James R. Copland joins Rafael Mangual to discuss how activist investors are turning corporate America’s annual shareholder-meeting process into a political circus.
Most of corporate America is wrapping up the 2019 “proxy season” this month—the period when most publicly traded companies hold their annual meetings. It’s at these gatherings that shareholders can (either directly or by proxy) propose and vote on changes to the company. Since 2011, the Manhattan Institute has tracked these proposals on its Proxy Monitor website. This year's proxy season has followed a long-term trend: a small group of investors dominates the proceedings, introducing dozens of progressive-inspired proposals on issues ranging from climate change to diversity.
Copland has testified before Congress on the importance of reviewing the rules developed by the Securities and Exchange Commission governing the shareholder-proposal process. The Senate and SEC are considering changes to ensure that these proposals are relevant to business and fair to other shareholders.
Audio Transcript
Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal. Coming up on today's show, we have a special report from the legal policy team here at the Manhattan Institute. Jim Copland, the director of legal policy will be interviewed by Ralf Mangual, his deputy. They're both regular contributors to city journal and former guests. On the podcast. You can find Jim on Twitter at @JamesRCopland, that's c-o-p-l-a-n-d and Ralf at @Rafa_Mangual, m-a-n-g-u-a-l.
At City Journal, we've talked a lot about how the political left, either in universities or in city halls or in any number of civic organizations, are using their influence to reshape our cultural institutions to match their progressive ideology, but you probably didn't know is that activists are taking similar tactics into the boardroom. Using their power as shareholders to pepper corporations with proposals aimed at aligning corporate policy with progressive ideas about say climate change or diversity. These so called "gadfly investors" can cause a real headache for companies and shareholders for wasting time and money. If you think this isn't a real problem, think again. Last week, popular democratic socialist senator and presidential candidate Bernie Sanders spoke at Walmart's annual shareholders meeting where he urged the company to increase its minimum wage and put workers on the board of directors. Since 2011, the Manhattan Institute has tracked these annual shareholder proposals on its proxy monitor website. To find out more about this year's proxy season, you can visit www.proxymonitor.org and there will be a link to it in the description. That's it for me. The conversation between Jim Copland and Ralf Mangual begins after this.
Rafael Mangual: Thanks so much for joining us for another episode of the City Journal 10 Blocks podcast. I'm Rafael Mangual, and in addition to being your host, I'm a fellow and deputy director of legal policy at the Manhattan Institute for Policy Research. Now, I've had the pleasure of being a guest on the show a few times, but today I'm very excited to be on the other side of the microphone, filling in for our usual host City Journal editor, Brian Anderson. Today, I'm joined by my Manhattan Institute colleague and mentor, Jim Copland, who's also been on the show before. Jim is a senior fellow and director of legal policy at MI, where he writes on all sorts of issues, mainly in the law and economic space, and you can catch him on Twitter @JamesRCopland. Again, that's @JamesRCopland. Jim, thanks so much for joining us today.
James R. Copland: Thanks for having us.
Rafael Mangual: So Jim, on Twitter, Bernie Sanders has been bragging about attending the annual meeting of corporate bogeyman Walmart in order to push a shareholder proposal. Now, that proposal, as I understand it, would, among other things, have given even store-level employees at Walmart seats on the company's board of directors and it would have established a company-wide minimum wage. Now, the last time you were on the show, you were talking about a powerful piece you had written for the magazine on the four components of the modern regulatory state and one of the focuses of your piece was on corporate shareholder activism, much like the sort that Sanders was recently engaged in. So, why don't you start by explaining to our listeners why this sort of shareholder activism should be considered part of the regulatory state or how it relates to the regulatory state, and why people should see it as problematic?
