The Market Can Curtail Woke Fund Managers

Sponsors of the Index Act have identified a real problem. Their solution won’t be effective.

By Vivek Ramaswamy and Riley Moore, June 9, 2022

Senate Republicans recently introduced the Investor Democracy Is Expected Act, also styled the Index Act, which would require passive investment-fund managers that own more than 1% of a public company to collect instructions from their clients on how to vote their shares. The senators are right to focus on a major problem: The three largest passive asset managers control more than $20 trillion and vote nearly one-quarter of all shares cast at corporate annual meetings to support social agendas disfavored by many Americans whose money they manage.

But as long as BlackRock, Vanguard and State Street represent the largest shareholders of America’s public companies, they will disproportionately influence the behavior of those companies, regardless of whether their clients regain the power to vote their shares.

As a practical matter, most individual investors in index funds can’t cast informed votes at the shareholder meetings of portfolio companies. An individual investor in Vanguard’s total stock-market index fund would have to cast tens of thousands of votes each spring for the stocks held in that fund alone.

Further, the capital managed by BlackRock, State Street and Vanguard is often allocated to these firms not by individuals but by intermediaries such as state and employee pension funds. These institutions generally take their voting directions from two firms, Institutional Shareholder Services and Glass Lewis, which openly embrace the same political orthodoxies as the big three asset managers.

Certain states have already regained voting power from the big three, yet early evidence suggests they have performed poorly on voting in accord with their citizens’ wishes. According to Insight ESG Energy, a governance watchdog that grades the fiduciary performance and energy literacy of fund managers, BlackRock, State Street and Vanguard earned grades of C-minus, C and C-plus, respectively, for their 2021 voting behavior. Pension funds in Georgia earned an A, but Florida, Texas and Idaho earned grades of D-minus, D and D, respectively.

That’s in part because Florida and two large Texas pension funds last year joined the big three to elect three dissident directors to Exxon Mobil’s board to implement a more aggressive climate-change strategy, after which Exxon Mobil reduced its oil-production targets through 2025 from its earlier forecasts. One of the Texas pension funds also voted for shareholder resolutions requiring banks to restrict financing to new fossil-fuel projects. As Texas’ democratically elected Lt. Gov. Dan Patrick has observed, it strains credulity to believe that the votes accurately represent the intentions of Texans and Floridians whose money is invested in these pension funds.

Most importantly, shareholder voting itself represents only the tip of the iceberg in shareholder-led social advocacy, because very few corporate decisions require a shareholder vote. BlackRock boasts that in the first quarter of 2022 alone, it “engaged” 719 public companies on topics including “climate risk management, environmental impact management, human capital management, and social risks and opportunities.” BlackRock CEO Larry Fink writes an annual letter to America’s CEOs. In this year’s letter, he demanded that they set “short-, medium-, and long-term targets for greenhouse gas reductions” and “issue reports consistent with the Task Force on Climate-related Financial Disclosures.” In his 2020 letter, he told portfolio companies to publish disclosures in accordance with the Sustainability Accounting Standards Board.

These informal yet heavy-handed forms of advocacy are often more influential than shareholder votes. A 2021 study by researchers at the University of Colorado at Boulder, the University of Georgia and Penn State found that within 30 days of Mr. Fink’s annual letter, BlackRock portfolio companies tend to file Form 8-Ks—required by the Securities and Exchange Commission of public companies to disclose significant events—containing similar language to that in Mr. Fink’s letter on issues like climate change. The authors also observe that the annual letter caused companies to alter their advocacy efforts to align with Mr. Fink’s recommendations on topics such as environmental regulation. Mr. Fink said at a 2017 conference that “you have to force behaviors, and at BlackRock we are forcing behaviors.”

The aggregation of capital in the hands of three firms—and the associated power to shape corporate America’s social agendas—is an anticompetitive problem that demands a competitive market solution. One of us (Mr. Moore) is a state treasurer who has taken steps to cut ties with large asset managers that fail to advance the interests of his state’s citizens. This is a type of market response: State treasurers aren’t market regulators, but they are market participants who allocate capital on behalf of their constituents. Moving money has a greater impact than reclaiming voting power.

A key limitation remains: the absence of large asset managers that take different approaches to shareholder advocacy. Invesco, the fourth-largest U.S. provider of exchange-traded funds, now makes declarations resembling those of BlackRock: “Asset managers have a crucial role to play in supporting investment aligned with global efforts to reduce the impact of climate change on our planet”; ESG—an acronym for environmental, social and governance—“is something that’s fundamental to investing”; “we’re well down the path of embedding ESG in everything we do.” The big three may soon become the big four.

That’s why one of us (Mr. Ramaswamy) recently created an asset manager that guides companies to focus exclusively on product excellence, not politics. More competitors are needed.

An unintended consequence of the Index Act may be to quell the current uproar against the big three without achieving the desired intent of restoring the voices of individual investors. This may explain why BlackRock now publicly favors ceding voting power to its clients while keeping its asset base and fees, and influence, intact. Kudos to the Index Act sponsors for focusing on the problem. Now it’s up to the market to fix it.

Mr. Ramaswamy is executive chairman of Strive Asset Management and the author of “Woke, Inc.: Inside Corporate America’s Social Justice Scam,” and the forthcoming book “Nation of Victims: Identity Politics, the Death of Merit, and the Path Back to Excellence.” Mr. Moore, a Republican, is treasurer of West Virginia.

Read the article from Wall Street Journal here.