Nell Minow is Vice Chair of ValueEdge Advisors. Reposted with permission from the ValueEdge blog.
The SEC’s roundtable on the proxy system is scheduled for next month, and so articles that look suspiciously like plants from the CEO-funded fake dark money front group Main Street Investors Coalition are popping up like a sock puppet chorus.
In Forbes, Ike Brannon, a consultant affiliated with the Koch-funded Cato Institute, says that fiduciary financial professionals should not be bothered with “tangential” distractions like proxy voting. His folksy citing of “The Simpsons” and his friends in the investment business to support his argument cannot disguise the fact that he has clearly done no research into the subject and has no substantive argument to make.
Furthermore, his piece is, in its most essential elements, factually wrong. He says proxy advisory firms are not regulated, which is, first of all not true: as investment advisors they are covered by a wide range of regulations. But it is very disappointing to see anyone connected to Cato, which is usually the exemplar of robust free market economics, call for regulation of independently produced publications that no one has to buy, with advice no one has to follow, on shareholder resolutions that are advisory only — even a 100% vote in favor is not binding on the company. As with all Main Street Investors Coalition affiliates and acolytes, Brannon does not come up with a single example of a proxy proposal that was wrongly decided or harmful as a result of proxy advisory firms. The fact that well over 90% of proxy advisory firm recommendations are to vote with management somehow does not persuade him that any “power” he attributes to them is benign.
The word “tangential” reveals that Brannon concludes, without evidence, that there is no value in voting proxies. As an economist, and presumably, since he is affiliated with conservative politicians and organizations, he should know better. Proxy voting, especially by large institutional investors who are essentially permanent shareholders, is an essential component of free market capitalism, the restraint on the agency costs inherent in entrusting investment capital to other people. He does not model, explore, or even consider what would happen if institutional investors did not vote. For example, given that they hold up to 70% of stock in public companies, would there even be a quorum at the annual meeting? He does not consider the validity of a check on topics like CEO pay, where investors want more ties between pay and performance and executives want fewer. And he overlooks the merits of a cost-benefit analysis of engagement over selling a stock and fails to consider agency costs or externalization, pretty astonishing for an economist.
Professional money managers have both legal and economic reasons to vote proxies. Legally, they are subject to the strictest standard of care under our laws, the fiduciary standard, as a recognition of their own agency costs in managing other people’s money. Just as a trustee responsible for managing a minor’s real property must maintain it to make sure it does not deteriorate, a fiduciary investor must do the equivalent by voting proxies to protect the value of the investment. As a matter of economics, money managers want to protect their own interests. Returns affect their business and their compensation. And those who vote most clearly on behalf of investors have an edge in competing with those who do not. If clients want the same people who make the buy/sell/hold decisions, who have the deepest understanding of portfolio companies and economic trends, to vote the proxies as well, why should an economist object? Could it be his own self-interest in accommodating the views of funders and clients or prospective clients?
And then we have the shrill and slanted “How liberals’ feud with conservatives ensnared corporate boardrooms” from Joe Williams at the conservative Washington Examiner, funded by billionaire and funder of right-wing politicians and organizations Philip F. Anschutz. Williams writes:
A battle between conservative and liberal ideology is heating up outside the halls of Congress, and the outcome could shape Corporate America’s stance on issues from environmental policy to firearms sales.
For years, investment firms, unions and pension funds have used their ability to introduce policy proposals at annual meetings to drive change at some of the largest U.S. businesses. Social activists are increasingly realizing that, for fairly small amounts of money, they can do the same.
With as little as $2,000 worth of shares in a company, an investor can file a resolution seeking to force its board into actions from adding women directors to improving minority-hiring practices. While the measures rarely garner the majority support required for passage, they drive media headlines and often influence corporate decision-making nonetheless. Amazon, Facebook and Google parent Alphabet, for example, all independently announced new diversity policies for selecting directors this year.
We note once again that there are very strict limits on the subject matter of shareholder proposals. They cannot be about “ordinary business” decisions that are the exclusive province of the company’s managers and directors. But they have to be related to matters within the company’s purview and suitable for shareholder concern like, for example, the qualifications of directors or disclosure of investment-related risks. As Williams admits, most resolutions do not get majority support, and as he neglects to mention, even those that do are advisory only and companies can ignore them. But if a majority or even a significant number of a company’s shareholders support a proposal, that means that it is not just “activists;” it is pension funds, foundations, insurance firms, and endowments who are in favor. That is the essence of capitalism, and calling it “political” does not take away from the reality that if a majority of the people who have the most significant financial stake in the firm think that a particular action is necessary to protect their investment, their views have more weight than that of insiders, and certainly more weight than that of commentators like Brannon and Williams.