Research: Asset Management Giants Don’t Walk the Walk On Long-Termism

A new paper says proxy voting records show that BlackRock, State Street and Vanguard often vote in favor of short-term proposals.

(Chris Ratcliffe/Bloomberg)

(Chris Ratcliffe/Bloomberg)

While BlackRock, State Street, and Vanguard may benefit most from promoting the longevity of the companies they are invested in, their proxy voting records don’t always reflect that, according to recent academic research.

Proxy voting records on share buybacks and mergers and acquisitions show that these “Big Three” asset managers are voting in favor of proposals that could be harmful to shareholders long term, according to a working paper by Jan Fichtner and Eelke Heemskerk of the University of Amsterdam’s Corpnet research group, which seeks to “understand global networks of corporate control in contemporary global capitalism,” its website says.

The paper, entitled “The New Permanent Universal Owners: Index Funds, (Im)patient Capital, and the Claim of Long-termism,” has struck a nerve since its publication on February 7, according to its authors.

“It seems to touch on a certain amount of emotion,” Fichtner said by phone Monday. “We are observers, and we observe that there is a change in financial markets. The way we look at it, there is a certain amount of concentration of corporate control. We believe that is relevant.”

BlackRock, State Street, and Vanguard collectively control 90 percent of assets under management in passive equity funds, according to the paper. What’s more, the aggregated average ownership of the S&P 500 by the so-called big three hit 20 percent for the first time in early 2018, the paper said.

Heemskerk and Fichter used proxy votes in favor of share buybacks and mergers and acquisitions — moves often demanded by activist shareholders — to measure how often the asset managers pushed for provisions that the authors believe are short-term in nature.

“We used share buybacks because if a company uses them, the money is not available for research and development or employee training,” Heemskerk said by phone. The paper notes that in the past, Larry Fink, the chief executive officer of BlackRock, has argued against the excessive use of share buybacks.

But the data show that BlackRock – and State Street and Vanguard – voted in favor of buybacks more than half the time at proxy meetings in the United States, the United Kingdom, France, Germany, and Japan from 2012 to 2017, according to the paper.

The results were similar when it came to mergers and acquisitions. The managers voted in favor of every measure on a merger or acquisition at a proxy meeting in the United States from 2012 to 2017. Outside of the United States, the managers voted in favor of these measures far less often, though, the data show.

“While arguably a less extreme indicator for corporate short-termism than buybacks, M&A do represent a short-term measure that is often demanded by impatient capital such as activist hedge funds,” the authors wrote.

At least two of the firms took issue with the authors’ arguments, however.

“At the outset, we fundamentally disagree with the assertions outlined in this paper,” a spokesperson for Vanguard said via email, asserting that the firm is not disregarding its long-term focus when it comes to proxy votes. “When we encounter poor governance practices that could threaten long-term shareholder value, we can speak with our voice and our vote on behalf of each of the Vanguard funds.”

BlackRock vice chairman Barbara Novick said the firm carefully considers each share buyback and M&A deal.

“Each deal has to be looked at on its merit,” she said by phone Monday. “We will talk to all the parties involved and engage with them. We’ll listen to all the arguments and form our own opinion.”

Novick added that the same process holds for share buybacks.

State Street declined to comment.

[II Deep Dive: Larry Fink to CEOs: Contribute to Society or Lose BlackRock’s Investment]

So why do the researchers think these firms are voting in favor of these short-term measures? The paper’s authors said the firms may vote in favor of measures that promote short-termism because they lack the ability to exit from companies that are not focused on long-term performance. They also said it is difficult for these firms to represent the interests of all of their clients, because these interests are so diverse.

The authors concluded that the so-called big three now face a strategic dilemma.

“The concentration of ownership in their fund families was never on purpose; the concentration of voting power is a side effect of their successful business model,” they wrote. “How can they now develop a responsible stewardship role without increasing their operational costs, without raising antitrust concerns and without undermining their business model?”