Larry Fink blackrock

Charlie Munger Says We’re Turning This Guy Into the Pope

If you have only ever bought ETFs or invested via robo-adviser apps, then you probably don’t know what kind of voting rights you get when you buy individual shares.

It seemed like just the other day that we were all kicking up a fuss about Elon Musk taking over Twitter (and now he’s not?). We were concerned what it would mean for free speech if so much power was put into the hands of one man (who just so happens to be a straight white male).

Let me share the latest gossip with you.

A similar thing has been happening among the asset management giants of the investing world. In Australia, the top three issuers are Vanguard, BetaShares and iShares. And they account for a whopping 63% of all investments in ETFs in Australia.

What are shareholder voting rights? 

As a shareholder in a company, you get:

  • A claim over the company’s future profits in proportion to your share of ownership
  • A say in how the company is run. These are your voting rights. Certain managerial decisions are voted on by shareholders (e.g. executive compensation packages or how the company intends to manage climate and ESG risks)

Many beginners who want to start out investing via ETFs alone won’t know about shareholder voting rights, because ETF issuers employ voting proxies instead of passing voting rights on to you, the end investor.

What are voting proxies?

Voting proxies delegate voting power of absent members to a representative or proxy decision-making body. 

When you buy an ETF instead of individual shares, you are a unitholder in the ETF. You don’t get voting rights as a shareholder would, because the ETF owns the shares it holds in the trust, and not you. 

So the voting rights associated with the shares are managed on behalf of the ETF holders by the ETF provider. The problem is that there are massive oligopolies going on in the global playground of ETF issuers and asset management firms.

The rise of the ETF emperors

Globally, “the Big Three” Vanguard, BlackRock, and State Street hold almost a staggering 20% of the S&P 500’s total outstanding shares according to an article on Corporate Governance by the Harvard Law School Forum.

Charlie Munger, Warren Buffett’s long-time investing partner, has claimed dramatically that the power people like Larry Fink, CEO of BlackRock, are amassing through gigantic slabs of voting proxies is going to “change the world”.

When asked what impact he thought passive investing has had on stock valuations, this is what he had to say. 

“Oh huge…Maybe we could make Larry Fink and the people of Vanguard pope. All of a sudden we have had this enormous transfer of voting power to these passive index funds… I think the world of Larry Fink, but I’m not sure I want him to be my emperor. ”

– Charlie Munger, 98 years young

One hilarious commenter on Acquirers Multiple described his feelings for Larry Fink succinctly:

“People went into ETF’s to enjoy portfolio diversification and the low annual fees.  Fees at a fraction of a percent compared to managed funds at one percent or more.  We didn’t do it to make Fink the Emperor. 

I dislike the man intensely and whenever he makes a move, I evaluate my stock holdings to see if I will be impacted by his ESG lunacy. I adjust my holdings in response.”

– A disgruntled investor

But things might change in the future. BlackRock has since announced that they are looking to put mechanisms in place that will allow large shareholders to communicate their voting preferences, but I think it will be a while before this is available to Australian investors.

That said, most of the money pouring into ETFs are directed by financial institutions, like your super fund or other global pension organisations. So there is not much we can do about it as puny retail investors, but still.

Why ETFs make me both happy and sad

Not many people who own ETFs know about this whole voting power issue. Yet sadly enough, most people probably don’t care. From what I can see by surveying the vast internet plains from the comfort of my home office chair, shareholder engagement has been on the decline. 

Most people care more about the profits that companies can return to them rather than what for and how the company goes and uses their money. It’s always been the case that being engaged as an investor requires a lot of effort and interest. But now ETFs have surely made that a lot worse. 

Of course, ETFs are still a wonderful invention. They are a powerful tool in your portfolio shed, but it’s good to their limitations too.

Featured image credits: Reuters, Lucas Jackson

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