The Main Street Investors Coalition is an Industry-Funded Effort to Cut Off Shareholder Oversight
This post originally appeared on June 14, 2018 on The Harvard Law School Forum on Corporate Governance and Financial Regulation and was written by Nell Minow.
Here’s a tip from a long-time Washington DC lawyer: 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. And thus we have the Main Street Investors Coalition, which bills itself as “bring[ing] together groups and individuals who have an interest in amplifying the voice of America’s retail investor community.”
In reality, it is a corporate-funded group with no real ties to retail investors, and its advocacy is as fake as its name. MSIC uses inflammatory language, unsupported assertions, and out-and-out falsehoods to try to discredit the institutional investors who file and support non-binding shareholder proposals. While these proposals are filed at a very small fraction of publicly traded companies and even a 100 percent vote does not require the company to comply, somehow, this very foundational aspect of free market checks and balances is so overwhelming a prospect to corporate executives that they are unable to provide a substantive response and instead establish what in Washington is referred to as an “astroturf” (fake grassroots) organization, setting up a false dichotomy between the interests of large and small shareholders.
[A]s the size and influence of these massive institutional holders has grown, so too has their power, influence and share of voice — drowning out the voices and interests of Main Street investors who, despite controlling the single largest pool of equity capital in the world, have almost no ability today to influence the decisions these funds make on their behalf, with their money.
Of course this completely overlooks the fact that institutional investors are fiduciaries representing everyday working people like teachers, firefighters, and employees of publicly traded companies. What the folksy-sounding, corporate-front Main Street Investors want to do is divide and conquer. They know they can no longer rely on the support of investors smart and focused enough to tell when corporate management has gone off the track and big enough to make their views meaningful. So, they pretend to be concerned about some mythic, stock-picking investors who will read through the proxy statements and decide to vote for management’s recommendation. If MSIC really cared about the power of individual shareholders, and if in fact they controlled the single largest pool of equity capital in the world, it would help them to vote their proxies more effectively. It would help them provide oversight to the institutions who manage their money, perhaps circulating reports on the annual disclosures of how the funds vote. After all, index funds have the same fees and returns, but there are differences in how they vote their proxies. Then the investors could decide whether, for example, Vanguard’s votes on CEO pay were more appealing than Fidelity’s.
MSIC’s faux populism about the “real” investor being mom and pop and their little basket of stocks ignores the reality that most working people invest through intermediaries like mutual funds because they perform better. The whole idea of institutional investors is based on the reality that they do better than individuals who do not have the time, resources, or expertise. And it makes sense that the same people who make the buy, hold, and sell decisions should make the decisions about how to vote on proxies as well.
Capitalism, after all, is named for the investors who provide capital, not the executives. And it is founded on the idea of accountability to ensure confidence that the capital they provide will be used honorably. But now that investors are pushing back on issues like excessive CEO pay, ineffective boards, and failure to consider climate risk via advisory shareholder proposals, corporate executives are trying to kill the messenger. Corporate executives love to talk about the free market until it delivers a response they do not like.
MSIC is not a membership organization. Its board does not include representatives of the groups that actually do work with small investors, like, for example, the American Association of Individual Investors, which has excellent educational materials for its members, or Motley Fool and FolioInvesting, which provide services for individual investors. Instead, MSIC has “partners” like the powerful corporate lobbying group the National Association of Manufacturers and the anti-public pension fund American Council for Capital Formation, which says on its website that its purpose is “exposing the politicization of corporate governance.”
So we should be skeptical about their assertion that investors do not care about issues like the environment. PWC’s annual report on boards found, to the contrary, that investors are much more concerned about incorporating environmental risk into corporate strategy than boards are. This is exactly why we have a system allowing for shareholder proposals: to send a message when there is a disconnect between investor and director priorities.
The Main Street Investors Coalition has been tweeting about a new academic study that purports to show that shareholder resolutions have an adverse impact on share price. And where do we find that study? On the website of the NAM, which paid for it. That subsidy alone should make anyone skeptical about its findings.
There are further flaws as well. One is MSIC’s constant use of the term “political” to describe shareholder resolutions to indicate that their purpose is counter to shareholder value. On the contrary. These proposals, filed by fiduciaries who represent large, sophisticated financial institutions acting on behalf of millions of small pension plan participants in most cases, are explicitly grounded in the promotion of long-term shareholder value. SEC rules strictly limit the subject matter of these non-binding shareholder proposals to matters directly relating to legitimate areas for investor feedback. Every one of the proposals is explicitly tied to investor concerns about long-term, sustainable growth.
