BlackRock's Power to Influence

BlackRock's(BLK) announcement last week that it would purchase Barclays Global Investors from U.K. bank Barclays(BCS) for $13.5 billion confirmed that BlackRock would yield an enormous influence on corporate America.

In fact, the combined firm will own $2.8 trillion in assets, twice the size of its nearest rivals State Street (STT) and Fidelity, which hold $1.4 trillion in assets each.

If you've looked up recently the shareholder ownership tables for any large or small public company you likely have seen BGI's name among the top five holders of the stock. You've also likely seen BlackRock's name in the top 10. And with this deal, you will now almost certainly see the new BGI (BlackRock Global Investors) in the list of top three or four shareholders.

Most financial analysis of this BlackRock-BGI tie-up have focused on the price paid, the assets now under management and the growth of BGI over the last few years as an asset for Barclays. Barclays certainly owned a jewel which they wouldn't have parted with unless external capital demands from the British government required it, and also unless BGI's own executives had a compensation structure that incented a full sale. BGI accounted for 15% of Barclays' pretax profit last year.

Yet, there's another interesting question about this tie-up which has gone unmentioned: How will this new BGI behemoth vote its shares in future corporate elections?

Until now, BGI has chosen not to exercise its right as a shareholder and largely chosen to vote its shares in favor of management. It has retained a passive approach to governance and activism, in line with its passive index strategy.

BGI isn't the only large shareholder to avoid investing in a governance officer; it's just the largest. BGI has chosen to not take responsibility for informing itself of key issues at hand in corporate elections and voting those shares in a direction that should ultimately increase the value of those shares. Instead, it tends to sign a blank check for management. BGI is certainly in the minority among its large asset peers in doing this.

A couple of years ago, when I ran an activist campaign targeting Yahoo!(YHOO), I reached out to all the large institutional holders of the stock leading up to the annual meeting. I had made the public argument that a few Yahoo! directors deserved to be voted off the board because of the company's poor performance and general misdirection (most of the directors I identified are still on the board, by the way).

Of the 10 largest institutions holding Yahoo! stock, I spoke with eight. Most portfolio managers covering the company or governance officers already were aware of some of my arguments about the company before I spoke to them on the phone.

BGI was one of the two institutions better protected than Fort Knox in terms of being open to discussing the issues that Yahoo! was facing. Despite repeated calls to BGI's San Francisco office, I was rebuffed and unable to speak to anyone with any knowledge of the issues I wanted to discuss. Colleagues later shared with me that BGI was never set up to be aware of shareholder issues.

BGI buys massive numbers of shares for its iShares exchange-traded fund products. It invests in marketing its product. However, it has never housed a team of its own people to study issues like whether or not Ken Lewis should get re-elected to the board of Bank of America (BAC) this year. Certainly, doing so is an investment and initially costs money that otherwise would have flowed into the pockets of Barclays' bankers.

However, BGI's view of governance as a cost is short-sighted and not one that the large majority of institutions share. At most of the large mutual funds, I always spoke to very sharp portfolio managers or investment analysts who had covered Yahoo! for many years. I also spoke to management or the board several times in which they shared their views on how the company should be run in a very proactive fashion.

At some institutions, there was a governance officer or team responsible for voting shares in a way that they believed would help create more long-term value for that institutions' clients. Even at middle-sized pension funds -- whose shares in Yahoo! were far smaller than BGI's -- it was common to meet a team of people in an "office of corporate governance" with such a responsibility.

And, should anyone think that BGI's passive stance on shareholder matters is explained by the fact that it is an index investor, take a look at its largest competitor Vanguard. I was greatly impressed with the quality of people working at Vanguard who studied questions around corporate governance in their holdings. They clearly see the size of their holdings as giving them a great opportunity -- and I also would say responsibility -- to positively impact a company's long-term results through a constructive and ongoing dialog with management and the board.

Corporate governance is seen by these vast majority of institutional holders as an investment which creates far more value to their clients than the cost. I'm quite sure that if clients of these large institutions knew which ones were responsibly voting their shares on the clients' behalf, and which ones were rubber-stamping votes for less effective CEOs and boards, there would be ramifications seen through large-scale transferring of assets.

And this brings us back to BlackRock and the new BGI. BlackRock does have a reputation for speaking up and voting in favor of shareholder-friendly matters. It's also known for its much more active than passive culture. CEO Larry Fink has said one of the great virtues of this deal is that 80% to 90% of the two firms' activities do not overlap and can be left as is. I hope Fink will look closely at how the new BGI votes its shares and steers it closer to the BlackRock model and away from the Barclays model.

If Fink does this, and I have every reason to believe he will, the new BGI has a chance to play a powerfully positive role in voting its shares in future corporate elections.

Sleepy boards just lost one big chip of votes that, until now, they could count on being in their back pockets. All shareholders will benefit if there is a change in philosophy at BGI.

Disclosure: At the time of publication, Jackson had no positions in the stocks mentioned.