By Peter Halesworth, Managing Partner, Heng Ren Partners – originally posted at Linkedin
“As a fiduciary acting on behalf of these clients, BlackRock takes corporate governance particularly seriously and engages with our voice, and our vote, on matters that can influence the long-term value of firms.”
– BlackRock Chief Executive Officer Laurence D. Fink, Letter to CEOs of S&P 500 Companies, January 23, 2017
Coho Capital 2Q20 Commentary: Podcasts, The New Talk Radio
Coho Capital commentary for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more Dear Partners, Coho Capital returned 46.6% during the first half of the year compared to a loss of 3.1% in the S&P 500. Many of our holdings, such as Netflix, Amazon, and Spotify, were perceived beneficiaries Read More
The feedback so far about the plan of Snap Inc., the parent of Snapchat, to not provide voting rights to public investors at IPO, if you believe the bloggersphere, media reports, and good governance-types, has been controversial if not negative.
Considering Snap’s boldness in this denial of shareholder voting rights, it is likely the IPO promoters will dismiss this carping by Lilliputian funds as inconsequential to the success of their expected $3 billion mega IPO.
However, what if a giant investor like BlackRock were to decline participation in Snap’s IPO because of this denial of voting rights for Board members, and a merger or sale of the company? Would that make a difference?
The answer is it might. While BlackRock’s passive index funds would normally wait to invest until Snap’s inclusion in an index, its actively-managed institutional equity funds with assets under management of $120 billion as of the end of 2016, could decline to participate in Snap’s IPO.
The reason: the lack of shareholder voting rights which CEO Fink publicly stated BlackRock might like to utilize as a fiduciary acting on behalf of clients.
BlackRock’s public stance on Snap’s IPO could have a serious impact on investor sentiment and compel Snap to rethink withholding voting rights. Such a public declaration also might cast some doubt on BlackRock’s massive equity index funds ($1.36 trillion) future investment in Snap’s stock. This is material as BlackRock in total reportedly owns 5.67% or $1.79 billion of Facebook stock, frequently compared to Snap.
BlackRock should retain its “vote,” nor lose its “voice,” regarding this historic denial of shareholder voting rights.
This is a historic test. If BlackRock becomes a bystander to the shareholder unfriendly terms of Snapchat’s mega IPO – the first U.S. public company in memory to withhold shareholder voting rights at IPO – then the bar for corporate governance on U.S. stock markets will be set lower, permanently. Other issuers will be tempted to follow Snap’s lead and cause further damage to corporate governance standards in U.S. stock markets.
This puts CEO Fink in a difficult position. He has publicly pledged to BlackRock clients to act as a fiduciary on corporate governance with BlackRock’s vote, yet there won’t be a vote in the case of Snap. Meanwhile, BlackRock’s index funds, if they follow precedent, will mechanically buy Snap stock upon inclusion in an index, probably not long after the IPO, due to an expected market capitalization of $25 billion upon its market debut.
Expecting the major index providers – Standard & Poors (S&P), Nasdaq, Russell, Morgan Stanley (MSCI), and the Financial Times (FT) – to find the moral strength to exclude companies from their indexes in order to prevent lowering the bar for corporate governance in the U.S. has never been a winning bet.
Undoubtedly CEO Fink and BlackRock, fortified by a small army of lawyers’ skillful parsing, could presumably shake loose from their public pledges to pursuing good corporate governance through shareholder votes, quietly participate in the Snap IPO, buy on index inclusion, and bear with the lack of voting rights.
Presumably these same BlackRock lawyers also could create a pre-requisite that even its index funds require the availability of voting rights to exercise their fiduciary duties, and cite the unprecedented case of Snap as the cause of this change. That would send a powerful message heard around the world.
If BlackRock becomes an investor in Snap, BlackRock shareholders and clients would be owed an explanation from CEO Fink of how exercising fiduciary duties through “voice” and “vote” – which he declared less than a month ago – is reconciled when a public company does not provide BlackRock the “vote.” It would be assumed this creates the opportunity now for BlackRock’s “voice” to be heard.
Yet, so far, BlackRock has been mum. It was absent as a signatory of a February 3 letter to Snap from the Council of Institutional Investors (CII) about the lack of voting rights. The CII letter was signed by other Associate Members with the same standing as BlackRock.
So much has been, and will be, gained by BlackRock continuing to stand up for corporate governance for long-term shareholder value in the U.S. and globally, including in Greater China where we have witnessed their considerable influence. CEO Fink’s vocal public leadership on corporate governance has been admirable and has helped BlackRock outdo its peers, Vanguard, Fidelity, and State Street, on this score.
Now shareholders are at a juncture where much of this progress in corporate governance could be stalled without BlackRock sustaining its leadership in institutional shareholder influence. BlackRock should retain its “vote,” nor lose its “voice,” regarding this historic denial of shareholder voting rights.