Corporations have become the new front line in policy fights ranging from what to do about climate change to how best to achieve racial equity. Activists now routinely use shareholder proposals to push corporations to adapt their conduct to achieve social change.
While shareholders have the opportunity to vote on such proposals, this exercise in corporate democracy is surprisingly undemocratic. A reform recently proposed by the Securities and Exchange Commission isn’t likely to help.
Large asset managers like BlackRock and State Street retain the right to vote shares purchased by millions of individual investors but held in mutual and other types of funds. As a result, a handful of money management firms control enough equity, purchased with other people’s money, to be the deciding vote on critical issues. The funds’ investors—the people who actually paid for the shares—have no real say in how their investments are being voted.
In the name of furthering corporate democracy, the SEC recently proposed changes to the way investment funds report on how they voted. It seeks to make fund managers more accountable to their investors and the public through better disclosure. While an admirable goal, the reality is that it will have little practical effect.
Fundamental Failure on a Core Issue
Disclosure is useful when investors can act on the disclosed information. SEC officials appear to believe that investors can use the enhanced disclosures to find a fund manager whose proxy voting priorities are aligned with their own. However, investors cannot easily select or switch between fund managers.
For example, an employee who purchases shares as part of an employer-sponsored retirement plan may need to leave their job to get access to a new fund manager. Even if the employee knows and disagrees with how the manager is voting their shares, such an extreme course of action is unduly burdensome and often unfeasible. And even then, given the limited choices, there is no guarantee that the employee could find a manager who would vote in accord with their views.
Additionally, outside of tax-sheltered retirement plans, switching to a new fund manager would involve the individual selling their investment and paying capital gains taxes. An investor should not have to sacrifice one-fifth of their returns to achieve proxy voting alignment.
As a result of these constraints on investor choice, the SEC’s proposal represents a fundamental failure to address the core issues surrounding proxy voting. In a recent comment letter sent to the SEC, we point out that true corporate democracy requires that asset managers identify investors’ views and then vote accordingly. Soliciting investor input is well within the capacity of modern asset managers, given their considerable scale and resources. For example, the asset managers could use surveys to assess investor preferences and vote shares on a proportional basis.
Ultimately, there are two paths forward. We can continue with the status quo, in which a handful of money managers shape social policy for America’s largest corporations, and by extension society as a whole, without any input from their investors. We can leave pivotal decisions about issues like climate change, racial equity, and human rights in the hands of a few employees at BlackRock, State Street, and Vanguard.
Alternatively, we can empower the millions of Americans who own stock through mutual and other funds to have their voices heard. We can ensure that a far broader, more invested, and more representative group has the opportunity to shape how America’s corporations are managed.
To us, the answer is clear. It is time to put the demos back in corporate democracy.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Caleb Griffin is an assistant professor of law at the University of Arkansas.
Brian Knight is the director of innovation and governance with the Mercatus Center at George Mason University.
Andrew Vollmer is a Mercatus senior affiliated scholar and a former deputy general counsel with the SEC.