December 06, 2022

New Banking GOP Report Reveals How Asset Managers Use Proxy Voting Power to Advance Liberal Policies

Raises questions about compliance with federal securities and banking laws

Washington, D.C. – Republican staff of the U.S. Senate Banking Committee today released a report detailing how BlackRock, State Street, and Vanguard (the “Big Three” asset managers) use shareholder voting power to advance a liberal political agenda.

The staff report, titled “The New Emperors: Responding to the Growing Influence of the Big Three Asset Managers”, explains how the Big Three leverage their ability to vote on behalf of passive index fund investors to promote liberal political priorities such as ESG (environmental, social, and governance) and DEI (diversity, equity, and inclusion) policies. The report details how the asset managers have used both hard power by directly voting on resolutions and soft forms of influence. For instance, asset managers use “engagements” with corporate executives to change managerial decisions at the company, relying on the implied threat that an asset manager will vote against particular directors or oppose management on controversial shareholder resolutions.

Although federal law requires shareholders with significant equity positions to report on their influence over large public companies, the Big Three rely on an exception meant for passive investors to evade this disclosure—even though the Big Three’s influence is anything but passive. The report also delves into whether the Big Three could be considered bank holding companies. Under federal law, entities exercising “control” over banks are considered to be “bank holding companies.” Such designations would upend the asset managers’ business models.

Staff conclude the report by calling on Congress and regulators to investigate the Big Three’s influence over portfolio companies, examine the Big Three’s compliance with disclosure laws, and enact the INDEX Act to return voting power to true investors.

The report is the latest development in the Committee’s ongoing scrutiny of the Big Three. During the annual oversight hearing with the nation’s largest banks, Ranking Member Pat Toomey (R-Pa.) raised concerns about the influence of large asset managers over banks and other public companies:

“These large asset managers have enormous sway by virtue of the volume of votes they can cast, even though they don’t own many of those shares.

“If that sway goes to the level of control, then there are significant ramifications—legal and regulatory—especially if that control is exercised over financial institutions.”

In the same hearing, Sen. Bill Hagerty (R-Tenn.) explained:

“What these activists have figured out is that any radical policy that they can’t get enacted through government can be advanced through corporate America by hijacking trillions of dollars in voting rights from everyday Americans’ retirement accounts.”

Earlier this year, Ranking Member Toomey and Sen. Dan Sullivan (R-Alaska) introduced the Investor Democracy is Expected (INDEX) Act to address the Big Three’s consolidated influence by returning voting power to the true investors in a company. The INDEX Act would require investment advisors of passively-managed funds to vote proxies in accordance with the instructions of fund investors—not at the discretion of the adviser.

“The INDEX Act returns voting power to the real shareholders—retail investors who put their own money at risk,” said Sen. Toomey. “Further democratizing investing and diminishing the consolidation of corporate voting power are concepts members of both parties should get behind.”