The battle over Main Street Investors could determine the future of the American economy for decades to come. According to Cydney Posner of Cooley PubCo, on one side are those who believe investors must focus on maximizing financial return and management knows best. On the other side are those who want to broaden the focus of investors to include environmental, social and governance (ESG) issues, with everyone participating in the debate.
Think of it this way. You have two job offers. One job offers more money but you will inadvertently kill people. On the other job, you will help people. This is the old rationale for environmental, social and governance (ESG) investing. Helping society or the environment will cost you money. However, “100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital,” so no need to sacrifice. (Sustainable Investing: Establishing Long-Term Value and Performance)
In fact, investment performance is the most frequent motivation for using ESG data, followed by client demand and product strategy. (Why and How Investors Use ESG Information: Evidence from a Global Survey) The debate is no longer focused on whether or not to factor ESG into investing but where to find comparable data. (Bridging the Disclosure Gap: Investor Perspectives on Environmental, Social & Governance (ESG) Disclosures)
Battle Over Main Street Investors: Main Street Investors Coalition
The so-called Main Street Investors Coalition claims to represent real people, unlike large asset managers such as BlackRock and Vanguard. “Despite controlling the single largest pool of equity capital in the world,” real people (like former President Richard Nixon’s “silent majority“) “have almost no ability today to influence the decision of these funds make on their behalf, with their money. The Main Street Investor Coalition was created to help change that.” (Our Mission)
After giving his speech on the silent majority to rescue America’s “traditional values,” Nixon’s 50% approval rating shot up to 81%. Will an appeal “main street investors” have a similar impact for those pushing that term?
Main Street Investors Coalition: Who Are They?
The Coalition is made up of five associations. The following is a brief profile of each, drawn from Wikipedia:
1. The National Association of Manufacturers (NAM) is the nation’s largest manufacturing industrial trade association, founded in 1895. NAM’s earliest efforts called for the creation of the U.S. Department of Commerce to facilitate exports. Another early push was for a great national anti-union federation under the control of NAM. In the late 1930s, NAM used a public relations campaign to promote the benefits of capitalism and to combat the policies of President Franklin D. Roosevelt. In 1947 they pushed through the Taft-Hartley Act to restrict the power of unions. They produced an anti-communist TV show in the 1950s.
More recently, we see dissension in the ranks. Duke Energy did not renew its membership, in part because NAM opposes mandatory controls on greenhouse gases linked to global warming. Although ExxonMobil announced its decision to quit the American Legislative Exchange Council (ALEC), it continues on the board of NAM, which in recent months targeted individuals, groups and communities attempting to hold major fossil fuel companies accountable for their contributions to climate change.
2. The American Council for Capital Formation (ACCF) is a think tank that won substantial tax cuts. Although opposing EPA’s regulation of greenhouse gas emissions, ACCF says it does not reject climate-related science. The group is critical of proxy advisors. (Officers)
According to Timothy Doyle, ACCF vice-president of policy and general counsel, power transferred from the board to either the advisory firms or to the shareholders. “It’s like going from a representative democracy to a true democracy. That’s not the way the system should work.” (U.S. proxy report proves timely)
3. The Equity Dealers of America (EDA) members include Raymond James Financial, Robert W. Baird & Co., Stephens Inc., Stifel Nicolaus & Company, William Blair & Company, and Wunderlich Securities. EDA is under the umbrella of the American Securities Association, which fought the Labor Department’s rule to “require financial advisers to put their clients’ financial interests above their own,” according to the Wall Street Journal. (Smaller Brokerages Band Together to Challenge Regulatory Costs)
4. The Savings and Retirement Foundation is “dedicated to bringing together scholars, policy staffers, and industry experts to discuss and explore topics related to the issues of pensions, savings, and retirement. The goal of the forum is to help inform those who advise policymakers of the most current research in the field.” According to Charity Navigator, the Foundation has income of less than $50,000 per year. Ike Brannon heads the Foundation. His blog posts at the Cato Institute give some sense as to his beliefs. For example, in discussing “green investments” by public pensions, he notes,
Investing in an environmentally or ethically conscious way will invariably impose some sort of cost on an investor. While an individual investor may be willing to receive a lower return to assuage his conscience, asking a state’s current and future retirees—or the taxpayers who support them—to do the same in a world of underfunded pensions is a dangerous precept.
