Asset Managers Among the Worst-Governed Public Firms, Study Finds

Even firms like BlackRock and State Street that advocate for good governance score poorly for accountability and long-termism in a new analysis.

Illustration by II

Illustration by II

Major shareholder activists such as BlackRock and State Street speak out on governance issues at the public companies they invest in. But do these asset managers actually practice what they preach?

A new measure of governance quality developed by researchers at Swiss business school IMD suggests the answer is no.

The stewardship rating grades listed companies on qualities such as accountability, long-term focus, care for customers, trustworthiness, and prudence. IMD professor Didier Cossin created it with Stewardship Asia Centre chief executive Ong Boon Hwee for their 2016 book, “Inspiring Stewardship.”

“A good business creates value to society, rather than extracting it,” explained Cossin, who also serves as director of the IMD Global Board Center and president of the Stewardship Institute, which he founded. “It’s a concept people generally understand, but isn’t reflected in the market.”

Even standard environmental, social, and governance metrics often fail to separate good stewards from bad, Cossin argued. Commonly used governance criteria — such as whether a board has independent directors — don’t necessarily translate to good stewardship, and can be faked, he said.

To better capture how companies perform in areas like risk management, alignment with stakeholders, and innovation, Cossin used natural language analysis to rate companies based on their own public statements, including 10-K reports and the like.

A company that frequently used words like “currently” or “quarterly” might rank worse on long-termism than a company more often said things like “future” or “decade,” for instance. Similarly, words like “litigation” and “petition” would imply worse relationships with stakeholders than comments regarding “communities” or “transparency.”

In one particularly telling example, Wells Fargo — which came under fire last year for having created millions of fake accounts — used the word “customer” only twice in its 2014 reports, according to Cossin.

When the stewardship language analysis was applied to asset managers, the results were bleak.

“Asset managers are supposed to be well stewarded, but they’re among the worst,” Cossin said.

Asset managers scored below the average S&P 500 company in eleven out of twelve dimensions included in the study: accountability, care for customers, harmony with stakeholders, innovativeness, long-term focus, passion, positivity, proactiveness, prudence, purposefulness, and trustworthiness. The only area in which the average asset manager did better than the typical large public company was identification, a measure of the sense of ownership and identity associated with a company.

Even firms that have taken public stances on issues like climate change and board diversity generally performed worse than the average S&P 500 company. BlackRock, in fact, did worse across all 12 dimensions, though it came close to the typical large-cap company on passion, or expressions of engagement.

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

Compared to other asset managers, BlackRock scored well on measures of innovation, passion, positivity, proactivity, prudence, and trustworthiness.

State Street, meanwhile, earned its highest marks on identification, outperforming the average asset manager as well as the broader S&P 500. The firm lagged the typical large-cap company in every other category, but outscored its peer average on innovation, passion, positivity, and prudence.

The best performing asset management firm was T. Rowe Price. The Baltimore-based company outscored both its peers and the average S&P 500 member on accountability, identification, prudence, purposefulness, and trustworthiness.

Cossin and his research partner Abraham Hongze Lu concluded that T. Rowe Price benefited from being a “pure play” asset manager – in other words, not having as many “distractions and conflicts” as multi-asset managers.

These conflicts – such as simultaneously trying to serve both company shareholders and investors in their funds — can complicate governance for asset management firms, they explained.

Governance problems correlated with worse financial performance. Cossin said the public companies that scored best on his stewardship rating exhibited less down-side risk, with their stocks performing better in market downturns.

“Doing the right thing has the better chance of making money,” he said.