When corporations are forced to care more about social views and political activism than their company operations, and when the number of proposals presented at company annual shareholder meetings continues to climb, it is likely that problems exist with the shareholder proposal process. Such is the fate of today’s corporate governance.
The system has been hijacked and needs an overhaul.
The American Consumer Institute’s recently published paper highlights some of the issues facing shareholder proposals and offers some solutions to streamline the proposal process.
In the last few years, and for the first time ever, more than half of all proposals submitted are related to Environmental Social Governance (ESG), a term used to base governing considerations on the human effects on the planet, diversity in the boardroom, and other social causes. Basic business functions that would increase the bottom line, improve company procedures and efficiency, and enhance the customer experience take a back seat and ultimately suffer.
Essentially, corporate governance and investment funds are being used to advance social goals, goals which are not widely adopted and generally would not be enacted through standard democratic procedures.
Because of some lax Securities and Exchange Commission (SEC) standards, these ESG-centric goals are infiltrating countless large companies. The SEC is supposed to maintain “fair, orderly, and efficient markets,” yet it has facilitated in and created a breeding ground for shareholder activism.
What’s absurd is that only a handful of shareholders generate a sizeable portion of all the proposals each year and only two proxy advisory firms, Glass Lewis (GL) and Institutional Shareholder Service (ISS)—which advise investors on how they should vote at shareholder meetings—control up to 97 percent of the proxy advisory market. That’s a lot of power for a small group of individuals to wield, especially when there’s an agenda attached. It’s no secret that GL and ISS maintain an ESG focus.
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Luckily, lawmakers in certain circles have started to fight back. Multiple hearings were held on the Hill last summer and state governors and attorneys general are enacting laws to streamline or prohibit political activism in the proposal process. Citizens’ retirement funds and individual investments are at stake, especially since it has been shown that ESG-backed funds underperform. Firms have a financial responsibility to maximize returns.
As a result of the high volume submitted each year, companies are spending substantial resources just to manage the onslaught of additional shareholder proposals, many of which repeatedly present themselves year after year or have very little to do with a company’s performance or bottom line. Such resources could otherwise be reinvested somewhere in the company or simply run basic operations. Instead, these expenses are generally passed along to consumers through higher prices and diminished quality.
Correctional corporate guidance is completely acceptable; every company’s shareholders should raise appropriate concerns addressing basic policies and procedures. But there is a fine line between those that are warranted and those that are disconnected. The process should not be so muddled, so bogged down with redundant and irrelevant issues that it comes at the expense of consumers, nor the fiduciary duties owed to all shareholders.
More scrutiny, not leniency, from the SEC is crucial to facilitate a more manageable and legitimate process. Proposals need to stick to governing policies and procedures that will most effectively run a company, not sabotage its abilities to maximize profits and returns for investors, nor take away from its ability to serve customers. Social and environmental issues belong in the political arena, not the boardroom.
Some establishments are beginning to step away from the term ESG due to the recent backlash from the right, but don’t be fooled. The tenets of ESG are still embedded in their philosophy. Terminology may shift, but their motives will remain.
Nothing will change until action is taken. It’s time for the SEC to stop shareholder activism.
Kristen Walker is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.theamericanconsumer.org or follow us on Twitter @ConsumerPal.
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