Monday , June 21 2021

Proxies

Summary:
A correspondent asked for comment on the new ESG trend among asset managers. For example, BlackRock, and the recent Exxon upheaval with two new green directors (here, but cautionary WSJ coverage here, pointing out how empty the whole Exxon affair really is).  I'm sad to see even Vanguard (which has a lot of my money) going ...

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A correspondent asked for comment on the new ESG trend among asset managers. For example, BlackRock, and the recent Exxon upheaval with two new green directors (here, but cautionary WSJ coverage here, pointing out how empty the whole Exxon affair really is).  I'm sad to see even Vanguard (which has a lot of my money) going along on this...trend. 

Could you offer some thoughts about the trend of asset managers voting more critically this year? Are the big fund firms like BlackRock getting too far removed from the wishes of their customers? Other analysts say that BlackRock and other ESG-minded fund firms are only following the wishes of their younger investors who care more about those themes, maybe that makes it all ok?

My answer: 

As a private property fan, if the owners of a company want to spend its money on pointless virtue signaling, or important but unprofitable save-the-planet and cure-racial-injustice initiatives (depending on your point of view),  that’s up to them. I would rather get rid of the whole corrupt non-profit status anyway and see lots of organizations organized as corporations devoted to causes right and left. 

The issue here is representation. A very small minority is making these decisions on the behalf of a large and unrepresented majority. For example, if you have a company 401(k) managed by a plan, invested in a mutual fund, who hires out their proxy voting to a service, the decision to trade money for social good, and just what constitutes social good, is a long way removed from your preferences. (Me and Vanguard, for example.) 

I think the central problem is that our corporate governance system is stuck thinking of a world of fairly large individual investors who take an active interest in corporate affairs. There are regulations, for example the fiduciary rule that says intermediaries are not supposed to do anything but guard your money. But those are clearly not working, and rules can never provide a good outcome anyway. 

I think the world might be better of with more non-voting shares. Mutual funds and asset managers could hold non-voting shares, so certify that they will not inject their preferences along the way.  People who don’t want to think about proxies can do the same.

As an economist, I always look first to see what's wrong in the rules of the game if I don't like the outcome. 



John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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