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Much Shareholder Activism Not About Share Value

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Much Shareholder Activism Not About Share Value

Washington Examiner April 22, 2016
Legal ReformCorporate Governance

This week marks the beginning of corporate America's "proxy season," the two-month period when most large, publicly traded companies hold annual meetings. One might think that such meetings are mostly about the corporation's business, and shareholders are involved principally to make sure boards and management are protecting their investments. One would be wrong: Annual meetings are often as much about political and social issues as corporate governance and business strategies.

NYC pension fund's investment returns plummeted last year to 3.4%, less than half the fund's over-optimistic benchmark. That may or may not be related to the fund's leadership focusing on its shareholder-proposal campaign 

Typically, shareholders who exercise voting rights at annual meetings do so not in person but by proxy. Proxy ballots contain items proposed to the shareholders by the corporation, such as the election of directors, the appointment of independent auditors and changes to the corporation's voting rules or corporate structure. These ballots also, under federal law, contain shareholder resolutions, which can be introduced by any shareholder holding equity valued at $2,000 or more for at least one year.

Over the last 15 years, shareholders have become more aggressive in filing such proposals. 2016 is no exception. Overall, the number of shareholder proposals introduced this year is up: Companies holding meetings by the end of April face 7.5 percent more shareholder proposals than the average company in 2015 — and 48 percent more than in the comparable early period a year ago.

Many of the shareholder proposals being introduced involve social or policy concerns — 45 percent so far in 2016. The most-introduced class of proposal this year has involved a corporation's political or lobbying activities and the second-most-common class of proposal involves environmental concerns. These social- or policy-related shareholder proposals can influence corporate behavior, which is why their sponsors introduce them, but they are never supported by a majority of voting shareholders. More than 1,200 such proposals have been introduced. None has received majority support over board opposition.

Other classes of proposal, however, do sometimes receive support from a majority of shareholders, including most recently those that seek to grant shareholders rights to nominate their own directors on corporate proxy ballots, dubbed "proxy access." Beginning in 2015, the New York City pension funds, managed by the city's elected comptroller, Democrat Scott Stringer, have pushed this idea aggressively. Stringer's campaign has had success: Two-thirds of proxy-access proposals last year received majority shareholder support, as have four in 10 voted on so far in 2016.

Will proxy access help shareholders? We don't really know. The idea is sufficiently related to share value to attract the support of the large proxy advisory funds, if not some of the top mutual fund groups. Other investors and scholars remain concerned that shareholders interested in advancing social and political agendas may use the rule to pressure companies to do their bidding—a concern not helped by Stringer's decision to use "climate change" and "board diversity" as screening mechanisms for determining which companies to hit with his proposal.

What we do know is this: The New York City pension fund's investment returns plummeted last year to 3.4 percent, less than half the fund's over-optimistic benchmark. That may or may not be related to the fund's leadership focusing on its shareholder-proposal campaign — a Manhattan Institute study in the fall does find that public pension funds' investments tend to have lower share value than their peers, especially when targeted by social-investing shareholder-proposal campaigns — but it's clearly unfortunate for New York City's public employees and taxpayers.

It seems clear that the shareholder-proposal process as it functions today is untethered from market efficiency and capital formation, which the Securities and Exchange Commission is tasked with enforcing. But with the president's SEC nominees themselves held up by left-leaning members of his own party in the Senate, who want to push the commission further away from its statutory mandate, the odds of fixing this mess appear dim in the short run.

Thus, as another proxy season unfolds, companies will just have to deal with pressures unrelated to their business. Doubtless, corporate governance is unlikely to receive much public attention in the heat of a contested presidential election. But for investors and those worried about economic growth, the outcome of the election — and how legislators and political appointees on the SEC grapple with this issue—is of outsized importance.

This piece originally appeared in Washington Examiner

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