WALL STREET JOURNAL.
At BlackRock, Vanguard and State Street, ‘Engagement’ Has
Less aggressive than
activists, biggest passive money managers use their heft to
influence portfolio companies
BlackRock CEO Laurence Fink has
said the firm would be more assertive with the companies in
which it invests while ensuring they make the right decisions
over time for long-term shareholders. PHOTO: LUCAS
Jan. 20, 2018 7:00 a.m. ET
The biggest passive money
managers all like to use some version of the word “engage” when
describing how they hold their portfolio companies accountable behind
the scenes. They differ on how that engagement is measured.
Chief Executive Laurence Fink
cited the strategy this week in his annual
letter to other CEOs. He used the words “engage” or “engagement” 15 times to
describe how BlackRock would be more assertive with the companies in which it
invests while ensuring they make the right decisions over time for long-term
BlackRock had 1,603 “engagements” with companies in which it
invests during 2017. That is more than the 954 engagements counted by rival
Vanguard Group and 676 from
State Street Corp.’s money management unit
How those engagements are defined and disclosed varies from firm
to firm, making it difficult to assess how aggressively these big U.S.
wielding their growing clout.
BlackRock’s engagements, according to the company, can be
“basic,” “moderate” or “extensive.” Basic can be one conversation on a “routine
matter”; moderate “generally involves more than one meeting,” while extensive
can be “numerous meetings over a longer time frame.”
For Vanguard and State Street each phone call or meeting counts
as an “engagement”. State Street typically also sends hundreds of letters to its
portfolio companies that it also classifies as “engagements,” though they aren’t
included in the firm’s count of 676 engagements.
The three managers collectively oversee more than $13 trillion in
assets, bigger than the size of China’s economy, the world’s second-largest.
They have ramped up efforts to interact with their portfolio companies as their
assets and stakes in major companies have swelled. Those three firms owned 18.5%
of the S&P 500 at the end of the third quarter, up from 14.7% five years
earlier, according to research by Lazard Ltd.
BlackRock, Vanguard and State Street say they prefer not to use
their heft to make immediate demands such as putting a specific individual on
the board or divesting business units, in contrast to more aggressive dictates
from activist investors.
Instead they say they like to work behind the scenes and talk
with their portfolio companies routinely about their policies and plans.
BlackRock, for example, plans to write to about 300 companies in
the Russell 1000 that have fewer than two women on the board to ask them to
disclose their approach to boardroom and employee diversity, BlackRock
governance head Michelle Edkins said Thursday at a Santa Clara University event
in California. The firm plans to ask them to set a time frame in which they will
improve their diversity. State Street also pressed its portfolio companies to
improve their boardroom diversity in 2017.
“It is a conversation and we have an agenda and we have several
things we want to discuss,” Ms. Edkins said of the firm’s meetings with
companies. “It is absolutely not a thing that we do over bottles of wine. If
they’re lucky, they get a really nasty cup of BlackRock coffee.”
BlackRock has more staff dedicated to these discussions and other
investment stewardship tasks than Vanguard or State Street. It plans to double
that group to 60 in the next three years.
“The growth of indexing demands that we now take this function to
a new level,” Mr. Fink said of shareholder engagement in his annual letter
earlier this week.
Unlike traditional stock pickers, index funds managers can’t sell
a stock if they are disappointed by a company’s performance or disagree with its
strategy. They do, however, have other ways they can express their opinions
All use shareholder votes to oppose or support the appointment of
board members or management resolutions as well as proposals from fellow
shareholders. What they decide is increasingly determining the outcome of these
shareholder votes. The support of BlackRock and Vanguard, for example, helped a
shareholder proposal pass in 2017 at
Exxon Mobil Corp.’s annual
meeting that called for the company to share more information about
how climate change and regulations could affect its
At times, the three big passive owners come to differing
Procter & Gamble Co.’s biggest shareholder,
sided with management in the company’s battle last year with Nelson Peltz, the
Journal reported, while BlackRock and State Street voted with Mr. Peltz’s Trian
Fund Management. Mr. Peltz
narrowly won a seat on the board.
Sarah Krouse at