Repost from NPQ: Can We Overcome the Asset Manager Economy?

May 16

This article was originally published by NPQ online, on March 6, 2024, https://nonprofitquarterly.org/can-we-overcome-the-asset-manager-economy. Used with permission.

It’s not a huge stretch to say that asset managers dominate us all. As financial firms that invest money for clients in stocks, bonds, and other assets, asset managers’ priority is accumulating wealth for their clients. With trillions of dollars under management and major influence within the highest levels of government, these firms hold outsized economic and political power.

Asset managers—especially megafirms like BlackRock and Vanguard—have become key shareholders of thousands of companies, collectively driving rising inequality and a range of injustices. Because of this, asset managers have increasingly become the focus of critique and organizing over the past decade.

At the same time, despite sustained organizing, asset managers haven’t moved nearly enough on issues ranging from workers’ rights to climate. Earlier this month, for example, BlackRock and State Street sparked dismay when they retreated from Climate Action 100+, an investor coalition purportedly committed to decarbonization. The pullback comes after years of effort to push these firms on climate, serving as proof that they were greenwashing the financial sector all along.

For effective critiques and strategic movements against asset managers, we have to answer a set of questions: How powerful are asset managers? Are they the sites of real power behind corporations? What might be the best ways to organize around asset managers? What does an actionable anticapitalist analysis of asset managers look like?

“By 2021, assets under management ballooned to $108.6 trillion—around double the 10 largest national GDPs in the world combined. ”

To shed some light on these questions, I spoke with several experts in the asset management industry who self-identify as politically progressive. They emphasized that while asset managers are core actors within the corporate power structure, there are complications around substantively moving them on issues because of the limits built into their business models. To overcome them, we need democratic ways of managing society’s assets.

Asset Manager Ascendancy

The rise of asset managers, especially the “Big Three” of BlackRock, Vanguard, and State Street, rests largely on their portfolio of so-called “passive” funds that are indexed to overall stock and bond markets. For example, if you buy a share of BlackRock’s S&P 500 Index Fund, you invest in hundreds of major companies, and your balance sheet rises and falls with the overall market. While many of the major asset managers are known for their “passive” investing business, firms focused on “active” investing, such as in private equity and hedge funds, are also asset managers.

The asset management industry has seen astronomical growth and concentration, particularly over the past 15 years. In 2005, total global assets under management were $36.4 trillion. But when the 2008 financial crisis decimated the banking industry, with many financial institutions going under or being bailed out, clients increasingly turned to passive asset management firms as low-fee intermediaries to oversee their investments. Active asset manager investments in direct holdings of real assets like housing and infrastructure also boomed. By 2021, assets under management ballooned to $108.6 trillion—around double the 10 largest national GDPs in the world combined.

BlackRock, Vanguard, and State Street are the largest shareholders in 88 percent of the companies on the S&P 500. They have major stakes in thousands more companies. The Big Three hold 25 percent or more of the equity interests—making them beneficial owners—of top corporations ranging from Chevron to Lockheed Martin. While asset managers don’t ultimately own the underlying investments they manage, they control the shareholding power they bestow.

BlackRock, in particular, wields a large amount of capital in both the US economy and its government. The firm currently oversees $10 trillion in assets, the most of any asset manager company. Its financial power translates into political influence: former executives fill top positions in the US Treasury Department under the Biden administration. Officials in the Trump administration consulted with BlackRock executives to respond to the financial instabilities brought on by the COVID-19 pandemic. Ultimately, the Federal Reserve’s COVID-19 bond-buying program ran through BlackRock.

Universal Owners of Capital

Progressive organizers have increasingly focused on asset managers because of the outsized control they have over our current reality. Whether you’re going after private prisons, oil companies, war profiteers, or the boss, chances are that the money—and therefore the real power—behind your corporate target is overseen by asset managers. Names like BlackRock, Vanguard, and Fidelity have become increasingly synonymous in movement circles with the commanding heights of the corporate power structure.

“You cannot not focus on asset managers,” says Benjamin Braun, a political economist who has written extensively on asset managers. “They are too big and too important, and the financial sector is absolutely key for anything that happens in contemporary capitalism.”

