For 10 years, BlackRock did not vote on US shares in two global equity funds, and its clients did not notice – an oversight caused by flaws in stewardship reporting rules and the design of pooled funds
In June 2023, it came to light that two BlackRock global equity funds had not been voting on US shares for almost 10 years.
The BlackRock Aquila Life MSCI World Fund and BlackRock Aquila Life Global Developed Fundamental Weighted Index Fund are used by numerous investment platforms and UK pension funds. Clients at the time of the incident included pension funds sponsored by ConocoPhillips, London Borough of Hackney and Nestlé.
The question is how so many well-resourced institutional investors and their advisers could ignore, year after year, that they were not exercising any corporate influence through the majority of their investments in the two funds.
UK pension plans are obliged by regulation to report the efficacy of their stewardship in Implementation Statements (IS). Here is an excerpt from the IS for 2022/23 released by Nestlé’s UK defined benefit plan, a client of the Aquila Life MSCI World Fund:
“The trustee selects and engages with the investment managers regularly regarding its voting policy and activity to ensure it aligns with the trustee’s responsible investing policy. It is the trustee’s belief that the policies set out in the [Statement of Investment Principles] regarding the exercise of voting rights attached to investments and the undertaking of engagement activities in respect of the investments has been followed over 2022. No further follow up is required.”
Just two pages later, however, appears an admission that some kind of follow up was expected:
“Due to reasons beyond the trustee’s control, BlackRock were unable to exercise their delegated voting rights for US companies held in the Aquila Life MSCI World Fund during the reporting period. The trustee’s advisor engaged with the manager to understand the issue, and to limit the possibility of this reoccurring in the future. The advisor will monitor progress by the manager to resolve this issue ahead of publishing the fund’s next annual Implementation Statement.”
The Nestlé scheme had some very experienced heads, including Steve Delo, former head of the UK’s Pensions Management Institute and John Chilman, chief executive officer of the British railways pension fund (Railpen) and chair of the Pensions and Lifetime Savings Association (PLSA) policy board. To be fair to them and the other Nestlé trustees, however, no one else had spotted the error since 2014, including BlackRock itself.
There is a salient reason for the oversight. Most schemes in pooled funds take data on voting at the manager rather than the fund level. In that sense, references in Implementation Statements (ISs) to BlackRock’s policy and engagement at the manager level were accurate. Many ISs just copy and paste this information straight from asset managers’ own corporate governance material.
Some purely active managers offer strategies with different styles and therefore different voting policies. This was not the case with the two AL funds in question, which would have been voted in the same way as hundreds of other passive BlackRock strategies, taking direction from its central Investment Stewardship (BIS) team. So while the two funds’ assets combined were worth billions of dollars, that is a mere slither of total equities directed by BIS. As BlackRock was quick to quantify, no significant vote at a US-listed company would have had a different outcome had the two funds’ shareholding votes been exercised.
Next comes the size of the voting universe. ISS report how many eligible votes a manager cast. Year after year, for the two Aquila Life funds, the figure was in the 13-14,000s. This was technically accurate but the figure ought to have been over 20,000 votes for 2022 if US stocks had been included.
One UK investment consultant admitted, however, that he had no idea how many eligible votes to expect. If you don’t know what to expect, or you just trust your manager is doing the right thing, then no alarm bells get sounded.
“The bit that’s worrying is not spotting it for a decade”
Paul Lee, head of stewardship and sustainable investment services at Redington
But that low number was the giveaway for the corporate governance team at Redington, a London-based pension fund investment consultancy. In May 2023, the firm noticed that votes cast by the Aquila Life MSCI World Fund were far fewer than the average for a global index-tracking strategy.
BlackRock was informed and a decade-old problem was rectified in 24 hours. How could it happen so fast? One possible explanation was that when the funds were created, a box had not been ticked to demand voting at US companies.
It is a reflection of America’s dominance in investment management that when it comes to voting shareholder rights, the world is divided into just two boxes: the US and everywhere else.
The mistake and the remedy may thus ultimately have been just box-ticking exercises.
“It’s a small clerical error,” says Paul Lee, head of stewardship and sustainable investment services at Redington. “The bit that’s worrying is not spotting it for a decade.”
Looking back at those salient reasons, Lee is adamant that trustees and their advisers should be looking at fund-level data. “What really matters is what has been done in the fund the asset owner has invested in,” he said.
His argument is consistent with guidance for trustees from the UK’s pension fund association when ISs were introduced back in 2020.
“These new regulations require that trustees’ voting behaviour disclosures must relate back to their own portfolio […] asset managers are currently only required to produce a “general description” of their voting and engagement behaviour – likely to happen at a firm-wide level rather than at the mandate/fund-level which trustees need,” said PLSA guidance.
The PLSA recommended that managers be questioned in a way that relates to the asset owner’s capital. Instead, as this incident demonstrates, pension funds in pooled arrangements have tended to accept firm-level data, including examples of significant votes, from their asset managers.
Because of that technical hitch, the two Aquila Life funds could supply no examples of significant votes from companies listed in the US even though it is the world’s largest equity market by a mile.
But there are means for pension funds to express their own wishes on shareholder proposals, even if they are in a pooled arrangement. BlackRock itself offers Voting Choice, for which the two Aquila Life funds mentioned are eligible.
Bristol-based Tumelo offers a similar facility that can be plugged into any asset manager.
As another alternative, Manchester-based pension fund consultancy First Actuarial provides clients with analysis of managers’ records on most contested votes.
Rob Skelton, head of investment research at First Actuarial, points out that this is not only a means to avoid managers’ deciding the narrative on voting for pension funds – by supplying their chosen examples of significant votes – but also a fresh way to getting insights on their general behaviour.
This is because managers can be compared and contrasted with their peers’ record on contested votes.
Skelton believes that widespread access to data on pooled funds’ voting and their auditing will be the next step.
Lee believes that more technology needs to be applied to voting, which he describes as the Cinderella of the investment industry. When asked whether asset management systems are fit for the 21st century, he suggests wryly that some have only just breached the 20th century.
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