James R. Copland: Well, this is really a piece of a broader effort, and the short answer is that the shareholder process for these corporate annual meetings-- every publicly traded company has an annual meeting. Stockholders can come, they usually send a proxy statement in to vote. And while the rules are technically done under state law, the Securities and Exchange Commission, the federal independent agency responsible for this, governs the documents, including the proxy statement. And so not long after the SEC was created in 1934, in 1942 it first issued rules that said, 'well, any shareholder in a publicly traded corporation can introduce a proposal on the ballot.' Now, there are some requirements there in terms of substance and ownership, what have you, but, but they're very lax guidelines, and I can get into that more in a minute. Now, what Bernie Sanders actually did was just show up at the meeting. So it really doesn't involve this SEC process, but it's a reflection of the broader process. Because if you look, Walmart over the last 14 years that we track in our proxy monitor database-- you can check out all these shareholder proposals at the 250 biggest companies at proxymonitor.org-- they face more than 60 of these. A lot of these involve things that aren't related to the corporate governance structure or the executive compensation issues at Walmart. Instead, they've involved sexual harassment, and climate change, and sustainability, and greenhouse gasses, political spending and lobbying, and charitable contributions, and the people for the ethical treatment of animals even put one in about the chicken processing and sourcing at Walmart stores. So these things can be very niche, they can involve social and policy agenda items, and that's really what Senator Sanders was doing. Of course, what he was really doing was politicking for president and grand standing there, and the issues he's pushing are ones that national politicians have also been pushing. The fight for $15 minimum wage push is being waged, but it hasn't had success in Congress. It's had success in some states and localities, in blue states particularly, but it hasn't had success in Congress, and that's because folks representing places like Arkansas think, 'well, it's a bad idea.' Fifteen dollars is a lot more in Arkansas than it is in Seattle or New York City. So, they haven't had national traction on that. Elizabeth Warren, also running for president, introduced what she called the Accountable Capitalism Act over the summer, and she pushes for labor representation on corporate boards, which is something we do see in Germany. It's not unknown internationally, but it's certainly antithetical to how our corporate law has traditionally been structured, which is to have a lot of independent directors, not, directors with conflicts of interest, and to align around shareholder value, which is really aligning all people's interests around one sort of thing. So, all of the shareholder proposals that I'm talking about, though, are a function of the regulatory state. There's no congressional law that says 'if you want to trade your stock on a public stock exchange, you've got to let shareholders vote.' No, the SEC just decided-- and the SEC is supposed to protect investors, but also to promote competition and efficiency and facilitate capital formation-- and it just decided, 'well, you know, we want shareholders to have a voice,' and they put this on the ballot. So what we see with it is a lot of this back-door politicking. Between 40 and 60% in a given year of all shared proposals involve these environmental or social policy types of concerns. They almost never get majority shareholder support, but they really become a part of the corporate agenda and really what the government's telling the company to do is 'well, you have to put this on the ballot and give these people time, even if it's inimical to the corporate interest and adverse to investment interest of the average shareholder.
Rafael Mangual: So, are people like Bernie Sanders and other shareholder activists really just trying to use the corporate governance process in order to achieve the things that, as you mentioned, they're not having success with in Congress?
James R. Copland: I think it's some of both. I think on an issue like what Bernie Sanders is pushing, or some of the environmental proposals, they're not likely to change corporate behavior in some cases. Some of the companies certainly have capitulated to various environmental proposals on the ballot. But they're not going to get Exxon to stop producing oil. They're not going to get Walmart to pay above-market wages for its employees because it cuts at the very heart of the business model of the business. If Walmart gets to the point where it thinks $15 wages make sense for us, it'll probably do what some of the other companies have done and start lobbying for a higher minimum wage to create a barrier to entry for its competitors. Right. But as long as it doesn't think that that's the right wage, it's not the market-clearing wage for its workers, it's not going to shoot itself in the foot. So they're not going to succeed directly. And that's why Bernie's proposal-- now, it wasn't on the proxy statement-- but it only got roughly one one-hundredth of 1% of the shareholder support, the shareholders voted for his proposal. But part of what they're doing, also, is trying to leverage this process is to build political support for their broader agenda. And so they're co-opting the corporate proxy process for that end. Now, it's a free country, there's nothing to prevent people from protesting outside Bentonville, Arkansas or the nearby place where they're holding the annual meeting, and Bernie Sanders can certainly show up and talk, and if Walmart wants to give him time, or the floor for any shareholder at the meeting who actually shows up and they want to delegate their time to Bernie Sanders, that's really not a government issue. But when the government is mandating that companies say something, and put it out on their ballot, then that is an issue. And, as I was suggesting, the guidelines here are really, really lax. Anybody who holds a stock for one year, at least $2,000 worth of stock, can put their issue item on the ballot. And if it's a matter of general political or social concern, you would think that would be something that the company could keep off the ballot. That's what the SEC used to say for the first 30-plus years it had this rule, but in the last 40 years it's reversed course. You can't keep them off the ballot, generally. Unless the company has no ability to influence the issue, the company basically has to put it on the ballot if it's a matter of public policy or social concern. And it's a weird form of democracy. So people will talk about shareholder democracy, but really shareholders are just like any other investors. What they do have is ultimate voting rights, and that's because they don't have any contractual guarantees to get the capital of a company, the earnings of a company, paid out to them. Bondholders do, employees do, customers and suppliers do; they're all operating under contracts with the company. But the equity owners-- and there's a reason why equity ownership, why common stock corporations are 95% of the Fortune 500 for a reason: it's good for companies not to have to pay out a constant cash flow, especially when they're starting up. And equity owners can make a lot of money; if the company does really well, they get the residual capital. But they can only do that if the company pays it out to them. And there's nothing forcing the company to do that. So we have these fiduciary duties on boards, but the real way shareholders can get their way is by voting out directors. If directors are hording a bunch of corporate cash and not paying it out, they can make hay, and that's what Carl Icahn and hedge fund folks often do if they think the company is not paying out cash the way it should. But that's very different than having just a general plebiscite on any issue. Our democracy is messy for a reason, and allowing any old shareholder to put any issue he or she wants on the corporate ballot is a strange rule. If you think about the $2,000 limit, to some people that sounds like a fair amount of money, but not for Walmart, which is a $300 billion company. It's the equivalent of you and me, Ralf, the two of us, just the two of us with our two signatures, being able to force a national referendum vote on any topic we want to.