5. The Small Business and Entrepreneurship Council (SBE Council) “educates elected officials, policymakers, business leaders and the public about key policies that enable business start-up and growth.” The Council’s website includes testimony before Congress advocating for a wide range of changes to stimulate business formation, such as lowering the capital gains rate for individuals to 10%.
Main Street Investors Coalition: What They Want
The Coalition formed “to wage a multi-million dollar campaign aimed at countering the influence exercised by a number of large institutional investors and asset managers, like BlackRock and Vanguard, in the shareholder proposal process, particularly in connection with issues the Coalition views as inherently social or political.” (Groups Take Aim — From Opposite Directions — at Shareholder Proposals) The Coalition proposes four solutions:
- “We will call for managers to focus on maximizing performance ahead of pursuing social and political objectives that have not been sanctioned by fund members.
- We will insist that public pension funds meet the same basic regulatory and reporting standards as private pension funds as the first step to addressing a broken and deteriorating system.
- We will require that retail investors who own passive funds through 401(k)s, index funds and other vehicles have a say in how their shares are voted.
- And we will demand that ‘black-box’ proxy-advisory firms be more transparent about potential conflicts of interest between their business areas in order to ensure that their guidance actually benefits shareholders.”
Main Street Investors’ Probable Allies
- SEC Chairman Jay Clayton, who invoked “Main Street” investors 28 times in testimony to the House Committee on Financial Services, saying “voices of long-term retail investors are being underrepresented, misrepresented or selectively represented in corporate governance.”
- The Business Roundtable, which advocates laws to “tighten eligibility and enable more exclusions of proposals and repeat submissions.” (Modernizing the Shareholder Proposal Process) The CEO members who make up Business Roundtable lead companies with more than 16 million employees and more than $7 trillion in annual revenues.
- The United States Chamber of Commerce, which released similar recommendations on shareholder proposal reform to “fix the broken Rule 14a-8 system in order to protect investors and make the public company model more attractive.” The Chamber is the world’s largest business organization representing the interests of more than 3 million businesses of all sizes, sectors, and regions.
Main Street Investors Coalition: Why Now?
- Institutional shareholder support for social and environmental proposals increased over the past five years (from 19% in 2014 to 29% in 2018).
- Institutional and retail support of corporate political spending proposals has increased notably over a five year period (from 20% overall in 2014 to 28% this season).
The Coalition was formed because shareholder proposals seeking ESG changes are beginning to win more frequently, even though the number of proxy access shareholder proposals declined over the last four years (from 81 in 2015 to 34 in 2018). [data from 2018 ProxyPulseTM]
Shareholder Rights Group: Probable Allies
- As discussed in this PubCo post, the Council of Institutional Investors raised similar objections to the SEC’s reinterpretation of the Rule 14a-8(i)(9) exclusion. Voting members have assets of $3.5 trillion; nonvoting members have assets of $25 trillion under management.
- Since the Main Street Investors Coalition specifically targets BlackRock, Vanguard, and State Street for their shareholder activism, one can assume they are probable allies of the Shareholder Rights Group. BlackRock, Vanguard and State Street will soon manage $20 trillion in assets — more than the current U.S. GDP.
- Passive Investors, like BlackRock, Vanguard, and State Street are the new power brokers of modern capital markets. By 2024 they will hold over 50% of the market. “Although index funds are locked into their investments, the shareholders who invest in these funds are not.” Index funds compete with each other and with active funds through engagement. “Society is demanding that companies, both public and private, serve a social purpose.”
- Since BlackRock, Vanguard and State Strethave supported management proposals and opposed shareholder proposals more than most fund families but are still under attack by the Coalition, one can assume almost all funds are more likely to support the Rights Group than the Coalition. (See FundVotes.com) Rakhi Kumar, global head of asset stewardship and ESG at State Street Global Advisors (SSGA), warned their patience is running out with portfolio companies not moving forward on topics such as board diversity, refreshment and climate change. (SSGA’s Kumar warns companies on ESG progress) The three funds currently have in excess of $9 trillion in assets under management.
