Monday, December 7, 2020
Friend of the blog Bernard Sharfman has posted The Conflict between Blackrock's Shareholder Activism and ERISA's Fiduciary Duties (Case Western Reserve Law Review, Forthcoming) on SSRN (here). The abstract:
The focus of this Article is on the agency costs that may be created by the empty voting of investment advisers to index funds and how they can be mitigated so as to protect the value of private employee pension benefit plans. This Article focuses on BlackRock because it has taken a leadership role in the leveraging of its delegated voting authority. Therefore, the issue I address in this white paper is whether the fiduciary duties of a plan manager of an “employee pension benefit plan,” as authorized under the Employee Retirement Income Security Act of 1974 (“ERISA”), requires it to investigate BlackRock’s shareholder activism. This indirect approach is required as the fiduciary duties of ERISA do not generally extend to mutual funds and ETFs and their investment advisors.
This Article takes the position that a plan manager has a fiduciary duty, the duty of prudence, to investigate BlackRock’s shareholder activism. This duty applies not only to the BlackRock’s mutual funds or ETFs that an ERISA plan invests in but also to those BlackRock fund selections that it makes available to its participants and beneficiaries in self-directed accounts.
Given these fiduciary duties, this Article argues that if a plan manager were to investigate BlackRock’s shareholder activism, especially its engagement strategy, it would likely find it to be in conflict with the manager’s fiduciary duties. Such a finding would require a plan manager to seek out other reasonably available alternatives that is not associated with such shareholder activism.
While the focus of this Article is on BlackRock’s delegated voting authority and associated shareholder activism, it is meant to apply to any and all investment advisers who attempt to leverage their delegated voting authority for purposes of engaging in such activism. Moreover, the Department of Labor should provide guidance to plan managers on when the investment products of investment advisers with delegated voting authority need to be excluded.
This Article was presented at the George A. Leet Business Law Symposium (Case Western Reserve University School of Law) on Nov. 6, 2020.