Covid-19 Brings Folly of Big Investors' Political Activism Into Light
Since the outbreak of COVID-19 and the restrictions implemented to stop its spread, a huge number of US businesses – from large to small – have been left reeling. Others, with the capacity to withstand the impact of the pandemic or fortunate enough to be insulated from the worst effects, have been putting forth an effort to fight the pandemic and then help stabilize society and the economy.
As the lockdowns are eased and the economy transitions to the “new normal,” public companies will be expected to play a leading role in reigniting the economy and getting Americans back to work. However, before helping to turn the world’s largest economy around and reemploying millions of people, those businesses must first run the gauntlet of politically motivated pronouncements and voting practices from some of the world’s largest activist investors during proxy season.
Responding to activist investors has been a challenging issue even in normal times when companies have far greater resources to respond. Especially in 2020, a year that will be critical for many companies, corporate resources would be much better spent on productive activities to help companies survive the significant economic upheaval. Fending off spurious shareholder proposals from fringe activists with questionable implications is one thing. But increasingly, even mainstream investors appear to be supportive of these questionable proposals. For example, two of the three big index providers, BlackRock and State Street Global Advisors, have both said they will ramp up their political activism this year.
Blackrock, the world’s largest and most activist asset manager, is a particularly concerning case in point. Having agreed to a deal with activists to promote their agenda this proxy season in return for reduced scrutiny, the business took the opportunity to fire a warning shot to all companies in March, confirming that 2020 would be another year of implementing rigid policies on executive pay and pressuring companies to provide more – often meaningless – environmental data. The company has already followed through on its pledge by helping to force oil and gas company Ovintiv to produce a report analyzing the impact of climate change on its business model.
While political and climate activism may have its place, activists should not be influencing and pressuring public companies with other peoples’ money. Blackrock represents the single most influential proxy voting bloc in the United States, but others like Legal & General Investment Management are pursuing similar objectives, reaffirming that they will continue to focus on climate reporting and executive pay. It’s concerning that large investors have yet to provide meaningful data on how the benefits of producing such expensive reports outweigh the costs of producing them.
Some corporate executives may have inadvertently fanned these activist flames. In the summer of 2019 the Business Roundtable (BRT) announced a revision of its conception of corporate goals. It committed to “lead their companies to the benefit of all stakeholders,” and to “deliver value” not just to shareholders but also to employees, customers, suppliers, and communities.
Blackrock, a member of the BRT, was asked by As You Sow, one of the activists that most frequently raises executive pay and climate resolutions, to produce a report on the impact of its own purpose statement. Despite ramping up pressure on other public companies to produce reams of reporting and one-size-fits all approaches to executive pay, Blackrock petitioned the Securities and Exchange Commission to have the resolution excluded at its own annual meeting because the “proposal deals with matters relating to BlackRock’s ordinary business operations.” Perhaps Blackrock itself still acknowledges that society as a whole benefits when companies are profitable. That societal benefit has never been more evident than over the last two months.
Economic commentator Scott Grannis recently predicted that this will be recognized as the “the most expensive self-inflicted [economic] injury in the history of mankind.” So while private companies struggle for survival in the face of unprecedented economic disruption, some of the world’s largest asset managers seem unconcerned as they continue to pressure companies to publish questionable sustainability reports.
With corporate balance sheets under immense strain and a host of companies losing money and suffering from dramatic declines in their stock prices, this is exactly the wrong time for activists to pressure, handicap, and burden corporations with dubious concerns about climate change and CEO compensation. It’s unfortunate and extremely misguided that large asset managers are trying to demonstrate to a cohort of activists that they are worried about some imaginary end of the world, while businesses and their workers are worried about the reality of just getting through the end of the most challenging year in modern history.