- Passive Investors are on the rise and will hold 50% of the market by 2024. “Although index funds are locked into their investments, the shareholders who invest in these funds are not.” Since passive investors cannot exit, they compete with each other and with active funds through engagement.
- The third annual Responsible Investing Survey by RBC Global Asset Management found the percentage of US institutional investors who reject ESG outright shrank to 34% from 51% in 2017. 24% of US investors think ESG integrated portfolios will outperform non-ESG portfolios, five times the number who agreed in 2017. Globally, 90% of institutional investors believe ESG integrated portfolios perform as well or better than non-ESG integrated portfolios, and 72% are using ESG to make investment decisions. More than half consider ESG integration to be part of their fiduciary duty – double the percentage who said so last year.
- The rise of wealth inequality is a legitimate subject in politics. The share going to owners of capital increases, while labor’s share plummets. The top 10% own about 85% of assets, while the bottom 50% own practically nothing. (Capital’s Share of Income Is Way Higher than You Think) Dual-class shares, recent tax reforms and the coming robotic/AI revolution aggravate the situation. (Is Inequality in America Irreversible?) Support for both Trump and Sanders came from voters seeking to address wealth inequality but inequality has grown worse.
Battle Over Main Street Investors: My Assessment
BlackRock: Unlikely Savior
The Main Street Investors Coalition raises some legitimate issues but the group’s supposed solutions belie their identity as managers, not investors. They pretend to speak for Main Street investors but their recommendations would deny those same investors rights and voice.
“Maximizing performance ahead of pursuing social and political objectives.” This is at the heart of what the ‘Coalition’ gets wrong. Our survival depends on solving problems, like climate change, caused by companies externalizing costs. As Larry Fink noted in his letter to CEOs, “Society is demanding that companies, both public and private, serve a social purpose.” Fink did not arrive at that conclusion on his own. He did so under pressure from his own shareholders, including me. (Climate Risk – Walden Moves BlackRock)
BlackRock is attacked by the Main Street Investors Coalition for voting in favor of proposals on climate change at Exxon and Occidental.
A former top energy advisor to President Trump, George David Banks, will lead a new multi-million dollar campaign aimed at limiting the way large investment firms, like BlackRock, influence shareholder resolutions on hot-button issues like climate change.
However, when Preventable Surprises used ProxyInsight and Bloomberg data to analyze voting records at utilities, BlackRock still had the lowest score, voting against 9 out of 9 proposals, worse than even State Street, Northern Trust, Fidelity, Glodman Sachs, and Franklin Templeton.
Nan Bauroth, of the Coalition, complains BlackRock is greenwashing:
Vanguard and BlackRock get to declare publicly that they are on the right side of history. They get to buy goodwill for the day when the court of public opinion potentially turns on them. It’s a smart PR move. But using their clients’ money to buy that goodwill is also a breach of fiduciary responsibility and financial ethics.
Instead of insisting that Vanguard and BlackRock live up to their rhetoric, which places them “on the right side of history” with regard to issues like climate change, Bauroth wants her readers to ask them to back off entirely and just vote with management. (Big Index Funds Spend Your Money To Appear ‘Socially Conscious’)
Main Street Investors: Sleeping Giant
Real Main Street investors, whether invested directly in stocks or indirectly through institutions, could be the main drivers but they remain on the sidelines. Ninety percent of retail shareholders do not bother to vote. When we do vote, most reflexively vote as recommended by the board. After all, if we really thought the board was not running a company properly, we would sell. That is the cynical attitude of the largest member-based organization for individual investors.
When I testified at an SEC roundtable on how to get retail investors more involved, the American Association of Individual Investors representative stated that most retail investors vote with their feet. If they like what the company is doing they hold on to the shares. He quoted a typical member, “I vote about half the time, most of the time I don’t vote when I’m satisfied with the board and when I think something is being managed poorly, then I sell my shares.” (Video Friday: SEC Proxy Voting Roundtable)
Selling is too radical a solution, if the disagreement is minor. Why not work to fix any small problems? Most people I know would not move because of a dangerous intersection at the end of their block. They would try to get a stop sign or other remedy. They do not threaten to divorce their spouse with every disagreement. We negotiate.
