The Weekly Standard Forgets How Capitalism Works

We are always particularly disappointed when those who claim to be conservative, rhapsodizing about the purity of the free market and urging cutbacks in government regulation, become hypocrites when it comes to the very free market responses and corrections that are essential for the integrity of capitalism. That’s exactly what Jeff Patch has done in The Weekly Standard, arguing that we need government regulation of proxy advisory firms.

The average American who owns stock in a public company through a 401(k) or a brokerage account has likely never heard of Institutional Shareholder Services. The firm is perhaps the most influential proxy advisor, advising pension funds and other institutional investors how to vote on shareholder proposals. Nonetheless, the secretive firm holds a vast amount of influence over how public companies operate.

Let us point out again that proxy advisory firms publish reports no one has to buy and recommendations no one has to follow. Their clients find their analyses useful and are more likely to follow their recommendations to vote with management than the tiny fraction of recommendations to vote against. The average Americans who have a brokerage or 401(k) account do not make buy/sell/hold decisions because they recognize that large institutional investors have the expertise and resources they do not. Those who make the buy/sell/hold decisions are in a better position to make voting decisions than someone who has no idea why a stock is in the portfolio or even whether it is. Furthermore, thanks to the tireless work of our Chair and the founder of ISS, Robert A.G. Monks, over 14 years, the SEC requires investment managers to disclose their proxy votes. Customers can now see whether their investment managers voted in favor of outrageous pay plans or against shareholder proposals on climate change and switch to another manager if they do not like those votes. This is how markets work.

Let us also point out again that the shareholder proposals Mr. Patch is so worried about are non-binding. Even a 100 percent vote in favor can be overruled by the company. No one is forcing America’s most powerful companies to do anything they do not think is a prudent use of their resources.

If any pressure is being put on companies, it is from shareholders, not proxy advisory firms. That is how capitalism works, and if executives feel unduly pressured, they can take the company private, and see how they feel about pressure from those owners.

As for The Weekly Standard and Mr. Patch, we recommend that they take a refresher course in economics, markets, and consistency.

Source: Curb the Power of Shady Proxy Advisory Firms!

2 Comments Add yours

  1. They claim to be concerned that individual investors are being hurt because ISS is starting to recommend more favorably on ESG proposals, especially the ES proposals, which might hurt profits. This is based on a mythical Milton Friedman philosophy that the only business of business is to make as much money as possible for shareholders. Its a greed is good philosophy.

    The first corporation in America was Harvard. For many years, corporations could only be chartered if they served a useful social purpose. While that is no longer the case, there is a hunger across America for corporations to become mediating structures that help individuals shape a better world, not just using the wages or profits they extract but from the work they contribute.

    The folks going after ISS are going after an illusion. ISS isn’t that powerful. Their voting policies are shaped by their customers. Their customer’s voting preferences are shaped by public opinion.

    Read Renee Aggarwal, Isil Erel and Laura T. Starks, Influence of Public Opinion on Investor Voting and Proxy Advisors (August 6, 2014, Georgetown McDonough School of Business Research Paper No. 2447012; available at SSRN). They found that investors have been “voting less with the recommendations of management or proxy advisors.” In contrast, “public opinion on corporate governance issues, as reflected in media coverage and surveys, is strongly associated with investor voting, particularly mutual fund voting. In addition, even proxy advisor’s recommendations are associated with public opinion… media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.”

    Public opinion wants corporations to help solve ESG issues. It isn’t just ISS that is increasingly concerned with the E&S of ESG. A recent board survey found that corporate directors are slightly more concerned with ESG performance than with financial performance. https://www.directorsandboards.com/articles/singledirector-data-2nd-quarter-2018

    Why are the attacks on ISS and shareholders who file ESG proposals becoming so shrill? One reason is that more shareholder proposals are winning. Shareholders are voting in favor of proposals to address climate change because they value living on a salubrious planet even more than they value mammon. Shareholders are voting in favor of transparent reporting of political contributions and lobbying expenses because they want to know if their companies are working towards a better world or against it. A second reason is that we seem to have a political situation where telling lies has become acceptable.

    Congress may have the power to curb the power of ISS but can they curb public opinion? However, is a Republican Party dominated by Trump really ready to embrace “greed is good” as the mantra for America?

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  2. Henry D. Wolfe says:

    I love the comment that “….if executives feel unduly pressured, they can take the company private, and see how they feel about pressure from those owners.” Assuming the reference to “those owners” is private equity this is totally accurate. Too bad that the governance model at the top private equity firms’ portfolio companies is not mirrored by the public company governance model. For example, in an extensive McKinsey governance survey it was determined that only 22% of public company boards fully understood how their firms create value and only 16% fully understood the dynamics of their firms’ industries. The pressure from “those owners” and boards of the top private equity companies comes not just from their higher performance expectations (although this is highly operative) it also comes from their in-depth knowledge of the value drivers of the company being governed.

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