Don't Hold Main Street Investors Hostage to Political Advocacy
The investor is a polarizing figure in modern America. On the one hand, he is demonized for sitting back and collecting money for apparently doing nothing, profiting off the sweat of his brother’s brow while indulging in the biblically prohibited practice of usury. On the other hand, we recognize that investment allows businesses to grow and expand, lubricating the wheels of our complex economy. Investment income also serves as an important source of revenue for many people, such as a broad swath of our retirees.
For most Americans, the vast majority of their wealth is in a retirement fund, usually managed by an investment company they did not choose. We trust these companies to be good stewards of our wealth and to generate a decent return.
However, it does not always work out that way, and some investors worry that their fund managers have elevated concerns about the environment and other political issues ahead of the best interests of their investors. A group of business associations recently created the Main Street Investors Coalition to, in part, highlight examples of such conflicts of interest and protect investors losing money because of such conflicts.
New York Times columnist Andrew Ross Sorkin objects to this endeavor, arguing that “the group is actually funded by big business interests that want to diminish the ability of pension funds and large 401(k) plans — where most little guys keep their money — to influence certain corporate governance issues.” He goes on to note that the group vehemently objects to the fact that these investment management firms are increasingly using their influence to promote environmental, social and governance causes on issues like climate change, gun control and employee diversity.
It is unclear why we should treat 401(k) plans as a reasonable vehicle for advocating for social and governmental change. Surely the obligation of such funds is to represent their investors’ financial interests above all else, an obligation that is in no way compromised by giving shareholders a voice in how these funds are managed? Sorkin claims that individual investors rarely take active participatory roles in the management of their pension funds, and that this compels the investment management companies to vote their proxies as they think best, and that such conflicts of interest are hardly worth discussing.
But if we fixed the proxy voting system we might get more participation from individual investors. A study by Jill Fisch of the University of Pennsylvania Law School concluded that the antiquated voting system currently available to retail investors serves as a substantial stumbling block to greater participation.
Until now, individual investors with relatively small amounts of capital have been held hostage to the political positions of investment firms. Allowing individuals a vote on how their dollars will be utilized properly shifts the power away from the intermediaries, and towards the people actually ponying up the money in the first place — which is how it should be.
The objection offered many times before is that ordinary people are not sophisticated or farsighted enough to make decisions about their own money, and they need experts to handle things for them. While it is true that investors devolve the investment decision-making to their investment management company, it’s not unreasonable for individual investors to demand voting power over non-investment management decisions that have the potential to impact returns.
To see why the above rates more discussion, consider a recent study from Spectrum Group. It found that fully 92 percent of fund members consider a fund’s ability to generate positive rates of return as “important” or “very important.”
Investment management firms often argue that investment returns and good governance policies are inseparable, a notion that the Department of Labor recently forbade management firms from peddling, on account of it being essentially untrue. That sort of rationale has gone wrong before; in 2000, due to mounting public health concerns over the use of tobacco, the managers of the California Public Employees Retirement System reacted by divesting the fund’s investments in tobacco-related products. While smoking rates did fall in subsequent years, the stock prices of tobacco companies did not, and the divestment cost CalPERS roughly $3 billion in foregone returns.
It is fashionable among those who spend their time agitating for social change to lament the plight of the American worker and the unequal tax treatment to which he is subject. Capital gains are, of course, taxed at a lower rate than ordinary income, so it has become popular to claim that the rich, who tend to invest in high amounts, are getting off easy while the working man suffers from a higher tax burden.
In that case, here’s a chance for the small investor to gain greater veto power over that which can be inimical to returns, and in the process pursue capital gains that are taxed at lower levels. Let the average investor grow wealth in the way that the well-to-do already do; free of the socially-responsible investing strategies that can corrode long-term wealth generation.
