Fund Managers Should Focus on Returns, Not Political Ideals

As earnings season approaches its final month, the surge in politically orientated shareholder proposals has continued to gain momentum. In every industry, management teams across the country have found themselves under increasing pressure to consider issues which have traditionally been beyond the purview of the boardroom.

This trend, while relatively new, is alarming and it differs significantly from traditional activism. While traditional activist shareholders used the proxy proposal process to advance views that differed from management on what was best for the company, they never did anything that would undermine the reason for their investment, which was to maximize shareholder value. In contrast, the new wave of shareholder activists, have a fundamentally different goal; to exploit the proxy proposal process to drive wider societal change.

So, should fund managers and proxy advisory firms decide what’s best for society? What are the long-term effects of pressuring corporate America to take on political issues that should be left to policymakers who are elected by the people? What does this mean for companies, investors, and the economy in general? When you dig a little deeper, the rise in politically motivated shareholder proposals is extremely concerning for most of us who own stock.

For one thing, shareholder proposals are not cheap. On average, responding to each resolution costs a company up to $150,000.To compound the problem, outdated SEC resubmission rules allow the same initiative to be reintroduced year after year, even when it consistently fails to gain support from a majority of shareholders.

While $150,000 is not insignificant, the reality is that most companies typically face 15 or more proposals a year. This diverts as much as $2 million worth of company resources from shareholders.  Put another way, when dollars are being allocated to respond to the political proposals of the minority, they’re not being invested to maximize the value of the company for the majority.

This kind of activism also disproportionately impacts smaller companies who have fewer resources at their disposal. Instead of focusing on growing and staying competitive, companies are now devoting more resources to address these immaterial political issues; this directly impacts the bottom line. Public companies are engines of growth and innovation, not Trojan horses masquerading as elected politicians. 

Of course, private companies have a way to circumvent the extra red-tape, added cost, and politics; they can decide not to go public. And that’s exactly what they’re doing in record numbers. The scale of the problem is hard to imagine; IPOs are down 84% over the last twelve years, and the percentage of American stocks owned by the average investor has decreased by 60% since 1950. Fewer public companies reduces investor choice and stifles job creation.

Today, retail investors have fewer stocks to choose from and they don’t get to participate in the growth of a company and the corresponding increase in its stock price. Instead, access to the early-stage investing, which offers the potential for the greatest returns, is limited to private equity and high net-worth individuals. In other words, our system has evolved into one that prioritizes the rich at the expense of the mom-and pop investor, the exact opposite of the America ideal.

Put simply, the system needs to be reworked. The average investor needs a voice to advocate for them, to ensure that their primary goal – to maximize the value of their investments and their retirement savings – isn’t forgotten as distracted fund managers pursue their own political agendas.

That’s why the Equity Dealers of America is joining forces with other prominent organizations to launch the Main Street Investors Coalition. As a trade association for middle market financial services firms who serve retail investors, we believe that our investors are the bedrock of our financial system and must be protected.

Our campaign aims to bring badly needed reform to the system. Specifically, we demand that the executives of investment funds focus on their fiduciary duty instead of chasing political ideals, and that proxy advisory firms be transparent about how they develop vote recommendations on politically motivated shareholder proposals. 

We are proud to be a part of the Main Street Investors Coalition and champion the needs of America’s 100 million strong retail investment community.