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Big investment managers such as BlackRock Inc., Vanguard Group, and State Street Corp. have too much sway over the companies they hold and are using it to “play politics” with other people’s money, according to a new campaign launched by members of Washington’s business lobby.
The National Association of Manufacturers (NAM) and other trade associations that make up the Main Street Investors Coalition are billing themselves as advocates for individuals saving for retirement. The coalition is taking on top mutual fund managers and the nation’s largest public pension funds for becoming more vocal on issues from climate change to gun violence, saying it’s not in individual investors’ best interests.
NAM’s members include Exxon Mobil Corp., a company frequently on the receiving end of this kind of shareholder activism, which occurs through proxy votes and talks with companies. The manufacturers association has been lobbying on such activism recently, according to records compiled by Bloomberg Government. The lobbying records also single out the Securities and Exchange Commission’s rule covering shareholder proposals, which have come under fire from other business groups, as well.
“I’m worried about not just how they vote but how they engage companies and how they use their economic power in the political arena,” said Bernard Sharfman, who leads the coalition’s advisory council. Sharfman is a former law professor and an associate fellow at the R Street Institute, a free market think tank.
The fund giants have hit back, saying the point of their voting and engagement is to protect their clients’ investments. BlackRock, Vanguard, State Street, and similar firms have ramped up these efforts as their influence has grown with the rise of passive investing. Investments in passively managed index funds and exchange-traded funds have climbed from $1.8 trillion globally a decade ago to $8.1 trillion today, according to recent research by Morningstar Inc.
“You have this incredible situation where you have all this voting power concentrated in the hands of a few mutual fund advisers,” Sharfman told Bloomberg Law. The coalition, announced May 22, said it wants those who invest in mutual funds via a 401(k) retirement savings plan to have more say in how managers vote their shares.
The group hasn’t gotten into specifics yet on how to give a voice to investors saving for retirement, according to Timothy Doyle, vice president of policy and general counsel at the American Council for Capital Formation (ACCF), another free market think tank that’s a member of the coalition.
“This is about educating people,” he said, with papers, op-eds, and events planned. Doyle said the coalition wants to make sure 401(k) and pension investors “understand what’s going on with their money” and that fund managers “don’t play politics with that money.”
BlackRock, which has been pressing companies on issues such as climate change, diversity, and executive pay, said such efforts are aimed at “maximizing shareholder value,” not social values.
“This is because how well a company is governed, including how it manages its material environmental and social risks, gives us insights into its ability to respond to changes in the business environment and the quality of the management team,” BlackRock spokesman Ed Sweeney said. “Our activities in this area are aimed at maximizing shareholder value, not at implementing social values.”
Vanguard likewise defended its advocacy on issues including gun violence in schools and the opioid crisis. “Vanguard does not engage with companies to further a political or social agenda, but rather, to uphold our responsibilities as fiduciaries and protect the value of our shareholders’ investments,” spokeswoman Carolyn Wegemann said.
State Street didn’t return a request for comment.
The idea of passing voting power on to investors in mutual funds and pension funds has been floated before, according to Jill Fisch, a University of Pennsylvania Law School professor who’s written on the subject. Fisch said the question is whether investors, who have already handed investment decisions over to managers, would want to take on voting responsibilities, as the coalition suggests.
“I don’t think most mutual fund investors want to vote their shares,” she told Bloomberg Law. “They have a hard enough time choosing how to allocate their investments.”
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