Let Retirees Save Without Paying for 'Virtue Signaling'

This year’s proxy season continued the alarming trend of politically charged shareholder resolutions. This erroneous investment philosophy not only fails to enhance company performance or shareholder returns; it also damages American families who are forced to trade their market returns for virtue signaling.

So-called “environmental, social, and governance” (ESG) has become to be so widely accepted (and generally unquestioned) that Blackrock CEO Larry Fink recently declared shareholder activism to be an integral part of the company’s fiduciary duty towards its clients. But are these shareholder resolutions really the “all gain, no cost” strategy that activist investors sell them as? For money managers, yes; for mom and pop investors, recent research suggests otherwise.

A research team led by Harvard economist Dr. Kalt concluded that ESG proposals do not enhance enterprise value and actually cost shareholders, because they force companies to spend boatloads of shareholders’ money overcoming proxy fights.

A Securities and Exchange Commission (SEC) survey found that these companies report having to spend up to $2 million responding to each proposal — money that would have otherwise ended up in mom and pop investors’ pockets. I have witnessed this first hand as companies in the midst of layoffs are forced to spend millions defending themselves from these predatory proposals, at the cost of additional jobs for working families.

Unfortunately, cost is not the only problem caused by these activist fairytales. A second glaring issue is that the passive investor behemoths of Blackrock, Vanguard, and State Street are not equipped to take a hands-on approach to corporate governance. While many have tried to improve their processes and hire more staff, they still do not employ the army of analysts required to wade through the tens of thousands of proposals they get every year. And why would they deviate from the low-cost business model that has underpinned passive investors’ huge growth over the last decade?

Instead, many institutional investors outsource assessment of proposals to two dominant proxy advisory firms: ISS and Glass Lewis. These very same firms have recently come under fire from members of Congress for a series of suspect business practices, most notably conflicts of interest.

ISS, for example, measures and identifies environmental and social risk through company disclosures — providing consulting services to institutional investors and others on how to vote on shareholder resolutions introduced to the companies they own stock in. But at the same time, the business also provides consulting services to the public companies it rates on how to improve performance against their ESG criteria.

Glass Lewis even admitted to Chairman Heller that this provision of consulting services “creates a problematic conflict of interest that goes against the very governance principles that proxy advisors like ourselves advocate.” What’s more, once an assessment is filed, an investor has

almost no ability to engage with proxy advisors, even to correct factual errors. This issue specifically was raised in a congressional hearing by Darla Stuckey, the President of the Society for Corporate Governance.

So how do these two proxy advisory firms get away with it? As Sen. Heitkamp (D-ND) succinctly put it, “right now, there is no regulatory apparatus that applies to all proxy advisory firms, they are functionally unregulated.”

Making matters worse is that institutional investors follow recommendations as much as 80 percent of the time, while proxy advisors are estimated to swing certain votes up to 25 percent. Fortunately, the Corporate Governance Reform and Transparency Act of 2017, sponsored by Rep. Duffy (R-WI), passed the House last year. The legislation would force proxy firms to register with the SEC, make their methodologies for proxy recommendations public, and disclose potential conflicts of interest. In other words, this legislation would impose standard fiduciary responsibilities found throughout the rest of the financial sector.

The Senate should follow the House’s lead and stand up for Main Street investors by bringing the financial sector into the 21st century.