The problem of activist proxies

Via a reader, this is a very interesting document (.pdf) from the US Chamber of Commerce containing one of their member’s testimony to a Senate Committee. This excerpt near the beginning gives a flavour of what they’re protesting:

Public companies and their shareholders are increasingly targeted through the proxy system and other means over issues that are unrelated to – and sometimes, even at odds with – enhancing long-term performance. Topics that should be reserved for the legislative and executive branches of government – including a variety of social and political issues that may not be directly correlated to the success of the company – are increasingly finding their way into proxy statements and being debated in boardrooms. This has created significant costs for shareholders and in many instances has distracted boards and management from focusing on the best interests of the company.

In short, activist shareholders are demanding companies adopt SJW-driven policies which have a detrimental effect on financial performance. So who’s responsible?

As the Manhattan Institute has pointed out, labor-affiliated pension plans have historically been the most active at advancing such agendas that do not correlate with long term performance. From 2006-2015, labor-affiliated investors sponsored 32% of all shareholder proposals at the Fortune 250, many of which deal topics of a social or political nature. Both the Department of Labor (DOL) Inspector General and the United States Court of Appeals for the D.C. Circuit have expressed skepticism as to whether the shareholder activism engaged in by labor-affiliated funds is actually connected to increasing share value.

No doubt those in charge of managing the pension funds have guaranteed incomes and rock-solid personal finances so are happy to risk their members’ retirement incomes to pursue their own political goals. There is some good news, though:

The DOL took action this year in order to ensure that Employee Retirement Income Security Act (ERISA) fiduciaries are making investments based on economic factors and not elevating environmental, social, or governance (ESG) impacts over returns.

I wonder how many pension funds divested from oil stock, which traditionally pays consistent dividends, at the behest of SJWs?

A 2015 Manhattan Institute Report found that the social activism engaged in by certain public pension plan systems – such as the California Public Employee Retirement System (CalPERS) and the New York State Common Retirement System (NYSCR) – is actually correlated with lower returns for the plans. In other words, public pension plan beneficiaries and taxpayers in such jurisdictions are actually harmed when the overseers of public pension plans emphasize social or political goals over the economic return of the plan.

Outdated SEC proxy rules have allowed motivated special interests to take advantage of this system to the detriment of Main Street investors and pensioners. The problems we face today have in part stemmed from a lack of proper oversight over proxy advisory firms and a failure to modernize corporate disclosure requirements. Activists have been able to hijack shareholder meetings with proposals concerning pet issues – all to the detriment of the vast majority of America’s investors.

So the problem isn’t just that activists wreck the returns for their own members, they wreck those of anyone else investing in the company as well. I suppose the moral of the story is, when choosing a company to invest in, to look at whether their stockholders include public pension plans – particularly those from the New York or Californian public sectors.

This also chimes slightly with what I’ve been said before:

The deficiencies within the U.S. proxy system must also be viewed against the backdrop of the sharp decline of public companies over the past two decades. The United States is now home to roughly half the number of public companies than existed in the mid-1990s and the overall number of public listings is little changed from 1983. While the JOBS Act helped arrest that decline, too many companies are deciding that going or staying public is not in their long-term best interest.

So stay small, stay private, and avoid both regulations and the lunatics. It also won’t surprise many to learn that government regulations have created a cosy little duopoly, either:

Activist campaigns, as well as routine proxy matters that companies deal with today, are also magnified by the outsized influence of proxy advisory firms. Two firms – Institutional Shareholder Services (“ISS”) and Glass Lewis – constitute roughly 97% of the proxy advisory firm market, yet both are riddled with conflicts of interest, operate with little transparency, and are prone to making significant errors in vote recommendations that jeopardize the ability of investors to make informed decisions in their best interests.

What was I saying earlier about “guaranteed incomes and rock-solid personal finances”? The authors believe the answer is greater regulation for proxy advisory firms, but I don’t know if that won’t just deliver another set of unintended consequences further down the line. My preferred solution is more people stand up to idiotic lefties and SJWs wherever they are to found, using mockery, humiliation, and a refusal to play their game. Alas that will require courage, a trait largely absent in today’s business world.


15 thoughts on “The problem of activist proxies

  1. Accepting lower returns for government pension plans is just a sneaky way to push costs onto tax payers – who are required to inject money if there is a shortfall.

    I have seen the same in the UK. It would be controversial for a local government to just give money to local firms. However the local government pension plan invested in a fund which promised to pursue local social goals but at the explicit cost of higher fees and lower returns. These lower returns mean that the pension fund is going to fall short and tax payers will be on the hook. So the end result is that tax payers are giving money to some special local political projects.

    Opacity is usually used to sneak through something that would not otherwise be permitted. I am a big believer that civil servants compensation should be cash and defined contribution benefits – allowances, special tax treatment, “topped up” pension rights, etc are all just ways to disguise comp and pay amounts that tax payers would otherwise object to.

