Passive owners, active lobbyists?

Our colleague Brooke Masters’ weekend report that BlackRock has jacked up how much it spends on lobbying was both intriguing and unsurprising, given how Fink + Friends have increasingly found themselves in the political crosshairs.

BlackRock still spends less than rivals Invesco and Fidelity, and asset managers actually spend a lot less on lobbying than many other industries. But perhaps they can count on some indirect but potentially powerful “force multipliers” — the growing horde of companies they own big stakes in?

That is the implicit, controversial suggestion of a new paper by Marianne Bertrand, Matilde Bombardini, Raymond Fisman, Francesco Trebbi, and Eyub Yegen, titled Investing in Influence. Here is their abstract, with FTAV’s emphasis:

Institutional ownership of U.S. corporations has increased ten-fold since 1950. We examine whether these new concentrated owners influence portfolio firms’ political activities, as a window into the larger question of whether institutional investors can wield their control to extract benefits from portfolio firms. We find that after the acquisition of a large stake, a firm’s political action committee (PAC) giving mirrors more closely that of the acquiring investment management company (in our preferred specification, a 31 percent increase in comovement). This pattern is observed for acquisitions driven by new index inclusions, which suggests that our findings result from a causal effect of acquisitions rather than other correlated shifts in political agendas. We argue that investors drive the convergence in giving — the effects are driven by more “partisan” investors, and we show that firms shift their giving more around acquisitions than investors do. Overall, our findings suggest that corporations’ political business strategies are likely dictated by broader considerations than simple profit, and modeling corporate influence should take into account how corporations are governed.

Let’s dig in a little, as this is juicy. Bertrand, Bombardini, Fisman, Trebbi and Yegen examined 574 institutional investors with $30tn of total equity investments of $30tn, and matched them to political donations made by the 2,456 companies that were in their collective portfolio at some point between 1980 and 2018.

Broadly speaking, greater ownership by institutional investors tends to lead to companies spending more money on lobbying. But political donations is a murky business, and the drivers behind an asset manager making an investment in a company can be complex, and the data on donations is basic. Perhaps right or left-leaning portfolio managers tend to attract like-minded investors, and are just naturally more inclined to invest in the companies of similarly-inclined CEOs, the researchers speculate.

So they focused on passive investment funds. After all, they just invest based according to an underlying index, regardless of the political sensibilities of a company’s management. Bertrand et al then examined the impact of acquisitions due to benchmark inclusions.

They found that companies tend to tilt their political donations to be more in line with their institutional investor owners, rather than the reverse.

It is possible that this influence takes place without any direct efforts on the part of institutional investors — for example, portfolio companies may cater to investors’ preferences (political or otherwise) in hopes of gaining their support, for example in important votes at shareholder meetings. However, consistent with a more active voice from institutional investors, we show that the correlation in political giving increases even more sharply after an investor gets a seat on the board. In particular, in a specification that captures both the board seat and acquisition effects, the effect of an acquisition with a board seat is more than three times that of an acquisition alone.

Our results to this point suggest that the political preferences of a limited number of asset management companies are amplified as they gain control in U.S. corporations on behalf of their dispersed (and most likely — at least in the case of index funds — oblivious) clients.

There are a host of ways that one could unpick this argument, some niche, technical and focused on the underlying data, and others veering into corporate sociology and modern politics.

For example, it’s possible that the study merely picks up a general liberal-wards tilt of Corporate America (albeit mainly relative to an increasingly nutty right wing) and a secular increase in both institutional ownership and lobbying spending. Most public companies give money to both sides of the aisle to avoid being seen as partisan.

And we’re not sure one can classify asset managers easily. Yes, BlackRock’s Larry Fink is a Democrat and has been vocal on the importance of ESG and “stakeholder capitalism”. But he’s hardly a paid-up member of the DSA. It’s hard to see Big Oil — where BlackRock is one of the biggest owners — starting to give money to the Sierra Club just because of the asset manager’s growing ownership. And how would one classify other big asset managers?

Nonetheless, it’s an interesting paper with some fascinating findings and an intriguing conclusion, on a subject that’s likely to generate a lot of heat in the coming years.