If corporate management would like to explain on the merits why their positions are incorrect, they have as much room in the proxy statement as they like to rebut it (while shareholders are limited to 500 words). But so far, they have not been persuasive, which is why shareholder resolutions on better disclosure of climate risk, for example, have had support from almost two-thirds of investors. No wonder—78 percent of directors at the largest companies have said that climate change was never or seldom discussed in their board meetings. If corporate executives want to explain why that is appropriate, they will have to do better than they have so far.
Even with strong support for a few advisory resolutions, there is no evidence that financial institutions managing billions of dollars have all of a sudden turned into the Sierra Club. Approximately half of top asset managers opposed more than 50 percent of key climate-related proposals in 2017, and several top managers voted against more than 85 percent of key climate proposals. Eight of the top ten asset managers failed to support key climate votes more than 50 percent of the time. At the very least, this shows that the institutions MSIC is so shrill about are reviewing the proposals carefully and making distinctions between those they do and do not want to support. And that means that the votes are not in any way “political.”
The study MSIC is promoting uses highly suspect metrics to purport to prove that these proposals do not help and can hurt shareholder value. The study looks at the reaction of companies’ stock prices to both increased disclosure of climate-change-related information and shareholder proposals calling for such disclosure.
In what way is that a relevant measure? There are innumerable factors that go into the pricing of stock on a given day, and no one is suggesting that the adoption of particular policies urged by shareholders will have the immediate positive stock price impact that, say, a generous tender offer would. These are complex, multi-layered issues and, more important, these are essentially permanent shareholders. They are not trying to time or manipulate the market. As corporate governance expert Beth Young points out, “The yardstick should not be whether a company’s stock price goes up upon disclosure of climate-related risk/opportunity disclosure; investors might see the disclosure and think that the company has more risk than previously understood, or decide that the risks are being poorly managed, in which case the right direction for the stock price is down.” It is not in investors’ interests to have the stock price inflated due to inadequate disclosure. If more information results in a more accurate stock price, that will help managers and directors make better decisions going forward.
And then there is the study’s “finding” that these proposals can impose millions of dollars of cost onto the corporations. We reiterate that these proposals are not binding, so there is no obligation to spend any money at all. And we fully expect that corporate executives, as a matter of professional responsibility and fiduciary obligation, would never authorize expenditures unless they were supported by cost-benefit analysis. Yet we do not see benefits from complying included in these calculations. More important, we suspect that self-reported, unsubstantiated reports of costs may be inflated to a considerable degree.
Perhaps the next step should be a shareholder proposal to stop wasting money on fake public interest groups and poorly designed studies.
And yet, they are trying to undermine shareholder votes here. What is especially outrageous is their argument that mutual funds are “uninformed,” because what they are suggesting here is that individual investors are somehow more informed. On the contrary, individual investors entrust their money to managers who have the expertise, resources, and fiduciary obligation to buy, sell, hold, and vote their shares.
In a post on this blog, MSIC asserts without any substantiation that retail investors don’t know and don’t approve of the way fund managers vote. They assert contrary to documented data that fund managers outsource their votes to proxy advisors. In reality, the data show that while institutional investors appreciate the analysis they receive from proxy advisors, they vote according to their own proxy voting policies, and the more complex or controversial the issue, the less likely they are to follow the proxy advisors’ recommendations. Proxy advisors are like securities analysts. No one has to buy their products. No one has to follow their recommendations. But their clients find them a valuable resource. It is also not true that proxy advisors are unregulated. We often see corporations object to any regulation except that which protects them from competition or other market tests, so we note that proxy advisors are subject to stringent restrictions when they register as investment advisors.
MSIC engages in the slimiest possible rhetorical trick by assuming without evidence and contrary to the record that fund managers are somehow voting against the economic interests of their customers. They assert without any evidence that the people who manage money do not know what their customers want but they do.
We do agree with one point made by MSIC: the best decisions about proxy voting are made by those with the most significant economic interest. MSIC has none; indeed its interests are entirely the other way. So until they fully disclose all of their sources of funding and put some actual retail investors on their board they should leave it to those who have not only economic interest but fiduciary obligation, and are thus in the best position to provide what even they acknowledge is “an important component of efficient corporate governance.” The only way to make that vital component effective is to respond to votes against management’s recommendations by engaging with shareholders, not creating fake advocacy groups to try to undermine them.