Because of their large stake in the global economy, asset managers play a powerful role in driving the crises of modern capitalism—including the climate crisis. The Big Three manage a huge stake in the fossil fuel industry—over $300 billion in listed fossil fuel investments through their funds alone.

One study argues that 10 US asset managers are among 20 global shareholders with the financial power to accelerate a green transition through their governance decisions. In theory, asset managers can also swing governance fights within companies that activists might be targeting. “These firms are so large that, in a contested vote, they are almost by definition the swing vote,” said Braun.

The growing knowledge of this disproportionate power has led to more campaigns around asset managers. “There has been huge value in popularizing asset managers as an industry and BlackRock as a name among climate activists in the movement,” said author and researcher Adrienne Buller, whose books include Owning the Future: Power and Property in an Age of Crisis. For example, campaigners with the Stop The Money Pipeline coalition have done tremendous work highlighting the role of major asset managers and other financial firms in propping up the fossil fuel industry.

“For so long, they were quite invisible compared to the fossil fuel majors,” says Buller. With asset managers offering green lip service while continuing to invest massively in the fossil industry, she says there’s “major value in pointing out their power and hypocrisy.”

“But because overseeing the holdings of major corporations, such as 401(k) pools, is the bread and butter of asset managers, they may avoid stirring the pot with executives who decide which firms will manage billions in company funds. ”

Built-In Constraints

Although the rise of campaigns around asset managers seems promising, there is reason for skepticism surrounding the ability of movements to move asset managers on progressive concerns, be it a single portfolio company or with a broader approach to corporate governance over their vast holdings.

Theoretically, asset managers have sway over thousands of companies and can influence entire sectors, but in practice, they face a minefield of constraints—built into their organizational models—that limit their range of actions.

For one, big index fund firms like BlackRock and Vanguard accumulate capital by owning a general, cross-cutting slice of capitalist investment. They’re focused on steady rises in asset prices and stock indices as a whole. “Their business model is predicated on being a universal investor,” Buller explains. “In many ways, BlackRock is a follower of the global economy.”

Asset managers are preoccupied with issues like monetary policy and regulation, not the doings—or even the profitability—of this or that individual portfolio company. “Their power does not lie in controlling companies in which they own shares through their passive index funds, and I don’t think they want that kind of power,” said Brett Christophers, a professor at Uppsala University in Sweden whose books include Our Lives in Their Portfolios: Why Asset Managers Own the World. “They want to be passive shareholders.”

Nor, he adds, does the industry amount to a centralized, coordinated actor that exerts control over companies. “BlackRock and Vanguard and State Street are not a cartel,” says Christophers. “They don’t sit down and discuss how they are going to influence management at the 20,000 different companies where they each control six or seven percent of the shares.”

Wedded to the low-fee model that has propelled their growth, index fund asset managers also currently lack the capacity to govern thousands of companies. And it’s questionable whether they project a credible threat of disinvestment, which would undermine their modus operandi.

There’s also a contradiction built into the industry: asset management firms are top shareholders in the very companies whose money they hope to manage. But because overseeing the holdings of major corporations, such as 401(k) pools, is the bread and butter of asset managers, they may avoid stirring the pot with executives who decide which firms will manage billions in company funds.

More recently, asset managers have confronted new challenges with the “anti-woke” backlash in Republican-controlled states. In Texas, the decision to ban and pull funds from firms following so-called “ESG” standards—or environmental, social, and corporate governance considerations—has rattled the likes of BlackRock. This shows that the right can also dent the purse and public image of asset managers.

“By taking an activist role in corporate governance, asset managers expose themselves politically, making themselves more vulnerable to political backlash, which can and probably will come in the form of tougher regulation,” said Braun. “And that’s the most important thing that they want to avoid.”

All told, asset managers want to evade controversy and promote policies that keep market indices rising. They are bent on not reacting to—and not encouraging—protest of any kind.

Intermediate Horizons

Asset management firms are not immovable, and given their centrality within the global capitalist economy, organizers must challenge them. But the strategic rationale for going after asset managers—the theory that challenging their widespread ownership of capital can swing governance fights, shift entire sectors, and command the government’s ear—is counterbalanced by their mode of financial accumulation and its constraints.

