June 8, 2018
In recent years, shareholder proposals have increasingly focused on politically-charged directives, with many calling for companies to comply with an unprecedented level of new disclosures. These efforts, often aligned with social and environmental issues, lead to often expensive and rigorous review processes for the companies being targeted. And to date, little has been known about what type of value such proposals actually provide. Until now.
In a recent Fortune magazine article, Joseph Kalt, Ford Foundation Professor (Emeritus) of International Political Economy at Harvard University’s John F. Kennedy School of Government, offers an important observation: There is “no basis for concluding that shareholder proposals seeking additional disclosures on the impact of climate change have any effect on stock prices one way or another.”
Drawing from his research, the newly released report, “Political, Social, and Environmental Shareholder Resolutions: Do They Create or Destroy Shareholder Value?” commissioned by the National Association of Manufacturers, Kalt points out that until now, there was no clear evidence examining the possible relationship between shareholder proposals and shareholder returns. Back in May, BlackRock claimed “our activities in this area are aimed at maximizing shareholder value, not at implementing social values.” Yet as the Harvard academic’s report points out, passive investors who have claimed to represent their clients’ best interests would have had no way of knowing if voting for a certain shareholder proposal would result in higher returns for their investors.
More from the write up in Fortune:
“We find no basis for concluding that shareholder proposals seeking additional disclosures on the impact of climate change have any effect on stock prices one way or the other. It’s hard not to conclude that support for high-profile climate resolutions by the likes of BlackRock and Vanguard is motivated more by political grandstanding, rather than protecting shareholders.
“…This does not, however, mean that such proposals are harmless. Targeted companies incur significant costs and burdens. The increased demands on management and board time could perhaps be justified were proposals yielding material information to shareholders, but the evidence indicates that they are not.”
Over the past few years, these types of proposals and disclosures have become a sizable burden on companies, which are left powerless in the face of influential shareholders such as large passive institutional holders that wield the collective power of millions of votes. These voters are fiduciaries—those who have a duty to vote in the best interests of the many individual investors they represent. Yet as this new report highlights, it may be politics swaying their decisions, not value adding.
Kalt’s findings are in line with the Department of Labor’s guidance on ESG investing and shareholder engagement by fiduciaries. In an April 23 bulletin, the DOL warned of the same pitfalls of select environmental, social, and governance factors:
“Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision. It does not ineluctably follow from the fact that an investment promotes ESG factors, … that the investment is a prudent choice for retirement or other investors. Rather, ERISA fiduciaries must always put the economic interests of the plan in providing retirement benefits.”
This new pattern of politically-motivated voting also has far-reaching consequences, and is negatively impacting public market in general. As the Kalt paper points out, the number of publicly traded firms in the U.S. has fallen by half over the last two decades as regulatory, financial and technological changes have made the public corporation less attractive.
The average investor deserves to know how their diligent contributions to their 401(k) plans are being voted on, especially if those votes are being used to place expensive burdens on the companies whose very performances will impact their retirement.