American values were recognized as at risk in 1932 when Adolf Berle and Gardiner Means argued that with dispersed shareholders, ownership has been separated from their control. (The Modern Corporation and Private Property) Ironically, concentration of equities under the umbrella of three or four indexed funds presents an opportunity to end that divide and make companies better reflect American values by being more accountable to their beneficial owners. Accomplishing that goal depends on transparent governance, such as proxy voting, and fostering real dialogue on the issues faced by corporations and investors. As I have argued, real-time disclosure of proxy votes could drive these huge funds to compete with each other based on not only profits and costs but their governance efforts, as reflected in proxy voting records.
Real-time proxy voting disclosure would fulfill the SEC’s intent of requiring funds to disclose proxy votes. The purpose of those disclosures is to facilitate the ability of Main Street investors to evaluate funds based on their voting records. Yet, N-PX forms are unusable for that purpose. Unless you subscribe to a comprehensive data service like Proxy Insight, you will not be able to align your American values with proxy voting behavior. Since funds are only required to report annually, the information quickly becomes dated with regard to evolving issues. Additionally, votes are usually reported not in a database but using pdfs. Comparing voting records of multiple funds is a nightmare. Compare CalSTRS’ sortable disclosure with that of State Street Institutional Investment Trust.
Funds Announcing Votes in Advance of Proxy Meetings
Long-term, announcing proxy votes in advance could be the biggest driver of proxy votes by retail shareholders and institutional investors who do not have the resources of Big Funds, ISS, Glass Lewis, Egan-Jones or others to help them analyze how to vote. It could also drive competition on the basis of aligning voting behavior with the values of investors.
MoxyVote produced a cartoon on the power of shareowners banding together. They gathered proxy votes from a growing numbers of investors who announced their votes in advance. Main Street investors could then choose to vote in tandem with trusted institutional investors. For example, I could set my preferences to vote with Domini. If Domini does not vote, vote with Calvert. If Calvert does not vote, vote with CalSTRS, etc. Unfortunately, the MoxyVote was slightly ahead of its time, was hindered by antiquated SEC rules and went out of business.
Institutional investors could win in the court of public opinion if they announced their own opinions before most decide how to vote. Such announcements could keep millions of Main Street investors from tossing their proxies. The New York City Comptroller recently joined a dozen or so other funds in announcing their votes in advance of annual meetings. Reviewing those disclosures is helpful in making voting decisions. After the demise of MoxyVote, ProxyDemocracy.org remains the only free aggregator of proxy votes announced in advance of annual meetings but their software crashes frequently and needs upgraded. As I write this, the site is once again down for lack of a small amount of financing.
Proxy Insight compiles all the information from pre-disclosing funds, as well as from all funds filing annual N-PX forms. Most Main Street investors are unwilling to pay for access. Investors can also research fund votes by looking up each fund listed in the Shareholder Action Handbook on CorpGov.net. However, that is a cumbersome process. However, other sites and applications are being developed that will lead to public pressure to disclose proxy votes in real-time to bring them into better alignment with American values. This post will discuss a few. If you know of others, please contact me.
Morningstar Will Drive Fund Vote Analysis to Align with American Values
At the end of September 2018, Morningstar acquired Fund Votes which has long analyzed mutual fund and ETF proxy voting data on company resolutions and shareholder proposals, including environmental, social, and governance topics. Fund Votes’ founder, Jackie Cook, recently joined Morningstar. Her database, research and thought leadership will now help many more investors better understand this information.
Morningstar wants to shine a light on how funds fulfill their stewardship role as significant owners of nearly every public company. How funds vote their proxies is a big part of that, yet it is hard for investors and non-investors alike to even find this information, much less make any sense of it. Morningstar will change that. How funds vote their proxies matters.
Morningstar currently drives billions of dollars into or away from funds based on their analysis of cost and earnings records. Their analysts and data are frequently quoted in the New York Times, Wall Street Journal, Financial Times and other news sources. Fund Votes will allow them to drive billions more based on voting records.