Rafael Mangual: Wow. When you put it that way, that's actually quite concerning. But I want to go back to something you said. Bernie Sanders's proposal, the one that he helped advance, I think you said it got 0.01% of the vote. If proposals are getting that little support, I think some people are wondering, why is it a problem? Why can't we just shrug these things off, let them crash and burn, and move on?
James R. Copland: Well, I think some perspective is in order. It's not as big a problem as other problems could be. And I would rather have shareholder proposals on these issues than a fixed $15 minimum wage. I would certainly rather have a shareholder proposal on the issue than Elizabeth Warren's idea to have 40% of all directorships filled by labor union representatives. I think these would be more destructive, but, while most of these sorts of proposals don't get majority support, and often quite small support-- the chicken when I was talking about, and a lot of these proposals I was mentioning get less than 3% support-- but if they do get 3% support, the SEC says, 'well, they can be introduced the next year,' and if they get 10% support, they can be introduced almost every year. And some of the proposals have started to get more support, and there's a concern there that the actual voting market itself is somewhat dysfunctional. And let me explain what I mean by that. Shareholder voting is by and large done by institutional investors. They own 80% of the stocks. And by and large individual investors don't vote their proxies very often. Institutional investors do, many of them are mandated to do so based on federal rules coming out of the administrative agencies in Washington, but they don't want to spend a lot of time on it, because they really don't get a competitive advantage. And that's particularly true since we've seen the rise of things like index funds. If Vanguard and BlackRock and State Street are all running an index fund, the job of which is to track the stock market, the whole point is to keep costs low, follow the market and say, 'it's not worth it for us to try to be stock pickers. We're going to spend more money trying to do it well than it's worth. We're going to follow the stock market.' This is sort of the Efficient Market Hypothesis. This is what a lot of people invest their money in. But if they're not spending much money, and the whole premise is to track the market, how are they supposed to be informed voters on all these voting questions, on all these ballot items for all these companies? And, some of them have little staffs on it, and they've sort of been moving some of them in the direction of progressive social goals. BlackRock's head of sustainability investing negotiated the Paris climate accord for Barack Obama. He doesn't have any investment experience, was a poli sci major, got a Yale law degree-- I've got one of those, too, but that doesn't mean I should be telling BlackRock how to invest all their money, although at least I've got an MBA and some business experience and some investing experience. This is the guy that is directing the sustainability investing of the largest institutional investor in terms of assets under management in the world. And they're doing that in part, I think, to try to attract capital. There's been a rise in these social investing funds, which are among the most active sponsors of shareholder proposals under these SEC rules. And the notion is some people want to feel good about their investments, et cetera, so they've marketed themselves this way. State Street had the marketing with the Wall Street girl in front of the bull, and is pushing for gender diversity on boards. BlackRock's come out with some of the environmental things, but they're not going to support every wacky proposal. Don't get me wrong. But there's some concern there because the capital is much more concentrated in these institutional investors than it is in businesses. These institutional investors hold a lot more capital than any company in the market, and 4 or 5 of them have a huge percentage of the market. So, if they start behaving in a certain way, there may be this back-door regulatory policy push going on that nobody's voting on. So, even though I think it's more dangerous to have a $15 minimum wage, I also think it's a legitimate thing for us to discuss at the national level and for Congress to debate. I'm not sure it should be done through these back-door pools of capital, particularly when some of those pools are controlled by folks who are state and local political actors. Scott Stringer is one of the most active players here. He runs the New York City pension funds. He doesn't have any investment experience at all. He went to John Jay College of Criminal Justice. He's been a politician or political staffer his whole life. Tom DiNapoli, same thing with the New York State Common Retirement Fund, and very active with all these social proposals, elected partisan officials, and playing a big role in the stock market. Listen, New York voted for these folks, and I think it's going to hurt New York's public employee pensioners and/ or taxpayers if they misallocate their investments along social and policy goals, but what we don't want is these New York politicians being able to decide all these big issues like climate change for the other 49 states.
Rafael Mangual: Right. And it would seem to me that that's actually particularly concerning, because pensioners, unlike regular investors, can't really pull their money and go somewhere else if they're dissatisfied with the results, right? It's kind of like captive capital.
