BAC Ascertain Client Voting Preferences

BAC: Ascertain Client Voting Preferences

BAC Ascertain Client Voting Preferences is a new type of proxy proposal for the 2024 season from James McRitchie, premiering first at Bank of America (BAC). It asks BAC to report on the feasibility of offering granular proxy voting preferences so that clients can maximize portfolio-wide returns by pursuing voting strategies designed to push certain companies to address social and environmental externalities.

BAC Ascertain Client Voting Preferences: Background

The Republican-backed INDEX Act is aimed at reducing the influence of large passive funds by essentially taking away their vote under specified circumstances unless they vote in proportion to voting instructions from clients/investors. Republican state lawmakers, largely from states that are dependent on the oil & gas industry, have opposed the ESG proxy voting agenda of large passive funds. They are afraid that if oil companies take steps to reduce their impacts on climate change, then companies will be less profitable, and that will hurt state revenues and employment.

One assumption is that funds will find it too costly to survey their investors on their values, so “woke” funds will be stripped of their voting power.  Some have warned, us to be careful what we wish for:

The inability of  large asset managers and other institutional investors to vote on behalf of their investors on non-routine matters could effectively shift control of key shareholder decisions—such as director elections (including contested elections), shareholder proposals and similar matters—to hedge funds and activist investors whose interests may be adverse to the same pension funds and lawmakers who support the bill.

After negotiating with companies and funds for decades, I am convinced that too many funds approach voting similarly to corporate directors. They use their votes to increase profits at each individual company, rather than taking a portfolio-wide approach. By that logic, for example, they vote at tobacco companies to get as many people hooked as possible, even if that reduces productivity throughout the economy and raises employee health insurance rates paid by other companies in their portfolios.

Most people invest only through mutual or ETF funds. The minority of Americans who own individual stocks beyond their own employer generally try to hold a diversified portfolio to reduce risk. Those with diversified portfolios should be more concerned with systematic risks like climate change. If one company in their portfolio adopts profitable strategies that disrupt the economy, they will seek changes at that company to maximize their portfolio as a whole.

Additionally, democracy is not simply a matter that should be limited to state institutions. According to Milton Friedman, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Even if you agreed with Friedman back in 1970 when he made that statement, you probably disagree with that today because through their lobbyists and as a result of Citizens United, corporations have set the “rules of the game.” We need them to be more democratic for our governments to be more democratic. 

BAC Ascertain Client Voting Preferences: The Proposal

BAC Ascertain Client Voting Preferences: Resolved

Bank of America (BAC) shareholders request our Company prepare a report on the feasibility of offering customized proxy voting preferences for BAC clients that seek to maximize portfolio-wide returns by pursuing voting strategies designed to push certain companies to address social and environmental externalities.[1] The report shall be available to stockholders and investors by October 1, 2024, prepared at reasonable cost, consistent with fiduciary duties and other legal obligations, and omitting proprietary information.

BAC Ascertain Client Voting Preferences: Supporting Statement

BAC and its subsidiaries manage approximately $3.6 trillion in assets. As a fiduciary, BAC owes clients and investors duties of care and loyalty in exercising shareholder voting rights.[2]

Controversy over proxy voting – especially environmental, social, and governance (“ESG”) proposals, increases risk.[3] Companies like BAC may be criticized from all sides.[4]

Diversified investors are interested in ensuring companies in portfolios managed by BAC do not threaten the rest of their portfolios[5] when individual companies prioritize their financial returns over systems critical to diversified portfolios.[6]  Practically, this can mean maximizing profits by externalizing social and environmental risks to the detriment of other companies.

Reliance on proxy advisors does little to mitigate this problem or shield Bank of America from controversy.[7] Such advisors generally provide advice that maximizes the value of individual companies, not the value of diversified portfolios invested in such companies.[8]

BAC offers extensive customization of portfolios based on risk tolerance, financial goals, cash flow needs, tax situation, social and environmental values. But BAC fails to offer granular control over customized proxy voting, a core advisor responsibility subject to fiduciary duty standards.[9]

Soliciting the diverse views of clients on issues raised in shareholder elections and incorporating them into voting/engagement practices, or facilitating the client’s ability to do so themselves, can mitigate risk. Criticism of BlackRock, Vanguard, and State Street[10] led to programs providing investors with voting choices.

However, these programs present limited choices due to overreliance on traditional proxy advisors. New technologies facilitate soliciting investor preferences efficiently to inform voting and engagement.[11] Therefore, the report should not be limited to preset voting profiles but should include approaches and technologies that provide clients with granular control over voting, like the configurable options offered by BAC for constructing portfolios.

Investors want a voice. According to one study from Stanford Graduate School of Business, 83% of investors, irrespective of age, life stage, or ideological bent, want managers to consider their preferences when voting on environmental issues.[12]

Investment companies that fail to engage clients more fully in proxy voting will be subject to ever-increasing legal and reputational jeopardy.

Vote For Proposal [4*] Ascertain Client Voting Preferences

[1] https://www.routledge.com/Moving-Beyond-Modern-Portfolio-Theory-Investing-That-Matters/Lukomnik-Hawley/p/book/9780367760823, chapter 5.

[2] See 14 CFR 275.206(4)-6

[3] https://ssrn.com/abstract=4360428

[4] https://ssrn.com/abstract=4299462

[5] https://theshareholdercommons.com/wp-content/uploads/2022/09/Climate-Change-Case-Study-FINAL.pdf

[6] https://ssrn.com/abstract=4056602

[7] See,  e.g., https://www.texasattorneygeneral.gov/sites/default/files/images/press/Utah%20%26%20Texas%20Letter%20to%20Glass%20Lewis%20%26%20ISS%20FINAL.pdf, https://www.wsj.com/articles/blackrocks-false-voting-choice-proxy-esg-ballots-iss-glass-lewis-66652357?mod=opinion_lead_pos1

[8] https://theshareholdercommons.com/wp-content/uploads/2023/09/The-Shareholder-Commons-response-to-ISS-Policy-Survey-2023.pdf

[9] https://www.privatebank.bankofamerica.com/solutions/investment-management.html

[10] https://ssrn.com/abstract=4580206

[11] https://ssrn.com/abstract=4360428

[12] https://www.gsb.stanford.edu/sites/default/files/publication/pdfs/survey-investors-retirement-savings-esg.pdf

Shareholders - key linkBAC Ascertain Client Voting Preferences: Conclusion

Mark Latham proposed an open and competitive system to facilitate investor input into proxy voting using a market-driven framework at least as far back as the year 2000. See The Internet Will Drive Corporate Monitoring and other papers on the VoterMedia.org Publications page. Now with the internet and artificial intelligence, our tools make real participation by beneficial owners in proxy voting cost-effective. More democratic corporations can be easily achieved if our financial institutions are willing to give their clients what they want. For more on the importance of addressing externalities, see The Shareholder Commons.

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