Addressing the 800lb gorilla in the boardroom

Passive giants have potential to wield enormous influence, creating conflicts of interest

Addressing the 800lb gorilla in the boardroom

The investment community needs to pause and take a hard look at the “800lb gorilla in the boardroom”.

Talbot Babineau, president and CEO at IBV Capital, said the recent corporate governance proxy season has raised some serious questions about the impact of increasingly influential passive giants like BlackRock and Vanguard.

With companies starting to push specific agendas, the potential for them to wield considerable voting power has increased, giving rise to possible conflicts of interest.

Babineau said that far from democratising the investment process, these firms have taken thousands of investors and individuals, and consolidated them into one big vote.

In 2008, ETF strategies had $700 billion in assets under management but that has ballooned to more than $4.6 trillion and is set to grow to more than $7 trillion by 2020.

He said: “This is a problem because of the size and scale. If you look at the shareholder registries of a lot of companies, what you end up finding is that these passive investment vehicles represent the vast majority of the top five shareholders of a particular company.

“When combined, whether it’s a 7% holding with Vanguard and another 7% from BlackRock, you come to understand they represent the vast majority of ownership. Through their sheer voting power, they are influencing – or can influence – the boardroom.

“Up until this point they’ve been quiet in nature but as you’re seeing their influence grow, they’ve taken it upon themselves to start pushing very specific agendas and that is a watershed moment.”

He added that he doesn’t think the investment community, and the regulators, have sat down and thought about the implications - both intended or unintended - of having a $4 trillion investor making decisions at the boardroom level across the entire market.

Babineau highlighted BlackRock chairman and CEO Larry Fink for pushing a “very divisive social agenda on firearms” after a spate of gun violence in America as an example on what could lie ahead. Such influence is something IBV Capital has to be aware of, he said.

“It’s important to investment companies like ours because, in very select instances, we speak with management and the board to collaborate with them to provide ideas on how to unlock shareholder value. Now we have to be very conscious what ETFs or passive investors are involved with particular companies to see the receptivity of some of our ideas and thoughts.”

While keen not to paint a doomsday scenario, he added that the best solution would be to ensure that voting rights get passed through to the individual investor.

He said: “The simplest approach to this would be to pass on proxy voting the same way dividends are passed through. From an administrative standpoint that would be challenging but that would represent the easiest solution or the cleanest.”