On October 7, 2021, BlackRock announced that it will allow institutional clients to directly cast votes tied to their investments. Despite this effort to seemingly surrender influence, major asset managers will remain the hegemon in corporate governance, until we decide otherwise.

In their seminal 1932 piece, The Modern Corporation and Private Property, Adolf Berle and Gardiner Means explained that the wide distribution of shareholdings in large public companies made it impossible for shareholders to perform their essential responsibility of monitoring corporate actors. The economic rationale was quite straightforward: with wide dispersal of share ownership, no shareholder has enough skin in the game to spend the considerable amount of time and money necessary to effectively monitor directors and management. Thus, shareholder scrutiny, the essential private mechanism by which companies are held accountable, is rendered ineffectual. Berle & Means’ theory was highly influential and served as a guiding philosophy for the New Deal policies that sought to use government regulation to fill the gaps left by traditional corporate governance.

Fast forward nearly a century, and the shareholdings of public companies are no longer widely dispersed. Instead, major asset managers command significant holdings in the largest publicly traded corporations. In a well-documented phenomenon, BlackRock, Vanguard, and State Street collectively own about 22% of the average S&P 500 company, a figure that shows no signs of slowing down.

This new concentration of ownership may seem like a method by which the free market can address the issues identified by Berle & Means. However, this is not the case. First, asset managers are not true owners of the shares they manage. Rather, in exchange for buying and selling shares on behalf of their clients, asset managers collect management fees in the form of a small percentage of assets under management. Accordingly, a performance increase at any one portfolio company is negligible from the asset manager’s perspective. Therefore, asset managers have concerningly weak incentives to effectively monitor each of the thousands of companies in which they hold shares.

Second, and more fundamentally, even if concentration of institutional ownership represents an opportunity to address the shortcomings of dispersed ownership, should the likes of BlackRock be given this responsibility? In the wake of the Great Depression, it was the government that stepped in on behalf of the public to address the excesses of directors and management. Now, given its sheer size but also its express willingness to engage, BlackRock exercises arguably the greatest influence on corporate governance apart from the government itself. Whether or not it should is a question that is not lost on commentators and regulators, as evidenced by numerous academic papers on the subject and public calls by regulators for increased safeguards. In response to the growing criticism and risk of regulation, on October 7, 2021, BlackRock transferred power to its clients. However, the extent of this transfer is unlikely to make a meaningful impact.

While many institutional clients are able to vote shares managed by BlackRock for the first time, they may still opt to delegate voting authority to BlackRock. Accordingly, this policy represents an expansion of a similar policy that has applied to equity separate accounts at BlackRock for some time. However, among accounts that were previously eligible to withhold voting authority from BlackRock, only approximately one-quarter actually did so (‘Specifically, some of our equity separate account clients choose not to delegate voting authority to BlackRock. We estimate that approximately one-quarter of equity separate account assets managed by BlackRock do not delegate voting authority to BlackRock’ (Blackrock Viewpoint, July 2018)). Combine this figure with BlackRock’s estimate that its new policy will affect 40% of its equity investments under management, and only about 10% of equity assets currently managed by BlackRock will escape from BlackRock’s domain at shareholders’ meetings. This result should be expected. The incentive to monitor among widely dispersed shareholders, of which any individual institutional client of BlackRock is a part, is exceedingly low. Thus, despite what BlackRock claims about the widespread desire among institutional clients to exercise greater stewardship over their investments, this policy is unlikely to result in a major shift of voting power away from BlackRock.

Consequently, the corporate governance issues outlined by Berle & Means a century ago still remain. But, now, these problems coincide with existential issues such as civil rights and climate change, which have made their way into the boardroom and demand immediate attention. Despite what they claim, it is not clear whether major asset managers, with their increasingly significant public holdings, are the appropriate entities to address these problems. Instead of relying on the futile gestures of private actors with inadequate incentives, it is essential that other avenues for reform are considered in order to properly address growing issues of public concern from which corporations are no longer isolated.

 

John Friess is a JD/LLM Candidate at University of Michigan Law School and Bocconi University.