Three firms are gathering enough control over the stock market that if they are aligned on a corporate board decision, there’s almost no way to stop them. BlackRock, Vanguard, and State Street now control such a large part of the U.S. stock market, that when voting together they can control nearly any issue. John Rekenthaler explains at Morningstar:
In aggregate, the Big Three of Vanguard, BlackRock, and State Street now hold 43% of the fund industry’s U.S. equity assets. In addition, each of those companies serves institutional clients through separate accounts and collective investment trusts–vehicles that bring them additional shares but which do not appear in fund databases. Index fund managers may speak softly, but they carry a very heavy stick.
Exxon Mobil (XOM) learned that lesson the hard way when an activist hedge fund upturned its apple cart. The hedge fund, creatively named Engine No. 1, appeared to have little chance of influencing giant Exxon Mobil, given that it owned only 0.02% of the company’s stock. But thanks to backing that it received from institutional shareholders, Engine No. 1’s initiative won enough votes to place three dissident candidates on Exxon Mobil’s board.
Chief among those institutions were Vanguard, BlackRock, and State Street. Engine No. 1’s loudest advocates were several state pension funds, which held more Exxon Mobil equity than did Engine No. 1 but nevertheless were minor shareholders. If the endeavor were to succeed, the rhetoric needed to be matched by muscle. Enter the Big Three, which controlled a hefty 21% of Exxon Mobil’s stock. Quietly, they threw their weight behind the dissidents.
Of course, a 21% market share cannot decide matters alone. Vanguard, BlackRock, and State Street do not hold enough Exxon Mobil stock, or that of other companies, to determine an election’s results on their own. However, if the three organizations vote together, as they did with the Exxon Mobil proposal, they can decide close elections. Any proposal that attracts one third support will pass, if its proponents can convince the Big Three to join their forces.
You know this is about the EGO of the company’s CEOs. They want to pursue their version of what’s right, even at the expense of shareholder return. You invest, but they win.
Action Line: Avoid the control exerted by these big fund companies by owning a diversified mix of individual stocks. If you need help, I would love to talk with you.
Originally posted on Your Survival Guy.