Posted at 4:00 p.m.
Suddenly, everything changed. Managers and boards of directors of public companies must, with more or less enthusiasm, come to terms with the expectations, pressures and wishes of large investment funds, which have developed a belated social conscience in terms of the environment and societal issues.
The economic interest of shareholders, until recently the dominant objective under the term “creation of value for shareholders”, is now subordinated to obligations of a completely different order.
It is no longer enough for the company to rigorously respect the rules and duties imposed by the legislators, but under the leadership of the large investment funds, it must now make the concerns of all of civil society its own.
Index funds, these immense so-called “passive” funds because their management does not involve any choice of securities, but only a faithful reproduction of the performance of the major stock market indices, claim to respond to the wishes of their newly aware clients by imposing on companies environmental targets and other non-economic goals as a condition of supporting current board members.
To fully understand the scope of the issue, it is necessary to have a fair appreciation of what these index funds, often traded on the stock exchange (ETFs), represent.
According to data compiled by Bloomberg Intelligence, an S&P 500 company saw an average of 21.2% of its shares held by such funds in the spring of 2022.
The sums invested provide the Big Three — a group made up of BlackRock, Vanguard and State Street – an extraordinary power of influence.
According to various studies, the three managers control on average nearly 25% of the votes recorded (therefore excluding the votes not cast) at the annual meetings of the firms of the S&P 500, and collectively constitute the largest shareholder of nearly 90% of them. they.
These so-called funds passiveat the request of their customers, they say, have therefore become very proactive, even aggressive, wanting to impose on companies objectives and policies in terms of the environment and societal issues.
- Are these funds as proactive as they claim?
- On what basis do these index funds claim that they are only meeting the expectations of their clientele?
Relevant to the first question, a recent study by Bebchuk and Hirst reveals that over a three-year period, no dialogue was engaged with 92.5% of the companies whose shares were held in the portfolio of members of the Big Three.
This is hardly surprising considering that the three firms each had, on average, only 26 employees dedicated to stewardship matters to analyze the documents of more than 12,200 companies held in their various portfolios around the world.
Strangely, however, if these index funds are primarily an investment vehicle, an analysis reveals that no demand made during direct engagements with representatives of the Big Three with company executives focused on issues related to their financial performance.
As for the second question, it remains unanswered for the moment. However, there is no doubt that through his highly publicized speeches advocating a radical change of direction for public companies, the president of BlackRock enjoys considerable informal leadership in these matters.
The fact that the Big Three does not yet fully exercise all the influence it could claim is undoubtedly due to the risk that the issue of its legitimacy will be raised.
Already by announcing annually the social and environmental concerns that should be given priority by the leaders of large listed companies, by influencing the results of votes on shareholder proposals – more and more numerous and increasingly relating to other issues than those related to business—these large managers adopt positions that may differ from those of the savers who give them this influence.
Thus, the former Chief Justice of the Supreme Court of Delaware, Leo E. Strine Jr., has been attacking for a few years the fact that fund managers take often controversial positions without having checked whether all their clients share their orientations. .
Charlie Munger, co-head of Berkshire Hathaway, has publicly expressed concern that the Big Three becomes a new center of power in governance, calling its leaders new “emperors”. Bernie Sanders, champion of the American left, for his part described the power of influence of these fund managers as “obscene” last July.
When a topic brings together actors with such varied political philosophies, the concerns they raise are probably well-founded…and index fund managers should beware.