Marton.

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