Shareholders Organize Around American Values
Web portals and phone applications are automating the ability of Main Street shareholders and Mr. and Ms. 401(k) to lobby both companies and mutual funds.
Their pitch is as follows:
Too many companies have harmed the long-term interests of their customers, their employees, their investors, and the mutual fund shareholders by pursuing short-term sales tactics, labor practices and competitive strategies with adverse environmental, social, and governance effects. Short-term strategies are often led by CEOs paid 300 times what they pay typical employees. Many find that risky and demoralizing.
A unique feature on the site is the participant’s ability to vote your opinion on the same issue at multiple companies. For example, the Drug Pricing Ballot says, “There’s concern the six companies on this ballot are becoming over-reliant on drug-price increases for growth. If so, it’s a risky way to treat customers. These proposals try to give the firms’ CEOs an incentive to take that risk into account.” Clicking through sends a message to all six companies.
According to Alexander Lebow, Co-Founder of Say:
We’re building the rails of a direct communications framework between companies and shareholders that can be used for many different applications, most of which we haven’t even imagined yet. It’s a simple concept–companies and their shareholders directly communicating with each other–but the reality today is that most of these interactions take place through the proxy system and its web of intermediaries, high costs, and bad customer experiences.
See Say.com Goes Live on Tesla for an example at work.
Stake provides a brief introduction to Creating Change and argues,
If you own shares in a fund or a company, you have a stake. Your stocks in a fund or company are more than a financial asset. You have rights to a say in what the company does. When you throw out the ‘proxy ballot’ you receive in the mail each year, you give up your power to improve the company toward your vision of a better world.
First, users connect their investment accounts with their Stake account to verify shareholding. Then users can support an “Ask” of a fund or company. Or, they can write their own Ask, leading the “charge” on what matters most to them. One innovation of Stake is use of “Champions.” Once an Ask receives substantial support, a Champion, like Walden or Zevin, with a proven track record of improving companies on social and environmental issues, is appointed to negotiate the Ask.
Public Opinion Drivers to Reflect American Values
As I have noted previously, public opinion drives the voting policies of proxy advisors and probably the Big Funds as well. (Influence of Public Opinion on Investor Voting and Proxy Advisors). Sites aimed at the general public can also transform corporate behavior.
“More than 200 million people in 196 countries are creating change in their communities” using Change.org. Thousands of petitions are started every day on Change.org, on a wide range of issues. As I write this, the following are a few listed victories:
- Massage Envy leadership announced a comprehensive and transparent plan to address the issue of sexual assault, that includes working with RAINN, the nation’s largest organization devoted to preventing sexual assault and supporting victims.
- We did it again! In response to our campaign, Walmart is joining Lowe’s, The Home Depot and Sherwin-Williams by banning dangerous paint strippers containing the dangerous chemicals methylene chloride and NMP (N-Methylpyrrolidone) by February 2019.
- Starbucks is investing $10 million to create a fully recyclable and compostable NextGen cup. McDonald’s is partnering.
Journalists are sourcing powerful stories and covering Change.org campaigns hundreds of times a day. Many involve ESG issues at corporations.
SumOfUs advertises itself as “15,096,345 people stopping big corporations from behaving badly.” “There is a chink in their armor. The biggest corporations in the world rely on ordinary people to keep them in business. We are their customers, their employees, and often their investors. When we act together, we can be more powerful than they are.” Recent press releases include:
- Almost 50,000 people join Tibet groups and corporate campaigners in demanding Google immediately drop “Project Dragonfly’, the censored China search engine
- Airbnb Commits to Removing Rentals in Illegal Israeli Settlements in the West Bank
- Advocacy Groups Meet With Canada Pension Plan Investment Board Urging Divestment From Private Prisons That Separate Immigrant Families
Databases Facilitate Proxy Proposal Submissions Reflecting American Values
Another growing phenomenon is sites specializing in one or two specific topics that help shareholders easily identify companies that fail to live up to American values.
