The proxy process for publicly traded companies has been taken over by institutional investors at the detriment of retail traders and investors.
The US Senate Committee on Banking, Housing, and Urban Affairs (SCB) held a hearing on April 2, 2019, entitled, “The Application of Environmental, Social, and Governance Principles in Investing and the Role of Asset Managers, Proxy Advisors, and Other Intermediaries”. It examined the proxy process of publicly traded companies.
“A proxy vote is a ballot cast by one person or firm on behalf of a shareholder of a corporation who may not be able or have the desire to attend a shareholder meeting, or who otherwise desires not to vote on an issue.” ,Investopedia states.
As a result, a small group of institutional investors have grabbed so many shares of most of the important publicly traded companies that they dominate most shareholder meetings. As a shareholder in a publicly traded company, that individual is a part-owner in the company; but their voice is rarely heard, especially if they don’t own that many shares. These shareholder meetings become one chance where shareholders can have their voice heard.
Mike Crapo is the Republican Senator from the State of Idaho, and he chairs the SCB. He said Hedge Funds, Mutual Funds, and other institutional players now dominate these shareholder meetings, where retail investors no longer have a voice.
“Last year, Chairman (Jay) Clayton (of the SEC) expressed concerns that the voices of long term retail investors may be underrepresented or selectively represented in corporate governance.” Crapo said. “Whether it is a company’s use of a proxy advisory firm or an asset manager’s investment decision making policy, the retail investor should have a clear understanding of the decisions that are being made which ultimately represent their shares.”
Crapo referred to an oped in the Wall Street Journal written by John Bogle, the creator of the first index fund in which Bogle stated, ‘If historical trends continue, a handful of institutional investors will hold vote and control of virtually every large US corporation.’”
Big institutional investors aren’t merely dominating shareholder meetings but there is a trend to use their power to affect social policy.
James Copland is a Senior Fellow and Director Of Legal Policy at the Manhattan Institute, a think tank in Washington D.C. In his written statement, Copland first laid out the current situation.
- Shareholder voting today is dominated by institutional investors.
- Many of these institutional investors, and other intermediaries, are subject to capture by interest groups with values misaligned from those of the ordinary diversified investor and in tension with efficient markets and capital formation.
- American corporate law and securities regulation, to date, have not been equipped to address this problem.
He illustrated the problem by pointing out a 2017 McDonald’s shareholder meeting.
“For example, when McDonald’s stockholders gathered for the company’s annual meeting in 2017, they had to vote on seven shareholder proposals. Among these were a proposal against the company’s use of antibiotics in its meat supply, brought by the Benedictine Sisters of Boerne, Texas; and one by the nonprofit Holy Land Principles, which wanted the company to modify its employment practices in Israel. The Boerne Sisters owned 52 McDonald’s shares.” Copland said. “The Holy Land group owned 47. No shareholder sponsoring a proposal at the company’s annual meeting that year owned more than 0.0001% of the company’s stock.”
Meanwhile, the industry heavyweight Black Rock, has led a move by these wealth managers to consider social policy when using their proxy power. Her referred to the Fink Letter, written by Laurence Fink to shareholders of Blackrock, in the winter 2018.
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” Fink said.
Copland said this sort of social advocacy is nothing new.
“In 2016 and 2017, a majority of shareholder proposals sponsored at Fortune 250 companies involved social or policy issues largely unrelated to share value, executive compensation, or traditional board-governance concerns. Last year, many of our largest publicly traded companies faced four or more shareholder proposals on their corporate proxy ballot, including AmerisourceBergen, AT&T, Chevron, Citigroup, Dow Chemical, DuPont, Eli Lilly, Emerson Electric, ExxonMobil, Facebook, Ford, General Electric, Google, Home Depot, JPMorgan Chase, McKesson, and Starbucks.
“In every year for the last decade, no more than 1% of these shareholder proposals were sponsored by institutional investors without a social-investing purpose or orientation, or a tie to public employees or organized labor. The SEC’s lenient shareholder-proposal rules have also empowered a very small number of investors with limited investment stakes to assume an outsized role in corporate-boardroom debates; three individuals and their family members—commonly called ‘corporate gadflies’—have sponsored between 25% and 45% of all shareholder proposals in recent years.”
Copland showed how PETA, People for the Ethical Treatment of Animals, used small corporate ownership to try and introduce social policy a shareholder meeting.
“In March, the People for the Ethical Treatment of Animals announced it was acquiring shares in Levi’s in order to propose shareholder resolutions involving the manufacturer’s use of leather patches. PETA’s decision was not related to investment concerns; it announced it was acquiring the minimum number of shares required to reach the SEC’s $2,000 threshold.” He said.
Copland said another issue is that there are proxy advisory firms- Institutional Shareholder Services, or ISS, which is today owned by private-equity firm Genstar Capital; and Glass, Lewis & Co., a subsidiary of the Ontario Teachers’ Pension Plan Board- who work exclusively in an advisory role with many of the wealth managers in framing their proxy voting role.
John Streur is President and Chief Executive Officer Calvert Research and Management, or one of these wealth management firms.
He also testified and noted that his firm needed to make decisions in 4,700 shareholder votes in the previous year. They were critical in helping Calvert in making those decisions.
Copland said these proxy advisory firms also come with longstanding social policy ideas. For instance, he referred to Rakhi Kumar, who handled proxy voting for State Street.
“State Street, the world’s third-largest institutional investor, delegates oversight of these issues to Rakhi Kumar, head of ESG investments and asset stewardship.” “Ms. Kumar has no apparent experience trading in securities, but she envisions for herself a broad role in overseeing aspects of corporate management both broad and granular: at the SEC’s proxy process roundtable in November 2018, Ms. Kumar talked about how she was working with corporate executives to change terms of maternity leave and to manage hog farms in North Carolina.” Copland wrote in his written statement. “It is hard to see what specialized expertise Ms. Kumar has over hog farming. But when shares are concentrated in large fund families’ hands—and proxy advisors like ISS threaten to withhold support for corporate directors who fail to act upon any shareholder proposal that receives majority shareholder support—it’s little wonder that company leaders pay attention.”
Copland argued this favors social policy ahead of maximizing shareholder value.
“Such sweeping policy oversight by institutional investors is far afield from the agency costs shareholder voting rights are intended to mitigate. It is particularly strange when employed by index funds. The premise of such funds is to leverage capital-market efficiency and minimize active management costs—in essence, to follow the stock market. Yet in shareholder-voting decisions, such fund families are actively supporting efforts to modify corporate behavior. There is no clear investment-based rationale for this obvious tension in strategy.”