This article originally appeared in Morning Consult on June 9, 2020.
With the proxy voting season in motion, corporations and shareholders are preparing to debate numerous potential changes to how thousands of businesses operate. This year, a single issue will be at the forefront of everyone’s minds: the COVID-19 pandemic. The virus has upended the status quo of just about every facet of our lives, not the least of which how we do business. The massive disruption caused by the coronavirus will have a lasting impact on our economy. As such, the manner in which organizations change how they operate during this year’s proxy season is uniquely consequential.
Public pension funds, already reeling from years of underfunding, mismanagement and the unwillingness of public officials to make tough political decisions, now face one of their greatest challenges yet. The COVID-19 market crash has greatly exacerbated pension liabilities in many states and localities – even ones which had previously been well-funded. It is likely that the record job losses and a prolonged economic downturn will limit tax revenues and force many fund managers to make tough decisions in the months ahead.
Given the severity of the current situation, it is imperative that public officials re-commit to their fiduciary obligations and ensure that public pension investments are freed from any outside political considerations. The public servants who have spent their lives paying into these funds deserve stable returns, not ideological posturing. Investment decisions must be made on financial criteria, not political correctness.
In spite of the challenges brought about by the economic downturn, it is likely that the issues put forward for shareholders to vote on this season will include numerous proposals intended to allow companies and financial firms to take political stances. Perhaps the most prominent example of this is BlackRock, the largest investment firm in the world, which has for the last several years tried to set itself apart as a firm at the forefront of Environmental, Social, and Governance investing standards.
While the movement toward ESG investing has gained traction among investors in recent years, the sheer size and influence that BlackRock has across the market means that its heavy emphasis on these standards presents a problem for those of its clients who value the maximization of returns over the advancement of a political agenda. Because pension beneficiaries do not control how their funds are allocated, it is important that the asset managers who do channel their clients’ money in a way that first and foremost protects their financial security. With ESG funds consistently underperforming passive index funds by as much 43.9 percent (and charging higher fees while doing so), placing them at the center of an investment strategy is an irresponsible violation of fiduciary duty.
BlackRock is a major shareholder in many corporations, and therefore has enormous influence in the voting decisions being made across the market. Due to the enormous amount of power BlackRock wields, investors are pressured to vote along the ideological lines drawn by the firm rather than what will maximize shareholder value in a time when the markets have plummeted in a way not seen since the Great Depression.
The problem with the kind of activist investment BlackRock is pushing is that its effects are felt not just on Wall Street, but across the country by those who serve their communities every day. Teachers, firefighters and countless other public servants put their trust in asset managers with the expectation that their financial security will be the No. 1 priority, a sentiment echoed on BlackRock’s own website. Its actions, however, say otherwise.
Kevin O’Connor is a retired Baltimore County firefighter who led the Governmental Affairs and Public Policy Division of the International Association of Fire Fighters, and also serves as an advisory board member of the Institute for Pension Fund Integrity.