Major Asset Managers Reduce Company Engagement Following New SEC Guidance

Event Overview

BlackRock and Vanguard, the world's two largest asset managers, have significantly scaled back their direct engagements with companies globally following new guidance from the U.S. Securities and Exchange Commission (SEC). This reduction in dialogue marks a notable shift in corporate governance practices, potentially altering the landscape of investor influence on corporate strategy and environmental, social, and governance (ESG) matters.

Details of Engagement Reduction

Data indicates a substantial decrease in company meetings held by these institutional investors. BlackRock's stewardship team engaged in 2,584 meetings with companies worldwide during the 12 months ended June 30, representing a 28% decline from the comparable period in the previous year. Similarly, Vanguard reported meeting with 356 companies globally between April and June, a 44% decrease from the 640 meetings held during the same period in the year-earlier period.

This contraction in investor-company dialogue is largely attributed to the SEC's new guidance, issued on February 11, 2025.

Regulatory Impact and Market Reaction

The pivotal factor behind this shift is the updated SEC guidance, spearheaded by Commissioner Mark Uyeda, concerning the distinction between Schedule 13G and Schedule 13D beneficial ownership reports. The guidance clarifies that a shareholder's ability to file the simpler Schedule 13G hinges on whether its holdings are without the "purpose or effect of changing or influencing" control of the issuer. Critically, discussions that "exert pressure on management to implement specific measures or changes to a policy" are now interpreted as potentially "influencing" control, thereby necessitating the more complex and costly Schedule 13D filing.

This expansive interpretation encompasses recommendations on governance changes, executive compensation practices, and specific actions on social, environmental, or political policies. Industry experts, such as Paul Schulman, senior managing director for proxy solicitor Sodali, assert that the guidance is "100 per cent the cause" of the observed decline in meetings. This regulatory tightening has created a "chilling effect" on investor-company talks, as fund managers become more cautious to avoid triggering stricter disclosure requirements.

Broader Context and Implications

The new SEC guidance primarily impacts major institutional investors like BlackRock and Vanguard, whose combined US$22 trillion in assets often translates to owning more than five percent of a company's stock – the threshold for the aforementioned reporting regulations. The resulting hesitancy to engage overtly means companies may receive less direct investor input on strategic decisions and could face unexpected outcomes at shareholder meetings due to a lack of pre-vote communication.

Historically, companies actively sought and valued investor feedback on governance structures and compensation. This flow of communication has largely diminished, potentially altering corporate governance practices by reducing shareholder influence, particularly on ESG issues, and shifting power dynamics between management and large institutional investors.

Expert Commentary

Multiple industry voices have underscored the profound impact of the SEC's directives:

Paul Schulman, senior managing director for proxy solicitor Sodali, observed that even when meetings occur, stewardship teams "are hesitant to signal their thinking on the issues."

Peter da Silva Vint, a former BlackRock executive now with corporate adviser Jasper Street Partners, stated, "The new guidance, whether intentional or not, created a chilling effect on the largest investors." He noted that fund managers often attend meetings in "listen-only mode," complicating companies' ability to gauge voting intentions.

Elizabeth Bieber, partner and head of shareholder engagement and activism defense at Freshfields, remarked, "The guidance significantly altered the landscape." She added that "nearly every large institutional investor changed the way that it engaged with companies," with many halting engagement until they could fully analyze the implications. Bieber also noted, "It is not uncommon for us to see investors that are subdued in meetings," and believes this muted engagement could persist indefinitely without further SEC clarification.

Paul Washington, chief executive of the Society for Corporate Governance, highlighted the challenge for companies, stating, "This season companies found it harder to know what their major investors were thinking."

Looking Ahead

With the "chilling effect" expected to persist in the absence of further SEC clarification, companies are being advised to adapt their engagement strategies. This includes redoubling their internal efforts to communicate their message effectively and proactively addressing investor concerns that might go unsaid. Furthermore, companies may need to broaden their outreach to a wider array of investors, including those who hold less than 5% of equity and are therefore less impacted by the 13D-G changes.

This regulatory shift also has implications for activist strategies, with a noticeable retreat from ESG-focused campaigns. The evolving landscape demands increased agility, proactivity, and transparency from corporate management, navigating a crucial period with reduced direct feedback from their largest institutional shareholders.