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Shareholder resolutions and the Big Three

A new analysis of proxy voting records by Morningstar shows that the big three mutual funds have an outsize influence on the fortunes of shareholder resolutions.

By Paul Hodgson

A new analysis of proxy voting records by Morningstar shows that the big three mutual funds have an outsize influence on the fortunes of shareholder resolutions.
(Photo by roibu via Shutterstock)
  • BlackRock and Vanguard significantly reduced their support for shareholder resolutions while, in general, State Street’s support increased between 2022 and 2023.
  • Excluding the proxy votes of the ‘Big Three’ mutual funds, nine environmental and social shareholder resolutions would have achieved majority-adjusted support, including proposals on lobbying and labour rights at Apple, Boeing, Chevron and IBM.
  • Among companies in the S&P100, Morningstar estimates that 59 resolutions would have received in excess of 40% of the vote, rather than the 28 key that did with the big three’s votes included.

Shareholder support for environmental and social (E&S) shareholder resolutions fell from an average of 30% in 2022 to 20% for all US companies in 2023, and to 17% for large-cap companies. A new report from Morningstar attributes the larger decrease among the S&P100 to the higher representation among large-cap companies of resolutions filed at firms with large insider shareholdings and dual-class shares.

To find out what was behind the lower support for environmental and social (E&S) resolutions this year compared to 2022, the Morningstar report asked what would happen if the proxy votes of the ‘Big Three’ mutual funds – Vanguard, BlackRock and State Street – were excluded from vote results. More than double the number of shareholder resolutions would have received over 40% support were the Big Three’s votes excluded, 59, compared to 28.

A similar situation occurred in 2022, where excluding the Big Three meant that 87 E&S resolutions would have received over 40% support – the report defines over 40% support as a “key vote” – compared to 59.

Those figures also indicate that, while support for E&S resolutions is higher among other shareholders, support fell among them also between the 2022 to 2023 proxy seasons. The report ascribes this fall in support of a lower average quality of resolutions this year.

“There were 194 ESG resolutions at large-cap companies that didn’t reach the key-resolution threshold [40% support] that we use as a means for ensuring a consistent level of resolution quality from year to year,” the report says.  

In September, Capital Monitor reported that BlackRock blamed shareholder resolutions for being overreaching while Vanguard said they were overly prescriptive.

Adjusted support

The report reports what it calls “adjusted support’, a figure that excludes the votes of non-independent shareholders – founders, board members and managers with multiple votes per share under dual-class share structures.

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“We also exclude strategic investors; basically, shareholders who don’t need to file or support shareholder proposals because they could phone the chief executive and actually get an answer,” says report author Lindsey Stewart, director of investment stewardship research at Morningstar.

“Warren Buffett’s holdings in Bank of America, Kraft Heinz, and Coca-Cola are good examples,” he adds.

This calculation shows that excluding those votes would have boosted average support for many more key votes into majority status.

Also looked at are “near misses”, resolutions that received between 30-40% support. If the Big Three did not vote their shares, around 30 near-miss resolutions at US large caps in each of the last two years would actually have been key resolutions. BlackRock’s support for near-miss resolutions fell to zero this year, while, in contrast, support for such proposals rose at both State Street and Vanguard.

A further nine resolutions would have received majority support in each of 2022 and 2023, including, this year, at defence contractor RTX (formerly Raytheon) and McDonald’s, if the Big Three had been excluded.

All three firms voted against all nine of these resolutions in both years.

Standards diverge

In aggregate, the three firms held an average of 30% of the shares at each company in question: a clear demonstration of their outsized influence. Most of these resolutions, representing a different kind of near miss – there, but for the grace of the Big Three, a win – were on the S side of E&S, typically labour issues and political spending or lobbying disclosures.

In most cases, the Big Three appeared to have agreed with management that existing disclosures satisfy the demands of the resolution. That a third of all shareholders disagree, often consistently from year to year, and want more detailed information, would seem that standards diverge.

While BlackRock’s and Vanguard’s support for key resolutions in the S&P100 fell from 2022 to 2023, 53% to 36% and 25% to zero respectively, State Street’s actually rose, from 53% to 71%, indicating that if the report had excluded only BlackRock’s and Vanguard’s votes, the number of key resolutions might have been even higher. Indeed, the report notes: “Because State Street increased its support for key resolutions in 2023, this damping effect of the Big Three’s votes must be primarily attributable to BlackRock’s and Vanguard’s voting decisions” [see chart].

The report also compared the Big Three's votes at large-cap companies with their voting record in the wider economy. BlackRock's voting record on key resolutions was basically the same, while State Street's support was slightly lower for all US companies. And, while Vanguard supported none of the large-cap resolutions, it did support 8% of them at all companies. The study looked at 158 E&S resolutions in 2022 and 222 this year.

[Read more: Investors underplay cost of FMCG giants’ indirect emissions]

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