Three of the largest investment shops in the U.S.—BlackRock, Vanguard and State Street—have long used their dominance in passive-investment funds to force corporations to comply with their preferred set of environmental, social and governance policies. Their reign, however, may be nearing its rightful end, as America’s law enforcers are waking up to the threats the Big Three pose to investors and the economy.
In an Aug. 4 letter to BlackRock CEO Larry Fink, 19 state attorneys general questioned how the company’s ESG advocacy squares with its fiduciary duties to investors. The attorneys general specifically raised whether BlackRock’s “coordinated conduct with other financial institutions”—i.e., the two other investing giants—to demonetize the oil-and-gas industry raises potential antitrust issues.
The attorneys general are digging into an important matter, but there is a much more worrying question they must explore: Why are the Big Three pursuing these policies in lockstep? Why have no institutions in the financial-services industry except one—the recently launched Strive Asset Management—opted to place the investor first, by giving priority to profit over social issues? The seeming answer raises concerns far beyond the Big Three’s anti-oil-and-gas collusion.
Through their management of passive investments, the Big Three collectively hold the largest voting blocs for nearly the entire S&P 500. Among them, they control a predominant share of the exchange-traded fund, or ETF, market, and of most participants in nearly every other market. Two of the three (BlackRock and State Street) are publicly traded companies, and so their officers disclose under oath in regular federal filings their institutional shareholders. In this paperwork, they regularly tell us not only what they own, but who owns them.
The answer reads like a punch line: The Big Three own each other and themselves.
Start with Vanguard, the privately held company of the group. Though 100% of Vanguard’s equity is held by its own managed funds, its investors hardly control them. The company’s directors are also the trustees of its funds, tasked with appointing its managers. Those managers are the only “owners” with votes on the membership of Vanguard’s board. It’s difficult to imagine a more circular arrangement.
But the rest of the Big Three come close. Vanguard is the largest owner of BlackRock and State Street, in each case followed by BlackRock. Taken together, the Big Three directly own about 19% of BlackRock and 22% of State Street. The companies also own controlling shares of many of the other institutional stockholders holding the Big Three’s shares. After including those holdings, the Big Three cumulatively control—if indirectly—no less than about 32% of BlackRock’s equity and 42% of State Street’s.
There are good reasons to worry about the downstream effects of the same set of players owning all the competing companies in other industries. Many in the academy have encouraged prosecuting these companies under Section 7 of the Clayton Act—an antitrust statute, enacted in 1914, that bars any stock acquisitions or ownership that “may substantially lessen competition.” Those concerns should be even stronger when the players in question not only own but control each other. The U.S. hasn’t seen this sort of corporate entanglement since Teddy Roosevelt and William Howard Taft busted the original trusts a century ago.
The Big Three’s present relationship explains why none of them defect from the ESG game. They can’t, because they’re not independent actors. The few other genuinely independent actors in the system—such as Fidelity—are privately held and controlled by families wealthy enough to prioritize luxury beliefs over productivity. Similarly, ownership and control explains why no other major player in the American financial-services industry defects and challenges the investing giants. State Street qualifies as one of the 15 largest banks in the U.S. The Big Three collectively hold controlling shares of 13 of the 14 others—with their directly controlled ownership shares ranging from about 17% to 25%, and their indirectly controlled ownership shares ranging from about 24% to 45%. The only exception is the Canadian-owned TD Group.
No substantive competition exists within the ESG paradigm because under the noses of our antitrust regulators the Big Three have acquired shared control over one another and almost every potential competitor. That’s not a situation that can be fixed with probing letters or industry-specific litigation alone. We’re now facing the original problem that Congress wrote American antitrust laws to address—coordinated ownership of everything by concentrated cliques pursuing their own priorities at the expense of the common good.
That demands the targeting and eventual dissolution of the Big Three. The 19 state attorneys general are doing necessary work, but they must aim higher—for the head.
Reporting from The Wall Street Journal.
