Vanguard and Blackrock, two of the world’s largest fund managers, recently warned corporate boards to expect tougher scrutiny on governance issues during this year’s proxy balloting. Growling like this can be an effective communication strategy, up to a point.
Proxy season is about to start, and fund managers will soon review voting materials for the thousands of companies in which they invest. Fund managers have a fiduciary duty to their clients – retirees, small investors and pension plans – to cast votes in accordance with their interests on things like executive pay and the election of board directors.
Vanguard and Blackrock have told companies they will be taking a tough stance on proxy matters this year. According to The Wall Street Journal, Vanguard CEO F. William McNabb III sent a letter to several hundred companies urging their boards to be “substantially independent of management.” Blackrock, for its part, is said to have revised its proxy guidelines and might oppose directors who’ve served too long on company boards.
With a combined $7.65 trillion of client assets, public companies take note when Vanguard and Blackrock start to bark.
Sabre-rattling like this can be a good public-relations tactic. It positions an investment group as assertive and confident, and it deflects attention away from difficult issues. Best of all, a tough-sounding letter gives the appearance of being aggressive without having to do anything substantive. And if your letter gets covered favorably in the press, its effect is magnified. Vanguard’s letter mirrors ones sent by BlackRock CEO Lawrence Fink in 2013 and 2014 that attracted favorable press coverage.
But this strategy has its limits because at some point letters need to be backed up by actions. That is where Vanguard and Blackrock are vulnerable.
The proxy-voting records show these big firms have seldom used their considerable ballot power by voting against management. Blackrock opposed a slim seven percent of corporate directors last year, down from eight percent the year before. Vanguard opposed just nine percent of management recommendations on compensation.
Nor do the investment firms say how often their votes differed from the recommendations of the major proxy-advisory firms, ISS and Glass-Lewis. Proxy advisors have become enormously influential as large investors seek to streamline their voting policies, lower costs and reduce the risk of litigation. If Blackrock and Vanguard vote largely in tandem with the proxy advisors, their letters ring hollow. Clients might start to question whether the governance analysts employed by these firms are little more than high priced marketing fluff.
The reporters at the Wall Street Journal, happy to have an advance peek at the letter and exclusive access to Vanguard’s CEO, steered clear of such hard questions.
Blackrock and Vanguard might be taking a page out of the Washington playbook. There the tactic of substituting high minded talk for real action is raised to an art form. When an issue flares up, it doesn’t take long for a member of Congress (usually a committee chair) to fire off a letter to a federal agency, trade group or even a large corporation demanding answers. Investigations and public hearings usually follow, and those summoned almost never look good under the glare. It all makes for dramatic media coverage but seldom produces good policy. It’s much easier to produce a spectacle than to do the hard, messy work of legislating and governing.
It’s the same story for fund managers. Writing tough-sounding letters to corporate boards and giving media interviews are easy. It’s much tougher to read the fine print in a proxy, exercise independent judgment and vote against management.
Letters from big investors will probably nudge a few companies toward better governance, and that may be enough progress to keep the ink flowing every year. But big investors might turn away from such letters if their voting records come under greater scrutiny and clients pressure them to challenge corporate boards.
That level of activism, common among hedge funds, is rarely seen from traditional money managers, but that might be changing. If it does, we will see them adopt new ways of communicating about governance policies and proxy votes. More disclosure about their voting records could be just the start.
(Disclosure: We advise Wintergreen Advisers, a mutual fund company that has been critical of corporate governance at The Coca-Cola Company and the approach taken by many fund companies when voting on proxy issues.)