0:02
As we learned earlier in the course,
the classical notion of social responsible investment as a sub-component
under the umbrella of impact investing had as its essence the notion
of eliminating investments from a portfolio or from an allegation.
Perhaps because an investor might find the activities of a company anathema
to their values.
They might want to focus on the cost of capital for such a firm,
perhaps by avoiding its investment increasing the cost
of going to market for management and for other owners.
But the moral equivalent of taking one's ball and walking off the pitch, or
walking off the court is, in its essence,
really a relinquishment of the ability to be proactive or to be an activist.
Shareholder activism has long been in the domain or
in the toolkit of impact investors in general.
And generally, investors who want to have an ongoing
active role in portfolio company management and control.
Of course, limited, or held at arms length by the just business judgement rule.
Nonetheless, shareholder activism serves and has served, and serves
by way of potential as an important tool that impact investors might wield.
Especially in public markets with issues that are held in a secondary manner.
As opposed to buying in primary securities in private markets,
buying public corporation shares often comes with votes.
Under US retirement and labor laws,
laws promulgated under ERISA, for example, by the Department of Labor,
regulated by the Department of Labor, shares, in fact, are treated as assets.
When an equity stake in a company confers voting rights,
owners can use those rights to achieve social goals as well as financial goals.
2:09
Modulo are holding constant the concept of fiduciary duty,
which we've discussed before.
Shareholder activism might be defined as using an equity stake in a publicly traded
company or a privately held company to influence it's actions.
Nonfinancial shareholder activism, using minority equity stakes in publicly traded
companies to bring about social change.
In most cases, shareholder activists and
sometimes other non-shareholder activists seek to impose costs or
direct control or direct expressions on target companies
greater than the perceived cost of agreeing to demands of those shareholders.
Theoretically, a rational management might submit to those owners
who are in the minority.
And if on a particular issue they can gain a majority vote, managers might be
forced to acquiesce to their wishes even if they find them anathema themselves.
Advisory firms, important actors in the span of modern economies, are often
retained by institutional investors to suggest how and whether to vote shares.
Two firms, Institutional Shareholder Services otherwise known as ISS, and
Glass Lewis together dominate more than 90% of the market share for
institutional investor vote consulting.
ISS and
Glass Lewis recommendation significantly influence shareholder voting.
Following the 2009 regulation changes we've seen in the US,
especially Dodd-Frank, brought with them enhancements of shareholder power.
Dodd-Frank Section 951 specifically mandated periodic say on pay votes,
allowing shareholders to have greater say on corporate manager compensation.
And 971 allows the SEC to making rules forcing companies to list shareholders'
director nominees on proxy ballots.
The SEC did make a rule, but a Federal Court threw it out in 2011.
The activism of big asset managers is critical here, and of owners.
The shareholder activism I've seen is, in fact, changing dramatically
as the world's largest asset managers begin to use their power.
Meanwhile, Congress in the US is attempting to restrict shareholders'
ability to force resolutions of issues through what are called proxy votes,
votes that you might cast when you don't go to the annual meeting, or
a special meeting called by companies whose shares you own, and
whose votes you have access to.
Until recently, shareholder activism was the province of certain gadflies,
often with non-social economic motivations,
the small niche SRI fund managers in progressive foundations.
4:49
However, historically CalPERS, the largest US pension fund,
was the leader among huge asset managers in activism,
reflecting trends in California politics, at least to a modicum.
However, today, firms like BlackRock and Vanguard, the two largest
asset managers in the world, reportedly holding as much as, together,
10% of the average share on Earth, have begun more aggressive efforts to press for
ESG reforms, mostly with a focus on governance.
This is very significant because the large asset owners often own the biggest stakes
in the biggest companies.
Their market power as owners is absolutely immense.
Historically, I think it's safe to say that many asset managers have been
reluctant to oppose management, especially in complex questions of running companies.
But this attitude is changing in response to customer demand, industry trends,
activist pressure, and, I would suggest,
the impact in ESG investor preferences that we've seen change.
5:54
The Fortune 500 pushback versus the shareholder activism agenda is active and
is being coordinated by a number of large players, Wachtel,
Lipton, Manhattan Institute, and others.
A bill to reform the Dodd-Frank Act, which has passed in the US House,
would change the threshold of ownership in a way that would greatly
restrict the ability of activists to get shareholder resolutions on proxy ballots.
The current standard in the US is that you have to own 1% of common stock or
$2,000 worth for about a year to introduce a shareholder resolution,
perhaps with respect to a non-financial idea.
Consider, for example, the idea of requiring a company to produce
an environmental or a carbon footprint transparency report or
an equal opportunity report as part of its regular reporting,
which now most corporations that are large do.
Although, it wasn't necessarily easy to get them to do it in all quarters and
at all times.
The reform bill removes the $2,000 ownership option,
only 1% of some companies is a tremendously large amount of value.
It's quite expensive to do under the new system.
For example, if an interest group wanted to introduce a shareholder resolution at
Apple, they'd be turned away unless they owned more than $8 billion worth of stock.
Pushing against the Democratic notion of atomistic share ownership.
The U.S. Senate has not taken up theDodd-Frank Reform bill, and
it's not clear if they ever will.
If they do, the shareholder resolution provision could be removed in conference.
But it's possible that the shareholder activism movement as we know it
could be brought to an end quite soon as a result.
Within in the impact arena, religious organizations
often coordinated through the Interfaith Center on Corporate Responsibility,
known as ICCR, to be distinguished from IRRC, which tracks votes,
historically, which I believe has been sold to ISS.
7:55
ICCR has 275 institutional investor members.
Also, labor unions quartered through groups like the AFL-CIO Office
of Investments, public pension plans
where the level of activism depends upon the leadership agenda.
CalPERS, CalSTRS remain influential,
although over the last couple of years the New York State pension system has risen to
take the mantle of leadership in some ways under the current Comptroller.
And then, activist groups for various issues,
all comprising stakeholders who are following active
share ownership principles for social impact and ESG investing.
For example, PETA, the People for the Ethical Treatment of Animals,
is one of the most energetic, and has gotten quite a bit of publicity,
both by voting its shares and also by engaging in the battle for public opinion.
And finally, social responsible investment fund families.
Green Century Fund is notable.
It is a majority owned by a consortium of state public interest research groups and
has taken on the mantle of a number of agendas including focusing on
deforestation and other social issues through activist approaches,
which would include meeting with management as well as voting shares.
Over the last five years, the number of shareholder resolutions introduced has
fallen, but only because activists have gotten companies to accept their demands
before a resolution is introduced.
It will continue to be a powerful metric under which
those who screen in rather than screen out shares, and
therefore have a stake, have a share, have a voice in what
happens at companies, in particular in the public domain.
Katherine KleinEdward H. Bowman Professor of Management
Christopher GeczyAdjunct Professor of Finance
