A battle between conservative and liberal ideology is heating up outside the halls of Congress, and the outcome could shape Corporate America’s stance on issues from environmental policy to firearms sales.
For years, investment firms, unions and pension funds have used their ability to introduce policy proposals at annual meetings to drive change at some of the largest U.S. businesses. Social activists are increasingly realizing that, for fairly small amounts of money, they can do the same.
With as little as $2,000 worth of shares in a company, an investor can file a resolution seeking to force its board into actions from adding women directors to improving minority-hiring practices. While the measures rarely garner the majority support required for passage, they drive media headlines and often influence corporate decision-making nonetheless. Amazon, Facebook and Google parent Alphabet, for example, all independently announced new diversity policies for selecting directors this year.
“It’s a tool that many investors don’t start with, but we want to have the right to utilize it,” said Tim Smith, director of environmental, social and governance engagement at Walden Asset Management. “The very fact that a resolution has been filed stimulates a lot of behind-the-scenes conversations.”
Business interests have argued that the shareholder-resolution process has become too easy, allowing investors with little at stake to have an outsized impact, and suggesting that the minimum holding required for such proposals should be raised. Their efforts may be gaining traction: The Securities and Exchange Commission is set to hold a Nov. 15 roundtable on the proxy process, and the shareholder proposal system is on the agenda.
The SEC review comes as partisanship divides Americans along ever-sharper lines, with shareholder proposals increasingly involving social policies, an area where change was once driven by groups outside the investor community.
In the 1990s, for example, Nike’s pledge to fight use of underage workers at overseas factories was driven not by an investor proposal but a coordinated effort from outside groups who said the athletic apparel chain was relying on foreign sweatshops for its products.
This year, by contrast, gun manufacturers faced resolutions pushed by investor groups including Catholic nuns that would require them to publish reports on their handling of firearm-safety issues. Such proposals were approved by investors at American Outdoor Brands, formerly Smith & Wesson, and Sturm Ruger, despite opposition from the leadership of both companies. The measures came in response to mass-shootings at a Florida high school and a concert in Las Vegas.
Activists also regularly push a measure to force businesses to disclose their political contributions. Companies targeted this year included Nike, AT&T and CarMax.
“A lot of these are management issues in disguise, and they are trying to compel a company to take a complicated issue and come to some sort of yes-no outcome on it,” Brian Tayan, a researcher at Stanford Law School focused on corporate governance, told the Washington Examiner. “That’s not the best way to make wholesale corporate decisions.”
In 2018, nearly 34 percent of all shareholder proposals addressed either an environmental or social issue, according to proxy advisory firm Glass Lewis. Experts on both sides of the debate say the majority of the shareholder proposals have a liberal bent.
BlackRock and Vanguard, for example, recently backed resolutions pertaining to climate change, and the impact of the large institutional investors’ involvement was felt quickly. Both ExxonMobil and Occidental Petroleum agreed to implement measures backed by the two firms to issue reports on the risk climate change posed to their businesses — after opposing them for years.
Observing such successes, conservatives have begun employing similar tactics.
When liberal groups backed measures to get companies to support single-payer health coverage, for instance, firebrand Justin Danhof filed mirror proposals with libertarian policies — only to be blocked by the Securities and Exchange Commission every time.
“The bias at the SEC is just so extreme,” Danhof, who serves as general counsel for the National Center for Public Policy Research, said in a recent interview.
Despite those frustrations, he realized there was an opportunity to use the agency’s rules to his advantage. Under SEC guidelines, resolutions are dropped if they are “substantially duplicative” of other measures. So as long as he was first to file, Danhof could block the more liberal-leaning proposals from even being considered.
The technique proved effective. Activists routinely submit measures that would require companies to disclose certain political contributions to Republican-aligned groups like the U.S. Chamber of Commerce, so this year, Danhof quickly filed proposals seeking identical disclosures that included how those groups contributed to economic growth. That blocked the competing measures.
“It’s a shakedown,” he said. “They want people to leave the Chamber and they are constantly attacking corporate members of pro-business groups.”
A particular concern for conservative activists is the power of proxy advisory firms, or companies that recommend how to vote on certain proposals. Widely influential, the recommendations are sometimes automatically followed by large funds.
The U.S. only has two major advisory services — Institutional Shareholder Services and Glass Lewis — and critics say they operate without much oversight or insight into their decision-making.
“Proxy advisory firms are much more likely to back some of these proposals than your average investor,” said Jim Copland, senior fellow at the Manhattan Institute. “ISS is effectively acting like the largest stockholder in the total stock market in terms of how it’s influencing these shareholder votes.”
Republican lawmakers like Rep. Sean Duffy of Wisconsin have pushed legislation to force the firms to register with the SEC and introduce more transparency into the recommendation process.
An ISS spokesman declined to comment for this article. Glass Lewis did not respond to an interview request.
The growing involvement of pension funds — like the California State Teachers’ Retirement System, or CalSTRS — has some experts questioning the rationale behind their efforts.
“If you look at the motivations of the people putting the proposals forward, you can question how pure those motives are,” Tayan said. “Are these proposals done to improve the returns to the retirees of the pension fund or are they done because the people in charge of the pension fund have preferences in terms of social and political policy?”
As corporate activism grows, companies are growing more adept at managing it. Many of the proposals are never made public because businesses are able to negotiate changes behind the scenes to appease shareholders.
But even with closer involvement from investor relations departments, activists are already planning new issue areas to target in 2019.
Along with common resolutions on issues like board diversity and climate change, proposals addressing sexual harassment will be prevalent, experts predict — a reflection of the strength of the #MeToo movement that has led to the departures of top executives like Harvey Weinstein and Steve Wynn.
The article was changed to include the correct gender of the ISS spokesperson.
