CW Industrial Partners


The Private Equity for Families Blog

A Fink May Be Voting Your Index Shares

Charlie Munger may be approaching 100 years old, but he is still sharp, and, more importantly, he is independent of the big money influences on Wall Street. Among that elite group is Larry Fink, Chairman and CEO of Black Rock. Black Rock dominates the index fund business with $10 Trillion under advisement.

John Bogle, former CEO of Vanguard, invented the index fund in 1976. He came up with the idea of letting investors own a market basket of securities for low fees. Since that time the index fund business has boomed and today allows investors to customize their investment thesis.  If you want companies with strong balance sheets, or companies with inflation resistant business models, Black Rock can cobble together components that are representative of that investment theme.

The beauty of the index fund is its ownership model. The fund owns the publicly traded components, but investors own a derivative tradeable unit that acts just like a stock. The stock (units) trade independent of the components. You can trade in and out without waiting to the end of the day like mutual funds, so this product is well suited to the “on demand” nature of popular financial products.

Gave Away Your Right to Vote

A pension fund, a public retirement system, a college endowment, or an individual investor does not actually own the underlying stock. The index fund owns it and for Black Rock with $10 Trillion of investable assets in more than 800 index funds the rights of ownership include an important right to vote the funds’ shares. The index fund owner who has put up the capital has unwittingly hypothecated his shares and given his proxy to the CEOs of Black Rock, State Street or Vanguard. Together they may vote as much as 20% of the shares in S&P500. That is big influence for Larry Fink (Black Rock), Mortimer Buckley (Vanguard) and Ronald O’Hanley (State Street).

On February 17 The Wall Street Journal’s Editorial Board published a sharp rebuke of the big three providers of index funds by reporting on Charlie Munger’s “Calling Out ‘Emperor’ Larry Fink.” The Editorial Board points to the recent board changes at Exxon where three directors were ousted by an activist hedge fund that owned a miniscule percentage of the outstanding shares as an example of concentrated voting power in the hands of CEO’s with an ESG agenda:
“Mr. Fink will also tell you what stand to take on those issues. He and his allies have become major swing votes in proxy board battles and shareholder resolutions. Climate-focused activist fund Engine No. 1 held only 0.02% of ExxonMobil shares, but it nonetheless managed to oust three board members last summer with the support of the Emperors’ club.”

Mr. Munger’s criticism has spawned several proposals for reforming the index shares voting rights. There are calls for making shares held by index funds non-voting or having them voted by index fund managers only if the true owner grants a proxy.

Is Power the End Game?

In any event, this is just another example of wealthy billionaires influencing more and more of our financial and political systems. In 1925 President Calvin Coolidge is credited with describing the single-minded focus of American businesses in his century as “the business of America is business.” The 21st century has witnessed an emergence of a billionaires club that has clearly mastered the business of business and now has billions of reasons to seek power as their next frontier. This is not my opinion but rather the conclusion the Editorial Board of the Wall Street Journal in their February 17th article about index managers:

“Rather than push companies to pursue higher returns, they’re trying to impose their political agenda on corporate America. CEOs and corporate boards can find themselves on the wrong end of a shareholder vote if they refuse to accommodate Black Rock’s policy preferences on climate and ‘stakeholder capitalism.’ Hail, Caesar, er, Larry.”

Thank you, Charlie Munger. For now, a Fink will be voting your Black Rock index fund shares. If you don’t like that, you must vote with your feet.


The above commentary is for informational purposes only. Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records. Founder and chairman of CW Industrial Partners (originally CapitalWorks, LLC), he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CW Industrial Partners or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.