Large asset managers play an outsized role in the corporate governance of the largest U.S. public firms. The Big Three (BlackRock, Vanguard, and State Street) collectively manage trillions of dollars of assets and own about a fifth of the average S&P 500 firm. Their influence extends beyond their voting power: The Big Three engage with portfolio companies on issues such as board diversity, executive compensation, and sustainability. However, we know surprisingly little about how they choose companies to engage with and what economic impact these engagements have.

In a new paper, we compile a dataset tracking recent data from the Big Three on the portfolio firms with which they have engaged. A key contribution of our paper is the use of this new information to analyze the determinants and consequences of portfolio company engagement. To the best of our knowledge, our study is the first academic analysis to use all Big Three engagement data rather than just selected anecdotes.

 We address three research questions. First, we use an event-study approach to measure market reactions to the Big Three’s disclosure of engagement targets. If investors perceive engagement as a sign of weak corporate governance, one expects targeted portfolio firms to exhibit negative abnormal returns. Conversely, if engagement leads to better governance, one expects positive abnormal returns. Second, we examine whether Big Three engagements plausibly create value for their clients. Asset managers have fiduciary obligations to their clients. If they force portfolio companies to adopt strategies that reduce their clients’ portfolio value, they violate their legal duties. Each of the Big Three therefore claims its engagement efforts are focused exclusively on creating client value. We empirically determine whether the Big Three select underperformers as targets. If engagement were intended to improve governance, one would expect asset managers to target financial underperformance. Third, we examine whether Big Three managers vote against management at portfolio companies after engagements. To the extent engagements are focused on financial laggards, one would expect asset managers to be more likely to vote against management after announcing that they disapprove of a company’s governance. We also analyze whether firms change key corporate governance practices after being engaged by Big Three asset managers.

Our findings suggest that Big Three engagements do not have an economically significant effect on the value of targeted firms on the date asset managers publish the list of engaged companies. Engaged firms exhibit negative abnormal returns on these dates, but these losses are tiny (10-50 basis points), transitory, and only significant for two of the Big Three. This result is inconsistent with the notion that engagements are a credible signal of weak governance and instead suggest that investors do not believe engagements reveal significant new information about a firm’s operations.

Next, assessing the Big Three’s selection of companies to engage with, we find little support for asset managers’ claim that they focus on financial value for their clients. There is no significant correlation between a portfolio firm’s financial performance and the likelihood that it is targeted for engagement by BlackRock, Vanguard, or State Street. Instead, the decision to engage seems largely a function of the asset manager’s influence over and exposure to the portfolio firm, with the percentage of firm equity owned by the manager serving as a proxy for influence and the percentage of the manager’s portfolio represented by the firm serving as a proxy for exposure. The lack of connection between a firm’s financial returns and the likelihood of engagement persists when we control for firm financials and a variety of corporate governance indicia mentioned in the Big Three’s investment stewardship policies. Therefore, Big Three engagements do not seem focused on financial performance as is their fiduciary duty and claimed by these managers’ stated policies.

Based on Big Three investment stewardship policies and extensive informal interactions with personnel, we believe that the Big Three do not pursue a value-based approach to engagements because their stewardship teams are understaffed. BlackRock – the largest of the Big Three – reportedly has only about a dozen individuals monitoring portfolio companies and selecting engagement targets in the U.S. This is striking, given that BlackRock engages with thousands of portfolio firms every year. Our conversations with informed parties indicate that the engagement teams at Vanguard and State Street are similarly small. It is implausible that teams this size could understand the corporate governance intricacies of the Big Three’s portfolio firms and then select the worst performers.  Moreover, the investment teams at these asset managers are reportedly separate from the engagement teams. Communication between these teams could clearly improve.  Further, we were told that “success” for the engagement team was not necessarily measured as improvement in firm performance.

Finally, we find that the Big Three are not more likely to vote against management at portfolio companies after engaging with them. Therefore, we find no evidence that the Big Three punish engagement targets. We interpret this to suggest that Big Three personnel consider an engagement successful after perfunctory communications with management. This could explain why the Big Three do not vote against management after an engagement. Beyond voting by the Big Three, we also do not find that engagement has any effect on corporate governance at portfolio companies. Therefore, engagement does not seem to change either the voting behavior of asset managers or the corporate governance practices of portfolio firms.

We emphasize that our results do not imply that institutional investors cannot have a positive impact on corporate governance, or even that their engagements cannot be intended to maximize their clients’ wealth. Instead, our analysis is a description of Big Three engagement as it is currently conducted. Nothing prevents BlackRock from expanding its U.S. engagement team beyond 15 individuals. We take no position on the optimal extent of Big Three involvement in corporate governance or engagement with portfolio firms. Our analysis, however, provides strong empirical support for the notion that their current engagement practices are not focused on targeting underperforming firms or maximizing value for their clients.

This post comes to us from professors Dhruv Aggarwal at Northwestern Pritzker School of Law, Lubomir P. Litov at the University of Oklahoma’s Michael F. Price College of Business, and Shivaram Rajgopal at Columbia Business School. It is based on their recent article, “Big Three (Dis)Engagements,” available here.