Investors thought they had reason to celebrate: A new report scores Wall Street firms on whether they put politics over their clients’ financial interests, and many firms got passing grades.
BlackRock, the world’s largest asset manager, received an adequate “C” score. Investment giant Vanguard got a perfect “A.”
But if the news seems too good to be true, that’s because it is.
While the study sheds light on a critically important issue — whether Americans’ retirement accounts, pension funds and other investments are being hijacked for political purposes — it lacks the in-depth analysis needed to show what’s really going on.
Here’s how the study worked: The Committee to Unleash Prosperity looked at how Wall Street firms voted on the 50 most extreme environmental, social and governance (ESG) proposals across corporate America last year.
The proposals were chosen because they have no connection to helping the company’s bottom line.
One, for example, instructed Chevron to conduct a racial-equity audit because Chevron allegedly finances the Richmond police and thereby contributes to police brutality.
Another told Chubb to stop selling insurance to fossil-fuel companies.
Researchers then looked at how asset managers voted and scored them accordingly.
There’s a lot the report got right: Dozens of firms, including Charles Schwab and State Street, earned “D,” “F” or “F-” scores. They certainly deserved it. And more.
As the authors note, failing to vote in your clients’ financial interest isn’t just wrong, it’s often illegal.That’s because asset managers have what’s called a “fiduciary duty” to put clients first.
If asset managers vote their political preferences instead, investors can sue.
But elsewhere, the study falls short.
Researchers only looked at the 50 most extreme proposals, ignoring the rest.
BlackRock, for example, votes on executive compensation at hundreds of companies and often asks them to tie CEO pay to achieving BlackRock’s ESG goals.
Vanguard has voted in favor of plastics-reduction reports at Jack in the Box, a racial-equity audit at American Express and emissions reductions at ConocoPhillips, Phillips 66, Rio Tinto and more.
The study also ignores the votes asset managers cast to elect (or oust) a company’s board of directors, even though directors have far more influence than a single shareholder proposal ever could.
On that front, BlackRock and Vanguard routinely elect leaders who put social issues over shareholder value, including Salesforce’s Marc Benioff and ousted Disney CEO Bob Chapek.
BlackRock isn’t shy about its motivations, either: In 2022, it bragged that it voted out directors at 936 companies for lack of diversity and another 176 over climate-related concerns.
The study also doesn’t consider what’s happening behind the scenes.
Vanguard, for instance, voted against a gender-pay-gap proposal at Cigna, but only after receiving assurances that Cigna was “addressing the underlying concern” by hiring outside lawyers to review its policies.
Similarly, BlackRock voted against an emissions-reduction proposal at Chevron, but only because Chevron already agreed to reduce its carbon footprint.
These asset managers aren’t putting clients first; they’re using the threat of upcoming ESG votes to extract smaller, though still problematic, ESG concessions.
Praising these votes is like praising an armed robber for never pulling the trigger.
Perhaps most fundamentally, the rankings fail on their own terms.
According to the study, an “A” grade means an asset manager “voted in the interests of their clients at least 90% of the time.”
But the law doesn’t require asset managers to vote as a fiduciary 90% of the time; it requires they do so 100% of the time.
Look at it this way: An employee that steals just once every 10 days would be fired; an asset manager that steals client votes with the same frequency — or just once — deserves the same fate.
Giving an “A” to these managers is misleading to investors, many of whom have already lost trust in a system that has misused their investment funds.
There’s no question the committee is doing important work. And it’s easy to see why it graded on a curve.
A report card where everyone fails is meaningless and unlikely to inspire change.
Handing out good grades to asset managers who vote with their clients’ interests in mind at least most of the time will hopefully incentivize them to do so all of the time, particularly now that they know the committee is keeping score.
But until then, investors should hold the champagne.
Justin Danhof is executive vice president and head of corporate governance at Strive.