“The Center for Political Accountability (CPA) is a non-partisan, non-profit advocacy organization leading the only successful effort that is achieving corporate political disclosure and accountability.” With no prospects for legislative or regulatory fixes nationally, CPA has developed an innovative strategy that enlists the cooperation of companies themselves by demonstrating the business value of spending transparency. Since 2003, CPA led in making disclosure and accountability the norm by:
- Publishing the annual CPA-Zicklin Index, which benchmarks S&P 500 companies, and is the only index of its kind.
- Building and maintaining the TrackYourCompany.org database, which includes undisclosed company spending and profiles, available to the public and the press.
- Educating companies on how voluntary disclosure and spending oversight can help them manage risk for both company and shareholders.
- Providing ongoing thought leadership, guidance and expertise to the press, including The New York Times, The Washington Post, TheWall Street Journal, The Guardian, FORTUNE, and more.
Companies are not legally required to disclose all of their election-related spending. However, many shareholders understand it is in their interest to know how their corporation engages politically, especially after Supreme Court justice Kennedy included the following in the Citizens United decision, which implies such spending is disclosed:
With the advent of the Internet… Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests… [Disclosure] permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.
Since 2004, shareholders have used CPA’s model political spending disclosure resolution to ask companies to adopt political disclosure practices and accountability policies. Success is on the rise. Especially after the 2016 elections, and Russian interference, many have decided dark money contributions should end.
Our mission is to share, free of charge, simple and usable information on gender leadership diversity. We want everyone to learn whether companies’ intentions match their outcomes to reward those that do well, encourage other companies to do better, and share their results.
Similar to CPA, the Gender Diversity Exchange database can be used as a topic specific resource in targeting corporations that need improvement in gender diversity to better reflect American values. The database is not limited to tracking the percentage of women on the board at each company but also includes information on each company’s diversity policy, quantitative targets, policy implementation, percent of women in the C-suite, percent of women in management and trends.
Full Service Advocacy for American Values
As You Sow’s mission is “to promote environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies.” “As shareholder advocates, we directly engage corporate CEOs, senior management, and institutional investors to change corporations from the inside out.” “We work directly with corporate executives to collaboratively develop business policies and practices that reduce risk, benefit brand reputation, and increase the bottom line, while bringing positive environmental and social change.” They make your American values come to life.
As You Sow takes a multi-pronged approach:
- filing proxy proposals on ESG issues and CEO pay on behalf of clients,
- providing free online tools to screen mutual funds on specific ESG issues to Invest Your Values,
- issuing reports such as on CEO Pay, Proxy Preview and sharing useful Proxy Voting Guidelines.
Coming Competition Among Big Funds to Reflect American Values
We are starting to see some competition among large funds based on voting policies. Ryan Bubb and Emiliano Catan reviewed votes on close to 200,000 and revealed The Party Structure of Mutual Funds.
Funds in the “Traditional Governance Party,” which include the Big Three (BlackRock, Vanguard and State Street), support management at the highest rate of the author’s typologies. Although these funds strongly support managers, they do defend the right of majority shareholders to wrest control at annual meetings by supporting proposals such as those to declassify the board and reduce supermajority vote requirements.
The “Shareholder Interventionist Party,” typified by Institutional Shareholder Services, supports shareholder proposals and proxy contests more than the “Shareholder Veto Party,” advised by Glass Lewis. The largest funds in the Interventionist Party are Dimensional Fund Advisors, OppenheimerFunds, and John Hancock Group. The largest Veto Party members are Franklin Templeton, Columbia Funds, and Charles Schwab. “The Shareholder Intervention Party supports shareholder proposals at a rate of 87%, compared to only 50% for the Shareholder Veto Party.” “In contrast, the Shareholder Veto Party supports management proposals at a rate of only 51%, compared to 63% support for the Shareholder Intervention Party.”
A few funds, like Domini and Calvert, score highly on both dimensions of fund preference. “Our framework shows that these socially responsible fund families are extreme in their shareholder rights orientation, as expressed through their votes.” (my emphasis) It is a mistake to dismiss such funds as extreme. Even though true SRI funds represent only a small proportion of all investments, sustainable impact investing grew 38% between 2016 and 2018. (US SIF Foundation’s 2018 Report on US Sustainable, Responsible and Impact Investing Trends). According to the same report, as of year-end 2017 more than one out of every four dollars under professional management in the United States—$12.0 trillion or more—was invested according to SRI strategies.
