Our Politicized Corporate Governance System Needs an Overhaul

The shareholder proposal process was once a valuable way to engage a public company’s shareholders in corporate governance on topics such as dividend policy and board structure. In recent years, however, the process has become a forum special interests use to promote parochial agendas.

The problem is so serious that the House Financial Services Committee began digging into it this summer. As I made clear in my testimony before Congress in July, the shareholder proposal process must be reformed to reflect the interests of everyday investors and stop subsidizing those with ulterior motives. This starts by restoring the traditional view that corporations are businesses building shareholder value, not political institutions shaping civic society—they’re supposed to put profits before politics.

Securities laws have failed to keep up with the vast changes in the financial sector, allowing outliers to hijack the shareholder proposal process and center the debate around cultural and social issues rather than the business of the corporation. It’s time for Congress to update these laws.

At the crux of shifting market dynamics are individuals’ overwhelming appetites to invest in one of the massive index funds that have grown in recent years to control a large percentage of shareholder voting power at all public companies.

To its credit, the rise of indexing has facilitated greater retail investor participation in the stock market and broad-based prosperity for everyday Americans. But this concentration of assets in the hands of a few elite managers created a new way for special interests to pursue their agendas at the expense of companies and their shareholders.

For instance, this past year, a small number of powerful special interests bought the scant stakes needed to qualify as nominal shareholders, then made proposals on topics such as abortion, diversity, gun control, and freedom of speech.

More than half of all proposals were submitted by just five parties, who then pressured asset managers to vote their views on these complex social subjects on behalf of millions of Americans—who not only hold diverse opinions on these topics but also didn’t invest in index funds to express them.

Smaller asset managers have long outsourced share voting decisions to one of the two powerful advisory firms, who likewise welcome the expansion of their businesses that the proliferation of shareholder proposals creates.

The growing power of such “proxy adviser” firms, however, is particularly dangerous to shareholders because such firms are not themselves shareholders, owe no fiduciary duties to shareholders, and need not provide any economic rationales for their opinions.

As bad as things are, the Securities and Exchange Commission has made them worse. For example, last year, it encouraged more political shareholder proposals by announcing it would require companies to include them whenever they “raise significant social policy issues,” even if they have nothing to do with a company’s business. It has proposed another new amendment to the shareholder proposal rule that would make it easier for special interests to re-submit defeated proposals and would allow the filing of duplicate proposals. The SEC also recently abandoned its longstanding efforts to enact regulations that would align the interests of the proxy adviser duopoly with those of America’s shareholders.

The transformation of the shareholder proposal process into a political arena benefits special interest groups across the political spectrum. While political shareholder proposals often advocate progressive causes, last year saw an uptick in conservative shareholder proposals submitted. Whatever the political angle, special interests win at the expense of corporations, shareholders, and ordinary investors.

A number of bills have been introduced to stop special interests from abusing the shareholder proposal process. They address the voting practices of asset managers and oversight of proxy advisers and give needed direction to the SEC.

Republicans and Democrats alike should support these reforms to check the politicization of corporate America. Otherwise, shareholders and investors will suffer as corporate leaders allocate more resources to politics than business and many simply decide being a public company isn’t worth it.

Shareholders should have a voice in corporate governance and the shareholder proposal process once provided it. The process has been an important reason that US public capital markets have been envied worldwide and delivered solid returns to American investors. Congress is right to act to protect these strengths.

Opinions reflected are not necessarily those of Mayer Brown nor attributable to any of its clients. This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lawrence A. Cunningham is special counsel at Mayer Brown and professor emeritus at George Washington University.

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