A potential shift in BlackRock's shareholder power that could influence future proxy battles.

• This year, BlackRock is giving shareholders representing 40% of its $4.8 trillion in index assets the power to vote on their own shares during public company annual meetings.
• Proxy battles over shareholder resolutions related to ESG issues, including CEO compensation, climate change, and human capital management, are predicted to be highly contentious once again.
• The huge influence of asset managers such as BlackRock, Vanguard, and State Street Global Advisors over shareholder votes has led to increased scrutiny.

The world's largest money manager and most influential vote holder, BlackRock, is introducing a major change in the way shareholders vote during annual meetings for corporations.

The top four or five asset managers, including , Vanguard and , control a significant portion of outstanding shares in corporations, with some publicly traded companies having up to one-third of investor shares held by these fund companies. As a result, shareholder resolutions often pass or fail based on the big fund companies' vote. For instance, Engine No. 1's surprise win at ExxonMobil last year was made possible by the support of big money managers.

Jack Bogle, the founder of Vanguard Group, cautioned towards the end of his life that one of the greatest risks facing fund giants was a creeping monopoly-like power over shareholder votes, which would attract more scrutiny from politicians and regulators. This concern has been echoed from within the market by Berkshire Hathaway vice chairman Charlie Munger, who has recently criticized the power of index funds. In response to this, BlackRock is taking a new approach in proxy voting for some of its underlying investors this year by giving them back the votes to decide on their own. BlackRock has announced that it will make "pass-through" voting, or what it calls "voting choice," available to approximately 40% of the $4.8 trillion in index equity assets, starting with institutional investors in the U.S. and UK.

BlackRock announced that they believe clients should have more choices when it comes to participating in voting their index holdings, and that this should include proxy voting options.

The future of shareholder influence is expected to grow with the implementation of pass-through voting, although it is uncertain what percentage of institutional clients will utilize the new voting power. This change may extend to competitors of BlackRock, such as Vanguard and State Street Global Advisors, and eventually reach retail investors.

Edmund Reese, chief financial officer at a BlackRock technology partner, stated that other fund managers may follow suit and utilize the pass-through voting service as a competitive advantage to their clients and potential clients.

From BlackRock to black box in future votes

Pass-through voting poses challenges for corporations in predicting the outcome of shareholder measures that conflict with management's stance. With the increasing use of shareholder resolutions, particularly those related to ESG concerns, the power of large asset managers has grown. These asset managers now have investment stewardship teams that prepare detailed policy positions and voting reviews, and engage directly with C-suites. However, this one-on-one relationship with a few top fund companies may no longer be sufficient as more votes are spread across multiple investors and segments, including pension funds and retirement plan participants.

In proxy fights, C-suites face issues with visibility into how a vote may trend when more underlying shareholders use new voting access, as it becomes opaque. Additionally, as vote distribution becomes more widespread, there is a greater chance that votes will come in later than expected from big asset managers, another potential visibility issue for corporate management teams.

While it is premature to predict that ESG investors will become the dominant asset manager clients seeking to vote shares, institutional and retail investors are increasingly paying attention to proxy issues and ESG concerns. By giving shareholders more control over their votes, companies like BlackRock may lose some of their influence over ESG issues. However, there may also be shareholders who hold differing opinions on how BlackRock votes on ESG matters and wish to express their views.

Proxy advisor Institutional Shareholder Services has been expanding its offerings to accommodate the growing demand for investors and institutional managers to have their own view on voting. It provides proxy guidance for perspectives including Taft-Hartley plans focused on labor, sustainability, and climate policy.

As the annual meeting season begins, ESG issues will once again be prominently featured in shareholder resolutions, with their success at annual meetings continuing to increase. In the 2021 proxy season, there was a record number of shareholder proposals on ESG, and shareholders provided record-breaking support, with an average approval rate of 32%, according to a recent Conference Board review and outlook. One notable data point that explains why Munger is expressing concerns is that even Buffett's company, which has traditionally been skeptical of ESG measures, has seen a significant increase in support from shareholders for such initiatives, with many voting against Buffett and his board's stated position.

The 2022 season's data will be analyzed by companies to determine the voting power's impact on voting trends and the percentage of shareholders who support the new power as a first step in permanently altering proxy voting.

A new generation of retail investors

Over 60 million people worldwide invest in retirement assets that will be eligible for "voting choice," and Broadridge Financial data predicts that this trend will eventually reach more young Americans who are directly participating in the markets, as ETFs become more common and zero-fee trading of equities becomes the norm.

Despite the attention given to meme stocks during the pandemic, Reese believes that the underlying data on volume growth in equities, mutual funds, and ETFs will remain sustainably higher even if it declines from the pandemic peak, which reached 26% volume growth. The growth is expected to remain in double-digits, and the broader investing is participating across sectors, including energy companies, financials, small-caps, and large-caps. Reese emphasizes that while meme stocks also experienced growth, they are not driving the overall growth.

Institutional Shareholder Services (ISS) governance business head Lorraine Kelly states that younger investors, who have recently opened brokerage accounts amidst the pandemic, are seeking greater influence in voting decisions, particularly with regards to environmental, social, and governance (ESG) issues. Many of these investors want corporations to take more action on ESG rather than less.

BlackRock stated in its announcement that it is considering expanding proxy voting options to include more investors, including those invested in ETFs, index mutual funds, and other products.

Experts suggest that regulatory and operational system changes, as well as partnerships with proxy advisory firms and investors, may be necessary to address the lack of 100% transparency in the current shareholder infrastructure. Despite these challenges, experts believe they are surmountable.

According to Reese, there are indications that retail investors are increasingly participating in annual meetings at companies, and this trend is expected to continue with the increasing use of virtual shareholder meetings. Broadridge hosted over 2,400 virtual meetings covering 80% of the S&P 100 last year, and the technology that facilitates greater shareholder participation is likely to remain a permanent feature in some form or another.

Retail investors who receive paper ballots in the mail often fail to act, but technology will facilitate voting by providing easy access and action. Eventually, retail investors will be encouraged to utilize their voting power through platforms such as 401(k) plan participation.

Reese explains that technology can enable shareholders to receive customized alerts about shareholder votes on topics they have opted in to communications on, such as carbon disclosures or climate. These alerts will engage shareholders in the voting process if their alert preferences are set to do so.

In the 2022 proxy season, pass-through voting may continue to be limited to sophisticated investors like pension funds that already have voting councils making these kinds of decisions with other shares. However, the opportunity to expand access exponentially exists, and from a technological standpoint, experts predict that it will be part of the future.