Instead of organizations that reinforce selling by investors at the first sign of disagreement or mere handwringing, we need organizations to embrace their social and political objectives as central to their investing strategy. We should be investing in companies that reflect our values. When those companies veer off course, we need to help push companies and public opinion in the right direction.
Real Main Street Investors Could be “On the Right Side of History”
Our own efforts and public opinion are main drivers in creating the future. (Will Corporate Elites Attack Public Opinion Next?) Public opinion is moving in the direction of investing with our values, instead of despite our values. This is especially true for younger generations. (Who Wants Impact Investing?)
The investor demand is there, But typically who do CEOs and CFOs hear from? They hear from analysts on quarterly calls, where the time horizons are very different. I’m not on quarterly calls because we’re long-term investors and we’re looking at long-term risks. We’ve published papers, we’ve sent letters, and we’ve talked about these issues at conferences for years. But we’re still trying to pivot management’s views to the long-term and that’s very challenging. (SGA’s Kumar warns companies on ESG progress)
The coalition believes it has common cause with the retail investor because it assumes the overwhelming majority only want to earn the highest financial return possible. (Commentary: Reforming a broken system) They are wrong. Investors increasingly want their investments to have a positive impact on the world, as well as earning a good financial return. Learn more of this phenomenon by attending the SRI Conference, November 1-4 in Colorado Springs.
The Main Street Investors Coalition fights a rear-guard battle. Yes, they can fund surveys that find most people invest primarily to earn money, not to have a social impact. However, people often invest with multiple objectives in mind. Not all their reasons are financial.
The Coalition tries to convince the public the only legitimate reason to own equities is for the highest financial gain, regardless of social or environmental consequences. They encourage investors to take a purely instrumental view of others and the natural world. What’s in it for me? Take, take, take without reciprocity.
Economics is more than zero-sum gain. As Adam Smith wrote 250 years ago, the commercial economy depends on moral imagination and the ability to put yourself in the other’s shoes. Politics has also been infected by efforts to turn economics into a science, devoid of moral values, assuming people act only as selfish robots.
Economics and politics suffer not from too much moral argument, but too little. Both fail to engage the big questions people care about. Market values overwhelm all other values. Winning in life is NOT dying with the most toys. We can neither empathize with others nor persuade them by sweeping our values or theirs under the rug. Finding shared norms requires moral imagination, exploration and dialogue, both as economic agents and citizens.
As Jessie Norman concludes in his his book, Adam Smith: Father of Economics,
Economics itself needs to own up to its limitations… it has long been overly preoccupied with its own models rather than with the real-world phenomena they are supposed to represent… It encourages politicians to persist in the responsibility-abrogating technocratic fantasy that economics trumps politics and can itself solve issues of justice, fairness and social welfare… There can be no such thing as value-free economics.
There can also be no such thing as value-free investing. Both the modern democratic state and the modern evolving corporation depend on mutual moral obligation. As Norman points out, we are in danger of “tilting the playing field still further towards insiders and away from citizens and consumers.”
For the center to hold, common values must be created through open dialogue and democratic elections, not by a few unaccountable individuals hidden in the shadows controlling companies like Wal-Mart, Koch Industries, Alphabet, or Facebook. See Recommendation of the Investor Advisory Committee: Dual Class and Other Entrenching Governance Structures in Public Companies. Both the purpose of the state and corporations must be discussed openly to create shared cultural values.
Like the Trump administration, the Main Street Investors Coalition seeks to win over public opinion, not through moral argument but through fake news and bluster. Hopefully, their campaign itself will open eyes to the need for wider participation in corporate governance through more direct investment in the funds, advisors and organizations of the Shareholder Rights Group. Others, such as CorpGov.net, ProxyDemocracy.org, Change.org, Say.com, YourStake.org, SumOfUs, AsYouSow.org, the Center for Political Accountability, and the Shareholder Rights Group should gain new participants as we collectively advocate for more democratic corporate governance.
For a plethora of posts exposing the so-called Main Street Investors Coalition as a sham, see Nell Minow’s posts on ValueEdge Advisors and elsewhere.
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