Professor Gensler: Unsolicited Advice

Professor Gensler: Unsolicited Advice

Professor Gensler

Congratulations. When confirmed to chair the SEC, you can take a major role in reconstructing our financial and economic systems. Below, I offer the unsolicited advice of a real “Main Street” investor.

Central to a recovery that helps America address its many issues (institutional racism, inequality, climate change, anomie, etc.) is a system that reconnects people and their values to their investments. For decades the SEC has treated average investors more like consumers than people with the power to shape corporations, one of our most important social inventions.

When we purchase stock or entrust our investments to a fund, we are buying something much different than a toaster that has passed UAL inspection or a collector item. We are not just betting on future worth, we are prioritizing our future economy, how it will be governed and how it will impact us. The SEC should help Americans understand and take responsibility for the connection between our values, priorities, and our voice.

After WWII the NYSE developed a marketing campaign, “Own Your Share of American Business” (OYS). The purpose was to rebuff communism, restore brokerage firm profitability, and gain support for policies favoring the rich (low estate and capital gains taxes). Decades later, President George W. Bush pushed the “ownership” society as a way of asserting individual property rights over ties to the state and Social Security. Neither movement stressed the role of shareholders in governing and shaping corporations.

Look up Shareholder Voting on Investor.gov. The latest entry is What is new in 2012. With your knowledge of blockchains, you are in a perfect position to reconnect the link between shares, ownership, and responsibilities lost in disintermediation. One study found sixteen intermediaries between a Main Street investor and their investments (What They Do With Your Money, p. 3). The SEC should facilitate deeper ties between shareholders/beneficial owners and the companies we invest with and in.

Easiest Transformative Change

While proxy plumbing and disintermediation are essential to any such effort, a much easier and more impactful step would be to require N-PX reporting forms to be data-tagged. Main Street investors could then compare fund proxy voting records.

Employers provide information on funds available to their employees through 401(k) and other investment plans. That information focuses on historical returns and fees. The most common investment choices in most plans are usually index funds, which now have more assets than actively managed funds. Returns and costs for indexed funds are similar for funds modeling the same index. See, for example, compare S&P 500 funds.

What neither employers nor most investment advisors provide is any information on fund voting records. That information must be extracted by a combination of computers using artificial intelligence and manual labor. N-N-PX  reporting in an easily tabulated and compared format would foster analysis such as Proxy Voting Adds Some Spice to Plain-Vanilla Index Investing and The Party Structure of Mutual Funds.

Comparable proxy voting records would drive choices, since differences in voting by funds are much starker than for earnings or fees, especially for the most popular index funds. Widespread reporting of fund votes will result in more debate about how funds should vote. Fund families would soon tailor individual fund voting based on portfolio objectives and investor expectations.

ESG funds would vote differently within the same fund family than funds not focused on such information. Customers will sort themselves, patronizing funds based on how the investor’s own values align with voting records. If funds cost the same and earn the same, how they vote will be a significant source of branding. Aligning with investor values and evidencing a record of engagement could drive competition.

Further Information. See my rulemaking petition, Proxy Scorecard and Fund Competition. I called on the SEC to require funds to report their votes in a machine-readable format in real-time. Last year’s news is irrelevant to most people, so I thought real-time disclosure was critical. However, many funds oppose real-time reporting. They fear being inundated by companies and investors asking them to change their votes. It also appears a substantial number of funds with trillions of dollars invested will announce votes in advance of meetings without making that a requirement, as Norges Bank recently did.

Investor.gov

As mentioned above, Investor.gov is outdated. The site should be refocused to not just protect investors as consumers of securities but to help them become engaged shareholders. Just as engaged citizens are less easily led down the path of ruin by self-serving leaders, the same is true for shareholders.

Investor.gov should discuss the importance of taking an active role in corporate governance.

  • The roles, rights, and responsibilities of directors, management, and shareholders.
  • How to read a proxy. What are the required elements?
  • How to find fund voting policies and records.

Since the vast majority of individual shareholders do not vote their proxies, Investor.gov could list and provide links to funds that announce their votes in advance of annual shareholder meetings. Reviewing how others voted and why can be helpful in determining our own vote. Over time we learn which funds are most aligned with our own values, so we copy their votes or use that information to supplement our own analysis. I include a list of such funds in my CorpGov.net Handbook.

Encourage Client Directed Voting

Reading through proxies and voting is time-consuming and too difficult to make the effort worthwhile for most retail shareholders with small holdings.

Institutional investors can hold millions of shares at an individual company. Yet they do not read through hundreds or thousands of proxies. Instead, they vote using proxy voting policies. Staff review is mostly limited to items that have not been anticipated by those policies.

SEC rules make such systems prohibitive for individual investors, even though individuals may hold only fractional shares. A few retail shareowners will read proxies, but most will not. Voting announcements by institutional investors prior to annual meetings posted on the Internet can help retail shareholder vote in a more informed manner. However, retail shareholders should also have the same right as institutional investors to vote by predetermined policies.

The SEC should encourage automated “client directed voting” (CDV) by facilitating the development of internet voting platforms and proxy voting policy defaults like institutional investors use. The SEC should mandate that shareholders are to have their proxies distributed to and voted by any agent of their choosing. CDV systems should be financially incentivized by the SEC with a portion of funds currently distributed to encourage movement from paper delivery. Reference the following:

Professor Gensler – Of course, I would be delighted to further discuss any of the above at your convenience.


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