  2. A friend of mine from a previous job found the green religion, and has got herself on the staff committee with the role of researching and minimising the … get this … carbon footprint of the pension reserve fund…

    We really have become so comfortable and wealthy that we’ve lost sight of the purpose of a pension reserve fund, and can now prioritise other things over, oh I dunno, maximising the pensions paid out on retirement, haven’t we?

  3. My firm are either going to list or go for a trade sale late next year, my preference is a trade sale to avoid the risk of public company reporting and misaligned shareholder pressure. An interested buyer for the trade sale is a private pension fund, they would be 100% passive and all they require is a long term agreed ROI, which suits me just fine.

    By the way the Manhattan Institute that is referred to in that report is an excellent information resource, I frequently read a lot of their writers work.

  4. I don’t really understand this. These proxies – these are firms/agents who vote on behalf of large volumes of shareholders who can’t be arsed attending shareholder’s meetings, yes?

    So either they’re (a) not informing their client how they’re voting, (b) they’re lying about how they’re voting, or (c) they are telling the client and the client (i) isn’t paying attention, (ii) doesn’t care, or (iii) supports the proxy’s actions.

    If it’s (a), regulation might help; (b), it’s fraud and existing legislation would hopefully cover it; (c), there’s surely not much can be done. It’s the special interest problem all over again: the people doing it are much more motivated than the people objecting.

    Have I got that right?


    isp001 – reminds me of the wind farms in Victoria, which were either paid for by some pension fund or used to keep the union pension fund solvent… something like that. I guess I don’t remember any of the details, cool story.

  5. These proxies – these are firms/agents who vote on behalf of large volumes of shareholders who can’t be arsed attending shareholder’s meetings, yes?

    Yes: the problem is one whereby one concentrated block of minority votes can exert a disproportionate effect on the majority of dispersed votes. You see this in body corporates in housing blocks: a business or the developer will own 30-50% of the block and so can get most things passed on their own, and to counter them you need to run around organising a campaign for everyone to oppose them.

  6. Thanks.

    That’s what I meant by the special interest problem: some minority group cares very much about a certain proposition; most people oppose it, but they don’t care as much, so the dedicated minority will get its way.

    For example: literally everything that’s happened in the last twenty years.

    What’s-his-face Taleb wrote about it recently, it was called “The Most Intolerant Wins” or some such.

    Society is remarkably vulnerable to stubborn, selfish wankers. I don’t know what we can do about that.

  7. “That’s what I meant by the special interest problem: some minority group cares very much about a certain proposition; most people oppose it, but they don’t care as much, so the dedicated minority will get its way.”

    It could be the case that the minority does not hold a specific view other than say a Machiavellian one. Eg I am a relatively small shareholder in my firm, my voting rights on face value are correspondingly relatively small as well. Unless I take a strategic view and lets say there is an issue that requires a vote and whereby I become the swinging voter ie the 49% shareholder has a view contrary to the other 51% (including me), I can swing it to the 51% by voting with the 49%. Lest just say I was indifferent on this issue and the 49% offered me an inducement to vote with them, why wouldn’t I, or alternatively the others offered me a a larger inducement to vote for them.

  8. @Matthew McConnagay on December 18, 2018 at 3:19 pm

    My understanding of proxies in this case is:

    Those who decide on investments and cast the AGM votes on behalf of all investors in a Pension Fund, Unit/Investment Trust etc

    Not a case of “lazy” shareholders, but activist fund managers/trustees hijacking for their own ends others investments.

  9. “The same thing happens with the Church of England. Why are they so bothered by global warming and fossil fuels?:

    All of these institutions including the Vatican were subverted a long time ago hence why they now sing the globalists hymns, the end game of which is nothing less than the complete transformation of political control to a single state society is now near complete as they herd us into their engineered crisis. Once the crisis is over and the new normal in place, the status of the high priests and their brethren, will change dramatically, see the Bolshevik treatment of Russian Christians for a preview of what will become of them following the revolution.

  10. That’s what I meant by the special interest problem: some minority group cares very much about a certain proposition; most people oppose it, but they don’t care as much, so the dedicated minority will get its way.

    See also more or less every Students’ Union ever. And, as if to prove Tim’s point, note the current state of the NUS’s finances.

  11. There’s a lesson here. Voting can change things. And there’s no rule says it has to be in the direction of the progressives.
    Maybe time for some shareholder activism. Activism in the direction of what companies are supposed to be doing. Making profits for shareholders. Some activist proxy voting to force public companies to throw out their touchy-feely, enviro-friendly, intersectional, inclusive, kumbayaing in favour of making piles of lovely wonga.
    What’s sauce for the goose is sauce for the gander. Populist investing.

  12. Graeme: The same thing happens with the Church of England. Why are they so bothered by global warming and fossil fuels?

    Because they can’t agree about / believe in God.

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