As You Sow’s new report Uncovering Conflict of Interests: Proxy Voting Data Reveals Bias for Asset Managers to Favor Clients shows a consistent trend for large asset managers to vote proxies in favor of management more often when receiving compensation for financial services.
The report assessed millions of proxy votes sourced from Insightia from January 2015 to June 2020, alongside Department of Labor 5500 disclosures of compensation received for advising and administering corporate retirement plans. The analysis found all major fund managers considered — including BlackRock, State Street, Vanguard, and T. Rowe Price — voted with management of their customers at a significantly higher rate compared to non-customers.
Analyzing proxy voting across all resolutions, BlackRock, State Street, and T. Rowe Price favored clients each of the six years analyzed; Vanguard favored clients in five of the six years.
“Bottom line, proxy voting by major asset managers favors their clients — a clear conflict of interest,”said Andrew Behar, CEO of As You Sow, the non-profit shareholder representative organization publishing the report. “These powerful asset managers, which own large stakes in every company, have traditionally voted with management. These votes have frequently been the difference between winning a majority vote on critical, material issues like climate change. We understand it must be hard to vote against a CEO pay package if a major corporate retirement plan contract is at issue. Strong firewalls between these departments must be established.”
Existing literature has identified fund managers voting proxies on behalf of shareholders, while also earning millions of dollars in record keeping and advisory services, are exposed to conflicting priorities — yet little evidence has assessed if proxy voting biases are statistically significant, until now.
To highlight examples:
- BlackRock voted in favor of management and against shareholders on the 2019 resolution at Exelon Corp for a report on the costs and benefits of environment-related activities. That same year, BlackRock received at least $7.7 million in compensation from Exelon.
- T. Rowe Price voted against the shareholder resolution for JP Morgan Chase to create a report on climate change and that same year also received $1.9 million in compensation from JP Morgan Chase.
- State Street voted against a resolution for General Electric to create a report of political lobbying contributions in both 2018 and 2017, and received $200 million from General Electric in 2019.
These examples highlight proxy votes with a conflict of interest, which are part of the broader trend for asset managers to favor management more often when receiving compensation.
Large asset managers received hundreds of millions of dollars where also voting proxies, presenting a substantial conflict of interest. In 2019, the four fund managers analyzed had commercial relations with 932 companies where they also voted proxies and, in total, received $489 million in compensation. A range of 13-25 per cent of the proxy votes cast by these managers occurred at companies that also provided compensation — demonstrating that a significant portion of their proxy votes are exposed to fundamental bias.
“We evaluated more than nine million data points and the trends are clear,” said David Shugar, As You Sow’s ESG and climate data analyst, and report author. “The bias is statistically significant and has been going on for many years.”
The report also assessed proxy voting bias trends across different resolution types, including management proposals; shareholder proposals; environmental, social, and governance (ESG) proposals; and climate-related proposals. State Street had the highest level of bias on shareholder proposals from January 2015 through June 2020, voting with shareholders only 23 per cent when business ties are present versus 37 per cent when no relations were present — showing a 14% bias to favor companies providing compensation.
For climate-related proposals during the same timeframe, BlackRock was nearly three times more likely to vote with shareholders when no business ties were present, voting with shareholders 10.4 per cent with no relations versus 3.6 per cent when commercial relations were present. These results show the trend for asset managers to favor clients across a wide set of proposal types.
A number of solutions can be implemented to address this conflict of interest. For example, fund managers can disclose existing business relationships when casting votes, delegate votes to a neutral third party, as well as recuse proxy votes when a conflict is present. There are new technological solutions, such as Citizen Shareholder, which is developing an online tool and mobile app for clients to vote all their proxies in one place, irrespective of how many asset managers or intermediaries they invest in. Legislative actions can be taken to remove conflicts for fund managers. For example, the EMPOWERS Act would allow workers to elect representative trustees to manage their retirement plans and set voting guidelines that investment managers would be required to follow.
This report has shed light on the widespread conflict present — asset manager proxy voting favors companies providing compensation. More stringent reporting requirements as well as new technological and policy solutions should be implemented to remove proxy voting conflicts of interest and allow shareholder interests, as intended, to be the primary driver of proxy voting.
