Stewardship Theater

Abstract

Large asset managers like BlackRock and Vanguard have amassed staggering equity holdings. The voting rights that accompany these holdings give them enormous power over many of the world’s largest companies. This unprecedented concentration of influence in a small group of financial intermediaries is a pressing policy concern. While law and finance literature on the topic has recently exploded, no one has offered a satisfying theory to explain their voting behavior. Existing work tries to understand their approach to voting in conventional terms—as an attempt to improve the performance of portfolio firms—but this is not why large asset managers vote the way they do.

In contrast, this Article offers a political theory of asset-manager voting. Because of the power they wield, and the high stakes involved, large asset managers risk severe political blowback from looking like reluctant participants in corporate governance and from voting counter to the views of powerful politicians. As a result, politics rather than finance drives their decisions.

Politically motivated asset-manager voting is problematic. It leads to market uncertainty and threatens the core division between business and government. It is also an illegitimate use of the voting power that asset managers are duty-bound to exercise on behalf of the shareholders in the funds that they oversee. But voting authority is a privilege not a right. To draw politics out of corporate governance, regulators should require that asset managers seek input from fund shareholders and reflect that input in their votes.

Keywords: mutual funds, agency costs, index funds, Vanguard, BlackRock, State Street, Big 3, asset managers, proxy voting, shareholder proposals, ESG, securities law, corporate law, Exxon

JEL Classification: K22