Do SuperLarge Funds Need More Federal Oversight?

Maybe On Some Procedures But Not Wholesale Changes

One thing conservatives have to be careful about is just because someone disagrees with you doesn’t make it okay to regulate and break up their business when you assume power.

I see statements that social media ought to be regulated or broken up. Maybe some procedures ought to be regulated out of existence and some merger and acquisition activity ought to be denied, but wholesale regulation usually leads to government picked winners and losers. I see schemes to control large institutional funds like Blackrock all over conservative media.

I’d be very very cautious about jumping to a conclusion or a knee-jerk reaction. Just because you have the power to stifle someone doesn’t mean you ought to use it. There might be better ways to give more independence and objectivity to businesses than stricter government oversight.

We have seen examples of several companies that “go woke and broke”. Their returns to shareholders drop when they change the focus of the company from return on total equity to social justice. Here is a Disney ($DIS) chart for one example.

Here is a chart of Philip Morris. Not a woke or socially justice-focused company by any means.

Clearly, Blackrock has a far left-wing tilt when it comes to its management team. Their bias has filtered down to the way they decide to vote their shares when it comes to company board elections. It also infects their conversations with top executives at firms when they talk about strategic directions.

Big changes in regulation will reverberate all the way down to investment returns. When Republicans lose power, Democrats will use power to clamp down on firms and companies they don’t like even harder than we are seeing today. I call it “The Golden Circle of Fascism”.

Perhaps a small change in regulation is better. Perhaps allowing the individual investors of those funds to vote their own shares is better than letting Blackrock do it for them. That change wouldn’t apply only to Blackrock but to pension funds and other large institutional funds that aggregate capital and invest.

There is one problem. Individual shareholders in America don’t often vote their shares. Heck, we have a problem getting voters to turnout at political elections. How are you going to get people to vote for several corporate board elections? Companies need a quorum by SEC regulations and when institutions vote, they get them.

Blockchain voting might be a solution but that is purely procedural and not a huge incentive to vote. It doesn’t change behavior. Maybe Richard Thaler and the behaviorists could tackle that one.

One thing I have said in the past and will reiterate here for anyone new to my blog. Free market capitalism is very very messy. It is not a puppet where a string is pulled and magic things happen. Often, it takes a very indirect route to a solution. They shouldn’t be controlled by a lot of regulation or constraints, otherwise, outcomes could become predetermined. Time is the thing free markets need to work.

In the long run, if Blackrock and other big institutions were to successfully implement their far left-wing ideas into strategic policy at corporations, those companies would see far less return. This is because those policies are not trying to maximize the return to shareholders, they are going after other goals. That would mean Blackrock customers would get less return.

There are several academic studies that back me up. The best commentary on this issue is Cliff Asness. He is a top fund manager and his AGR funds would fall under the restrictive ideas put forth by the conservatives that want to regulate simply because they disagree.

In a competitive market, Blackrock customers would pull their money out and put it in funds that had better returns, and presumably, those funds wouldn’t be focused on narrow left-wing goals but instead on seeking a maximum return for shareholders. Pulling money out of a fund is the death knell for the fund.

I think there are things that conservatives absolutely should do when they assume power again. However, they need to be very judicious in how they use it and apply it. There are adverse consequences that can come from seemingly appropriate regulation.

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