The sample period for Bubb and Catan was 2010 – 2015. Given growing pressures from the press, social media and applications outlined above, a similar study undertaken in the near future could yield significantly different results. In his 2018 letter, BlackRock CEO Larry Fink advised corporations to have “a sense of purpose.” “A company’s ability to manage environmental, social and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.” In 2019, Fink clarified that “purpose is not the sole pursuit of profits but the animating force for achieving them.
Fink also included the following in his 2019 letter,
In a recent survey by Deloitte, millennial workers were asked what the primary purpose of businesses should be – 63 percent more of them said “improving society” than said “generating profit.”
That is certainly a different view than the Main Street Investors Coalition, which sees earning a much as legally possible as the only purpose of investing. While all three of the largest funds have launched ESG funds to appeal to consumer demand, they have not moved as quickly in their proxy voting practices to reflect American values. That is because voting records remain largely invisible.
In the 2017-2018 season, asset managers supported, on average, 42% of climate proposals and 28% of political disclosure proposals. A clear pattern of leaders and laggards, with the largest asset managers showing the least support on key climate and political disclosure votes. For example, BlackRock and Vanguard supported only 23% and 33% of climate proposals, respectively; both voted against 100% of resolutions calling for greater disclosure of corporate political expenditures. (Asset Manager Climate Scorecard 2018)
Lack of support for climate and political disclosure proposals conforms with Bubb and Catan characterization of the Big Three as leaders of the Traditional Governance Party. However, reality has a way of catching up to statements made to bolster public relations. Just as the words “all men are created equal” in the Declaration of Independence became more revolutionary than the war those words sparked, the Big Three may soon be held accountable to statements, such as those made by Fink, which many consider hype but which do reflect common American values.
Of the Big Three, State Street has been the most supportive of both climate change and political disclosure reports. Maybe that has something to do with their creation of the Fearless Girl statue. Was the statue a publicity stunt to support their Gender Diversity Index (SHE)? Was it aimed at diverting attention from a $5 million settlement for allegedly underpaying women and employees of color or was the statue a genuine commitment to diversity? Whatever the reason, it marked an inflection point.
State Street asserts Fearless Girl has inspired 300 companies to hire female directors as part of its gender diversity asset stewardship programs in the US, UK, Australia, Japan, Canada, and continental Europe. According to State Street, the percentage of companies in the Russell 3000 Index without female directors has dropped from 24 to 16 percent since the end of 2016.
According to Broadridge, institutional investor support for social and environmental proposals increased from 19% in 2014 to 29% in 2018 (Broadridge, 2018 Proxy Season Review). That is a clear trend. If the Big Three want inflows to continue, real-time proxy voting disclosure would be one way to demonstrate their proxy votes actually reflect their public statements. “Disclosure on ESG issues is only beginning to gain prominence among U.S. companies; therefore, given the right targeting, there is ample room for these types of proposals to gain additional support.” (The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018) The Big Three will be an easier target to persuade than millions of dispersed shareholders.
A Broader Base is Needed for Companies to Reflect American Values
In the United States, the wealthiest 10 percent of households own about 84 percent of corporate stock. Given that tilt, proxy votes cannot truly reflect American values. For the 1967 revised edition of The Modern Corporation, Berle added a new preface, asking “Why have stockholders?”
What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, neither do they spin, to earn that reward. They are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.
The true rationale for shareholders, according to Berle, is found in its ability to empower individuals and societies.
There is… a value attached to individual life, individual development, individual solution of personal problems, individual choice of consumption and activity. Wealth unquestionably does add to an individual’s capacity and range in pursuit of happiness and self-development. There is certainly advantage to the community when men take care of themselves. But that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder’s existence thus depends on increasing distribution within the American population. Ideally the stockholder’s position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.
I will turn to that idea in an upcoming post.