Pearls of Wisdom: Investment Firms Could and Should Use Their Power for Good


Pearls of Wisdom: Investment Firms Could and Should Use Their Power for Good

One of the main reasons the United States is the center of global investment is because it has a strong regulatory framework that protects investors.  

Part of the framework comes from the Dodd-Frank Act, which directed the Securities and Exchange Commission (SEC) to implement "Say on Pay" rules, specifying that public companies periodically have a shareholder vote to approve the compensation of its top executives.

Another, more technical, part of the framework originates in SEC rules passed in 2003 that specifies that fund managers vote their own shares in the funds which they manage in the best interests of the investors.

To many, the rules may read like Martian. But it is crucial that we understand their importance. The rules are in place just to protect investors, they are there to protect the economy.

Chief Executive Officer pay has grown 90 times faster than typical worker pay since 1978. Those like myself who are concerned about economic inequality believe that outsized CEO pay deepens the divide.

It’s not exactly rocket science. When there are more people with less to spend, the economy suffers. More to the point, when public companies reward CEOs excessively even when performance is poor, the companies hurt their bottom line.

That is why I am so surprised to see my former employer, BlackRock, one of the world’s top fund managers, pushing back against an effort to shine light on the fund giant’s voting practices on executive pay.

BlackRock almost always votes its shares in favor approving higher CEO pay for the companies in which they are invested. They say that approving high pay is in the best interest of shareholders, because it is in the best interest of the company for them to be on good terms with the managers — that voting to approve high manager pay is a part of being on good terms.

Our member, Steve Silberstein, disagrees. He thinks the shares owned by BlackRock’s funds should be voted in opposition to all-too common pay packages that make CEOs exceptionally wealthy despite poor performance.

His shareholder resolution is innocuous. It would simply mandate that BlackRock issue an assessment on how to evaluate the performance of CEOs for the companies in which they are shareholders in accordance with “Say to Pay” rules.

It is important to note that the resolution does not say that BlackRock should change its policy, just that the board should issue a report, and for that reason, it seems so innocuous that I am surprised that BlackRock management is opposing it.

The goal of the report would be for BlackRock, as a shareholder, to see clearly whether or not massive compensation packages disadvantage the companies they invest in.

Silberstein believes that the report will show that it is in BlackRock’s interest to determine if the executives of the companies in which they are invested are being overpaid for under delivering. I agree with him.

On May 25th, the resolution will be put to vote. I hope that BlackRock’s board decides to put the best interest of its shareholders and of the economy at large first.

 

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