United States: Shareholder Activism Goes Mainstream: Investment Giants Increasingly Focused On Corporate Governance

The Wall Street Journal reports that Vanguard Group, the largest mutual fund firm in the U.S., and BlackRock Inc., the world's largest asset manager, are becoming more assertive in exercising their influence over companies in which they invest. This is a significant development, given Vanguard and Blackrock's immense shareholdings in large American companies.

BlackRock's recently revised its U.S. voting guidelines, which now indicate that the company may oppose a director's re-election over concerns such as insufficient board diversity, inappropriately lengthy tenures, and poor attendance, even over short periods.

A recent letter from Vanguard CEO F. William McNabb III sent to several hundred public companies warns: "In the past, some have mistakenly assumed that our predominantly passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth." In a separate interview, McNabb cited the rise of shareholder activism as a driving force behind Vanguard's move to increase its focus on corporate governance issues.

It seems, then, that even giant asset managers are taking a page out of the activist investor playbook. Indeed, the 1980s stereotype of the activist shareholder as meddlesome, belligerent and concerned only with short-term returns – investors the Economist once called "corporate raiders" and "jackals of capitalism" – is quickly falling away.

Up until the recent past, investment behemoths such as BlackRock and Vanguard were not known for their engagement in corporate governance issues. In 2013, the New York Times wrote that BlackRock was "far" from being an activist investor, explaining that BlackRock generally votes against a director only when "behind-the-scenes 'engagement'" has failed.

And as noted by McNabb in his letter, a passive management style has long been associated with a passive attitude with respect to corporate governance. The Economist recently wrote in support of this proposition, asserting that "[g]overnance has been weakened by the rise of passive index funds, which means that many firms' largest shareholders are software programs."

But perhaps the association between passive management and a passive attitude toward corporate governance is erroneous. Amy Borrus, deputy director at the Council for Institutional Investors presents a counter-argument to this long standing belief. She explains, "because index fund managers don't have as much freedom to move in and out of investment, these passive funds have an even greater stake in shareholder issues at companies". Similarly, the Economist acknowledges, "[o]nce viewed by companies as dumb bystanders, passive funds may be come to seen in a new light. Since they own stocks indefinitely they should have a longer-term perspective than almost anyone else."

From Vanguard and BlackRock's more assertive approach to corporate governance, it is clear that the passive investment approach championed by these massive investment firms and asset managers is not mutually incompatible with an engaged approach to corporate governance. When even passive investors appear to be embracing shareholder activism, it becomes all the more clear that shareholder activism has entered the mainstream and is here to stay.

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