Maybe asset managers themselves shouldn’t even be the main focus. They depend on billions in client money that comes from institutional investors like endowments and foundations, but especially retirement funds. Persuading sympathetic trustees of CalPERS (California Public Employees’ Retirement System) or union pension funds—work that some organizers are currently engaged in—may be more strategic than trying to talk sense into BlackRock CEO Larry Fink.

While the strategy of shaming firms to the public has limits, weakening their images in the eyes of big clients can sting. “They’re more concerned with what happens in the case of reputational damage with regard to their ability to attract money from institutional investors,” says Braun. “The lever is always reputation.”

Asset managers also depend on friendly regulatory policies, so another choke point for organizers is the political terrain. In theory, there is little to stop regulators from disciplining asset managers against harmful practices, whether through disclosure requirements or cutting off markets.

Moreover, while passive index fund giants like BlackRock and Vanguard have become synonymous with “asset manager,” active asset managers like private equity firms could potentially make better targets.

As Christophers argues, private equity firms like Blackstone, Macquarie, and KKR have trillions in direct, active investments in basic infrastructure—housing, energy, utilities, hospitals—that we all depend on. They’re more hands-on precisely because their business model, unlike passive investing, rests on the quick and ruthless extraction of profits from acquisitions they gobble up.

This may be especially true when it comes to the climate crisis. “These are entities that are direct owners of fossil fuel industry companies and projects that have faced very little scrutiny compared to the big public asset managers,” said Buller. “A lot of the dirtiest players are in these private, unlisted spaces.”

It’s worth noting that firms with reputations as passive investors also have substantial active investing wings. For example, in its biggest acquisition in 15 years, BlackRock just agreed to acquire Global Infrastructure Partners, an infrastructure fund manager, for $12.5 billion.

Ultimately, we need a coalitional, multipronged approach to challenging the power of asset managers. There’s no reason to ditch naming-and-shaming tactics. Protest and agitation that boosts awareness of the commanding role of asset managers are helpful and emboldening, as long as organizers don’t harbor illusions about the easiness of getting, say, a BlackRock or Vanguard to disinvest from a Dow or Exxon anytime soon.

“I think there’s general value in calling out the hypocrisy of BlackRock in its aspirations to be viewed as a leader on sustainability while it’s obviously failing to do that,” Buller confirms. “Going after that false branding is valuable and can impact their decisions.”

Moreover, campaigns around specific companies, issues, and sectors can be more effective in alliance with institutional investors or elected officials who possess real power to cut off firms from client money or to push state regulation. Crisis moments in society that highlight the ties of asset managers to harmful industries can also provide important openings.

System Change

Ultimately, the entire system needs to change. While legislation and regulation offer “intermediary solutions,” notes Buller, they aren’t the “end game.”

“This is an intensely undemocratic system,” she says. “We need to think of solutions that can contest the total monopolization of power of capital allocation within this industry.”

These alternatives include public and worker-controlled options that offer democratic and accountable means of managing assets that people depend on, but that don’t contribute to accumulating evermore power and concentration in the hands of a small circle of firms who invest in harmful industries.

Christophers also notes a major barrier to mere reform: capitalist states today, molded by neoliberalism, see asset managers as answers, not problems. They want to farm out investment toward the private sector.

“Asset managers are never going to deliver the outcomes that the left would consider most desirable, because that’s not what capital is designed to do,” he says. “The problem isn’t so much asset managers, but that governments have outsourced all our significant problems to asset managers rather than grappling with them themselves.”

The moral critique of asset managers as a “malignant force” in society, comments Christophers, while resonant, is a “misdirection of energies.” “They’re just doing what capitalist institutions do, which is to maximize profitability,” he says. Organizers might be better off focusing on the governments that have put asset managers in the powerful position that they enjoy today.

Of course, building a political force to democratize asset management and finance more broadly is a huge project in itself. But determined movements aiming to chip away at the power of financial capitalism must keep this kind of analysis front and center.

“It is important to not lose sight of these larger, more ambitious goals,” said Braun, “even if they may seem absolutely unattainable.”

Author: Derek Seidman, is a writer, researcher, and historian based in Buffalo, NY. He also serves as an Advisor at CFA.

Natalia Daies