James R. Copland: Exactly. BlackRock is very different than the New York City or State funds. BlackRock has to attract capital, so part of what they're doing is marketing themselves to try to get capital. They have a social investing group and social investing funds for a reason. Some people want to invest that way, and that's fine if they want to do that, but they also have to get good returns, or people will pull their money and go somewhere else, so they're not going to be too crazy about it. Although, if all they're doing is an index fund that tracks the market, there's no way to really beat your competitors on that, and that's where some of this danger emerges. That's why Senator Phil Graham and I testified before the Senate Banking Committee in April on this very point because, how is BlackRock going to distinguish itself from Vanguard? They're both just following the market. So it does create some weird incentive structures there, and part of their marketing strategy might be this, but they still are subject to losing capital, too. That's not true if it's a pension fund governed by state or local officials. That money's there and the only people paying at the end of the year are the taxpayers, but if they're able to affect national policy change, that's an inverted sort of federalism that doesn't make any sense.
Rafael Mangual: Right. So it seems to me that, while institutional investors and pension funds are things we should be concerned about, at least on the institutional investor side, those aren't really the folks driving these proposals and putting them forward, right? So, in terms of a policy fix, as I understand it, the SEC is currently considering some rule changes that are going to be aimed at the people who are peppering these companies as gadflies with a lot of these shareholder proposals, that sometimes end up getting the support of institutional investors. What have you heard about what the SEC is considering? What do you think they should be doing in terms of a direction?
James R. Copland: They're looking at the whole proxy process, but in this area there's three main things that I think they're thinking about that I hope they'll give some consideration to. One is just to raise, in some way, shape, or form, the threshold for introducing a proposal. It doesn't make sense that Ralph and Jim can get a national referendum item on the ballot, and $2,000 of stocks is probably not enough to be able to get an item on the ballot at Walmart. Exactly what that level is, people could debate, but it's a problem. There are three people and their family members. John Chevedden is a quirky guy, lost his job at Hughes Aircraft in the early '90s, filed a complaint with the Equal Employment Opportunities Commission, wasn't successful there, and then started introducing shareholder proposals at General Motors, the parent company. He and two other people and their family members introduce between about a quarter and 45% of all shareholder proposals every year. And they're not big shareholders. They tend to own just a little over $2,000 in a lot of these companies, and a lot of the activist groups are very well aware of this. So, when Levi Strauss went public this February, then in March, less than a month later, the People for the Ethical Treatment of Animals again comes in and says, 'well, we want to put up a shareholder proposal on the ballot about using leather, real leather, in their pants.' It's fine for them to argue about this in a public forum, but they're saying, 'we're going to only buy the minimum stock, $2,000.' They're not buying that stock to try to invest in Levi's. They're buying that stock to try to influence Levi's. And by raising these thresholds, it at least means that you've got to be a serious player. Similarly, the resubmission thresholds where, if 97% of the shareholders voted against it, you can get it back on the ballot. If 90% vote against it, as long as you've got 10%, you can get it on the ballot, and definitely, I think they're going to think about raising those thresholds so that the companies aren't just repeatedly getting the same proposal. And finally, what makes this a funny market is not all the institutional investors have teams devoted to figuring out how to vote on these like the BlackRocks, and the Vanguards, and the big institutional investors. A lot of them are small shops, and they're not going to pay any attention to it at all, so they outsource their voting to proxy advisory firms. It's not a very valuable business. There's only two big players, ISS and Glass Lewis, and they have about 97% market share. And ISS, when it was last owned by a publicly traded company, was getting about $120 million a year in revenue, which sounds like a lot, but it's not a lot compared to Walmart, for instance, which has $300 billion in market capitalization. So it's a relatively small player, but our empirical evidence suggests they're acting as if, in the shareholder proposal votes, they own 15% of the total stock market. That's about how much of the vote they control. And when you add Glass Lewis to that, you can get a pretty sizable shareholder vote, based on these proxy advisory firms, which themselves are often subject to capture by the social investing funds and the public pension funds controlled by politicians like Singer and DiNapoli. So, I think that the SEC is thinking about these issues, how much stock should you have? What should the vote, revote, resubmission requirements be? And how should we think about these proxy advisory firms, and what should their duties be under the law, because right now they’re essentially unregulated? That’s the scope of issues I think they’re going to be thinking about.
Rafael Mangual: Wow. Well, that was incredibly informative, Jim, as has been every conversation I’ve ever had with you. To our audience, if you’d like to drop us a line about today’s episode, please feel free to reach out to us on Twitter @CityJournal using the #10Blocks. Now, if you’ve been enjoying our show and want to hear more of it, please do leave us a rating on iTunes. This is your host for the day, Rafael Mangual, thank you to you for listening. And Mr. Jim Copland, thank you so much for coming on today.