Passive Investing Isn't Passive Ownership

Activist investing and proxy battles are typically associated with pugilistic hedge fund managers, so a panel of the world's three largest passive investors speaking about shareholder activism at the Morningstar ETF Conference was a sign of changing times. Jon Hale, Morningstar's head of sustainability research, was joined by the heads of stewardship for BlackRock, Vanguard, and State Street Global Advisors.

The topic was thrust into the limelight earlier this year when Exxon Mobil's shareholders, including the three asset managers represented on the panel, voted in favor of a resolution calling for climate-related disclosures.

Michelle Edkins of BlackRock took pains to stress that their vote wasn't about values, insisting that "environmental and social risks are financial risks." She said BlackRock was simply acting in its role as a fiduciary of long-term investor assets.

Vanguard's Glen Booraem maintained that his firm focuses on issues that are material to performance and companies to which fund shareholders are most exposed.

For State Street, gender diversity is a key focus of engagement, said Rakhi Kumar, invoking the firm's "Fearless Girl" campaign. She aspires to a world when one woman on a corporate board is a minimum. The firm also believes in periodic "board refreshment," and holds sacred the principle of "one share, one vote"-- governance issue that surfaced recently with Snap Inc. On the environmental side, carbon emissions and water usage are top of mind for SSgA.

Edkins explained that although indexers don't have the option of selling, they are locked in a long-term relationship with the companies they own.

Kumar likens this to "married with divorce not an option." Engagement is crucial, with proxy voting something of a last resort.

Booraem used a different metaphor.

"Passive ownership is like being in a car you can't get out of," he said. "We have to own companies. Exit is not an option. We need a good driver, i.e. the board and management. Governance structures are the seatbelts and airbags."

Kumar said when she entered the industry in the wake of the Enron scandal, governance analysis was considered a legal or compliance function. She and the other panelists now sit within their firms' investment teams.

"The goal is that eventually we don't have jobs," she quipped. "All analysts will do governance work."