A sneaky attack on activist investors
To hear the Main Street Investors Coalition talk, you’d think that pension funds, index mutual funds and other big institutional investors are trampling their members’ interests with a tsunami of “political” — that is, leftist — demands on corporate managements.
This “heavy-handed activism” is sapping the little guy’s wealth, the coalition says. It wants the Securities and Exchange Commission to put a leash on the institutions and the independent firms that offer advice on how they should vote on shareholder resolutions at corporate annual meetings.
Before you throw your hat in the air at the emergence of spokespersons for the small investor’s interests, there are a couple of things you should know about the Main Street Investors Coalition. First, it’s a creature of corporate managements and a front for their interests, not the individual investors’. Their goal is to narrow, not expand, the opportunities for shareholder interests to be brought before corporate boards and managements.
Among the coalition’s backers is the National Assn. of Manufacturers, the board of which bristles with executives from corporations such as Exxon Mobil, Dow Chemical, Pfizer, Rockwell, Goodyear and General Electric. Another backer is the American Council for Capital Formation, or ACCF, whose leadership includes representatives of the Edison Electric Institute (a utility lobby), the American Beverage Assn. and the auditing firm Ernst & Young.
There’s also the American Assn. of Senior Citizens, which goes by the moniker 60Plus. That organization might sound like a grassroots group, but no. It’s a right-wing advocacy group that has been associated with the Koch brothers’ network and has promoted pharmaceutical industry interests and advocated against the Affordable Care Act.
“This is management attacking the last sources of analysis and data that they don’t control,” Nell Minow, whose devotion to shareholder rights dates back to the 1980s, told me this week. As she observed in June, shortly after the coalition was created, “the more folksy or patriotic the name of the group, the more likely that it is funded by people who are promoting exactly the opposite of what it is trying to pretend to be.”
In this case, managements have gotten the ear of the Securities and Exchange Commission, which will hold a daylong round table Thursday on the
shareholder proposal process and the role of the advisory firms — the coalition’s two big bugaboos.
What irks managements is the proliferation of shareholder proposals on their annual proxies — the agendas for annual meetings. Any shareholder owning at least $2,000 in a company’s stock can submit a proposal, but in practice most are submitted by a small cadre of activists, such as John Chevedden of Redondo Beach, a longtime thorn in corporate managements’ sides.
Among their most common topics these days are how companies are dealing with the threat of climate change and human rights. Perennial concerns include board diversity, directors’ oversight of management and executive pay. Shareholder proposals are always advisory — even if one obtains 100% of the vote, management doesn’t have to do what it asks.
Because even a big institution would find it hard to analyze thousands of individual proposals at its portfolio companies, most outsource at least the initial screening to the proxy voting advisory, or PVA, firms. The biggest firms are Glass Lewis and Institutional Shareholder Services, which tell their clients how the proposals fit with the clients’ investment strategies.
Corporate managements and boards have been on the warpath against activist shareholders for decades. The latest campaign is ostensibly based on empirical evidence — or at least claims that shareholder proposals cost companies millions of dollars and diminish investors’ values. But there’s reason to doubt these claims.
Take an ACCF report trumpeted by the coalition and purporting to document “robo-voting” by institutional investors — that is, voting in lockstep with the proxy voting advisors to an extent that breaches the institutions’ fiduciary responsibilities to their own beneficiaries.
But there’s a problem: Proxy Insight, the statistics firm that was the source of the data ACCF used in the report, came to the opposite conclusion. “The number of investors delegating their entire policy and voting to a [proxy voting advisor] is actually very low,” it said in a statement to the SEC. “Our data demonstrates that investors are clearly making voting decisions themselves rather than simply delegating to PVA house positions.”
In other respects, the coalition’s arguments look about as threadbare as a widow’s shawl. In a comment submitted to the SEC round table, Bernard Sharfman, a sometime corporate lawyer serving as chairman of MSIC’s advisory council, acknowledged that “proxy advisors vote in support of management’s recommendations about 90% of the time.”
That would seem to undermine the very notion of “robo-voting,” but apparently it’s not enough to satisfy corporate executives, for it means “proxy advisors do not support management in thousands of votes,” Sharfman wrote. When I called Sharfman on Wednesday to ask him to expand on his assertion, he hung up on me.
The group’s position papers also involve some sleight-of-hand tricks. One is to brand the interests of shareholder activists as “political,” and therefore out of bounds. Is that a fair label? A National Assn. of Manufacturers paper cited by the coalition focuses on so-called ESG proposals — for environmental, social and governance topics. But if you’re investing in Exxon Mobil, isn’t management’s approach to climate change and its connection with fossil fuel usage a question of corporate survival, rather than “politics”?
“Labeling the Coalition as anti-ESG, or anti-proxy advisory firm is simply false,” the coalition told me in a prepared statement. “We oppose firms using the retirement savings of hardworking Americans to pursue political agendas that may be unrelated to the core business of the underlying investment. Research has shown time and again that when investors are given a choice between maximizing returns and pursuing other objectives for their investments, they choose the former.”
What are these “other objectives,” however?
“Shareholders should decide what’s political and what’s not,” Minow says. “If 78% of boards say they’ve never discussed climate change, you could say that’s ESG, but I’d say it’s about strategy, about risk and return, about looking at opportunities to expand your business.”
The same goes for issues of corporate governance. In an online post in June, Sharfman and George David Banks, the coalition’s executive director, took aim at shareholder proposals attacking dual-class shares. (These are arrangements that typically cement a founder’s control of the company no matter how many other shareholders exist.)
“Despite their use by super successful companies like Google, Facebook, and Berkshire Hathaway,” Sharfman and Banks wrote, “mutual fund advisors have joined forces with public pension funds to vigorously advocate for the elimination of dual class shares.”
Well, yes. Super-ownership arrangements create unaccountable management, as has become increasingly evident at Facebook, where undisputed monarch Mark Zuckerberg plainly needs some supervision, and at Snap, which is floundering under the leadership of a couple of twentysomethings who control 80% of the share votes.
The goals of the corporate managements backing campaigns like the coalition’s include limiting shareholder access to the proxy, perhaps by raising the threshold of share ownership required to submit a proposal, encouraging institutional investors to vote on proposals in accordance with management wishes (and management more often than not prefers a “no” vote) and subjecting the proxy advisory firms to more SEC oversight than they receive now.
They want individual investors with IRA or 401(k) money invested with huge mutual funds to be able to dictate the funds’ votes on shareholder proposals, knowing full well that few such investors will bother to express their wishes, and if they did, the entire shareholder voting system would break down. Which would suit managements just fine.
The coalition paints the small investor as almost invariably the prisoner of liberal activism by institutional managers, but where’s the evidence for that? Sharfman and Banks sound the alarm that institutional investors will become preoccupied with a “social purpose” rather than “wealth maximization.”
Bizarrely, they point to a 2017 open letter to CEOs by Larry Fink, the head of BlackRock, the world’s largest asset management firm and not everyone’s model of a flaming leftist. But they get Fink’s letter dead wrong. It’s true that he spoke up for the social purpose of public corporations. But his context was that only by doing so can a company “achieve its full potential.”
Otherwise, he warned, “it will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for longterm growth…. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”
Does that sound like BlackRock is misaligned with shareholder value maximization? It almost makes you think that BlackRock, not the Main Street coalition, is the entity that has the interests of the small investor at heart.
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