March 13, 2018
In a November 2017 speech on transparency in the markets, U.S. Securities and Exchange Commission Chairman Jay Clayton articulated his concern that “the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance.” Main Street investors often wonder what they can do to hold companies accountable. Unfortunately, their options have become increasingly limited in recent years.
From an investor’s perspective, there certainly were simpler days—days when having stock really did feel like owning a bit of a company, even if it was just a small percentage of it. If you owned a share, you often got to vote and have your say on how that company was run through annual shareholder meetings. While that principle hasn’t changed today, fewer and fewer retail investors are being heard at companies’ annual meetings.
Case in point; according to a study by Broadridge Financial Solutions and PwC only 29 percent of retail investors voted on proposals in 2017. In contrast, 91 percent of institutional shareholders engaged that year. The difference is stark.
So what changed for Main Street investors?
A special report from the Urban-Brookings Tax Policy Center shows that in 1965, 80 percent of stock was owned by individual investors and funds outside of retirement and nontaxable accounts. In other words, investors directly owned stock—meaning they could vote on issues that determined how the companies they invested in were managed. By 2015, that number had dropped to 25 percent. Meanwhile, the proportion of U.S. public equities managed by institutions has risen steadily over the past seven decades, from roughly 8 percent of market capitalization in 1950, to around 67 % in 2010.
Today, corporate ownership in America lies largely with employees through 401(k) plans and similar retirement vehicles. But the shift away from taxable accounts to retirement saving structures has created a major downside for retail investors. As employee-owners of these 401(k) plans, Main Street investors do not have proxy voting rights, which are instead exercised by fund providers.
As a collective, customers’ stock gives fund providers, managers and leaders tremendous voting power. Managers end up with enough votes to have significant impact on the proposals that shape how many large corporations are run and, more importantly, how those companies generate a profit.
Managers do have a fiduciary responsibility to act in their customers’ best interests and are obligated to disclose their proxy voting records every year. However, at the end of the day, individual investors have few options but to trust that managers will vote in a manner that ensures stable returns for Main Street investors’ retirement funds.
Ultimately the reality is that the majority of Main Street investors’ dollars are invested in vehicles where the investors, whose money is actually at risk, are not truly in control of their financial future because their voices are not being heard. It’s a sad state of affairs and one that needs to be addressed urgently.