20 Jun 2024 Scott Shepard: Giant Investment Houses Are Still Infinitely Partisan

In a commentary published at RealClearMarkets, Free Enterprise Project Director Scott Shepard makes an assertion that is likely startling to those who aren’t fully paying attention:

[T]he Big Three investment houses – BlackRock, State Street and Vanguard – are so steeped in personal-policy bias throughout their operations that they have become, collectively, the greatest fiduciary-breach machine in human history.

To understand how this could be so, read Scott’s entire commentary below.

In a recent article, Sarah Nassauer and Theo Francis, reporting on the efforts of “anti-woke” shareholder representatives, made a small error that occluded a vital fact about modern American investing: the Big Three investment houses – BlackRock, State Street and Vanguard – are so steeped in personal-policy bias throughout their operations that they have become, collectively, the greatest fiduciary-breach machine in human history.

Scott Shepard

The authors’ error is a syntactical trifle. The article reports that “Most anti-ESG proposals received support from less than 2% of shares voted, and none have passed—among the worst showing of the categories tracked by ISS,” and this is true. The rest of the article ascribes those anemic showings, especially in comparison to those of left-ESG proposals, to a failure “to gain traction” amongst shareholders. That’s the bit that’s vitally false.

The problem for “anti-woke” (we prefer pro-neutrality and pro-fiduciary, but “anti-woke” is certainly still a badge of honor) shareholder proposals – and the explanation for the gap in vote totals between left-ESG and non-ESG environmental and social proposals – is this: None of the Big Three, or of the two giant proxy-advisory services, Glass Lewis and Institutional Shareholder Services (ISS) has ever, to the best of our highly interested knowledge, voted in favor of or recommended votes for any environmental or social proposals that arise from a non-left ESG point of view, or that would advance non-left ESG goals. Not a single one.

And because these five have, in any given year, supported somewhere between quite a lot and an absolute majority of left-ESG environmental and social proposals, this makes the partisanship-gap of the five mathematically infinite, if I’m recalling junior high math properly.

This absolute partisanship may not be a legal problem for the proxy-advisory services (though it does render it a violation of fiduciary duty for custodians with such duty to rely on their recommendations as though they were objective and sound), but it suggests an astonishing breach of fiduciary duty by the investment houses – and it’s just a chip off an iceberg of such breaches.

Using BlackRock as the example, consider: for years, CEO Larry Fink has asserted that BlackRock is “not partisan” and “not woke,” despite the fact that the twin goals of ESG that he has merrily (and with pride admittedly) “forc[ed]” on companies – equity-based discrimination (known as “DEI,” until the public came to understand what that term really meant), and decarbonization on a politically generated schedule without regard to technological, economic or geopolitical considerations – are identical to the two chief whole-of-government initiatives of the Biden Administration. When Fink made these claims of neutrality and fidelity to duty, he failed to make them in a fiduciarily sound way: laying out all the evidence, including that which cut against his position; explaining fully the (vast) amount of that evidence pointing to the opposite conclusion; demonstrating willingness to accept and correct mistakes. Rather, he first asserted that BlackRock wasn’t partisan in his early 2022 letter (marching orders?) to CEOs. There he made the naked claims, and spent the rest of the letter providing additional public evidence that the assertions were false, and that BlackRock’s guiding stars were his (and perhaps other directors’, executives’, and Davos pals’) personal policy preferences.

The problem with all this, of course, is that the Big Three don’t make all of these obviously partisan moves with the companies’ own money. They do it with money over which they are custodians for ultimate investors, to whom they owe high and solemn fiduciary duties to act not in their own personal interests, but in the objective, neutral interests of maximizing returns.

The Big Three respond by claiming that these behaviors (the ones they use other people’s money to force) are money makers. It’s facially unlikely that reintroducing race, sex and orientation discrimination into American corporate life could possibly be a dollar spinner, and research by Strive Asset Management has demonstrated that the research leading to those conclusions in “deeply flawed.” We have discovered similar flaws in the net-zero claims.

The Big Three have not responded responsibly to these concerns. In fact, in the last year BlackRock has begun spending significant sums to hire swarms of lobbyists to shut down duly constituted, evidence-backed investigations into whether BlackRock and its peers are violating their duties to advance directors’ personal policy preferences. And, of course, we’ve had another year of 0 percent support for any non-left environmental and social proposals from all five.