Thanks to our prodding, the fake dark money front group Main Street Investors Coalition is now admitting that it has no connection to Main Street or investors and is in fact funded by corporations. Yet, in an essay by Advisory Board Chair Bernard Sharfman in P&I (accompanied by a disclaimer disavowing any editorial approval), MSIC still claims to be an advocate for shareholders. In fact, it continues to promote the opposite of what it claims. It urges transparency for proxy advisors (who are already regulated as investment advisors and already disclose their conflicts of interest), but is coy about its own. If they were honest about who they are and what they are seeking they would call themselves The Corporate-Funded, Energy Lobbyist-Led Coalition of Corporations. There is no one with a record of investor advocacy associated with the group and not one investor group has endorsed them. Until we pointed it out, they were using “we” to refer to investors, not corporate executives and lobbyists.
Sharfman claims MSIC is the first to focus on agency costs as an issue in corporate governance. In fact, since Berle and Means identified the “separation of ownership and control” as a threat to the credibility and viability of capitalism in 1932, the issue of “agency costs,” which Sharfman condescendingly tells the investment professionals who read P&I is a sleep-inducing term, has been a concern. It is covered extensively in the literature, including the MBA textbook, Corporate Governance, written by VEA Chair and Vice Chair Robert A.G. Monks and Nell Minow. But the rise of large, professional, fiduciary institutional investors since the 1970s has made it possible for meaningful oversight by shareholders for the first time in nearly a century, and it is that which MISC wants to stop.
We are pleased to see Sharfman admit “that climate change is real and poses a serious threat to our world.” We therefore call on MSIC to answer the questions we have previously posed: What shareholder action or engagement on climate change do you support? How will the reforms you are proposing aid in those initiatives?
We suspect, however, that it is shareholder proposals on climate change that MSIC is referring to as the “political” issues it thinks retail investors do not support. We can only suspect that because we have repeatedly asked MISC to give an example of a shareholder proposal they consider wrongly analyzed by proxy advisors or wrongly decided. They have not and can not. Overwhelmingly, more than 90 percent of the time, proxy advisors recommend votes in favor of management. When they recommend a vote contrary to management, many of their clients disagree and vote in favor anyway. Shareholder proposals are submitted at a small fraction of companies and even a 100 percent vote is not binding. Companies do not have to make any changes despite overwhelming shareholder support if management thinks it is detrimental to business operations or strategy. They do not even have to respond. So, what is MSIC so terrified by?
Proxy advisors sell research no one has to buy and advice no one has to take. MISC decries proxy advisors as “powerful” in influencing the outcome of proxy votes, but it is the other way around. Institutional investors are powerful because they hold a lot of stock, the majority of stock in many companies. They decide which independent proxy advice they want to buy and which advice they want to follow.
MSIC seems to suggest (again, they are coy about actual policy proposals) that individual investors, including pension fund beneficiaries, should override proxy votes by their fund managers. Yet their own numbers show that only 29 percent of individual investors vote. This is what economists call “rational apathy” due to the “collective choice problem.” It is not in any individual’s interest to devote the time to proxy votes, given the amount of research required. (VEA staff votes our own proxies, because we are familiar with the issues and we enjoy it, but we are outliers.)
Why shouldn’t individual investors, whether retail investors or pension plan participants, have the right to delegate voting authority to the same people who make the investment decisions? Why shouldn’t passive investors be the most engaged in proxy issues, as they cannot sell out of a stock? VEA Chair Robert Monks documented the economics of this issue in his book, and we have seen evidence of this increased engagement at firms like BlackRock and via pension fund clients with index investments.
Sharfman’s piece, while slightly more honest than most of MSIC’s communications, including its outrageously misleading twitter feed, is still obfuscatory smoke and mirrors. He writes, “I expect the coalition to become a leader in the field of shareholder advocacy.” Yet MSIC has failed to produce a single proposal other than suppressing shareholder votes by restricting access to independent research and re-routing voting back to people who have willingly delegated it.
Let us remind him of what agency costs really are. Agency costs are internal costs incurred from asymmetric information or conflicts of interest between principals and agents in an organization. The agency costs in this case come from the corp-splaining of a dark money fake front group funded by CEOs telling investors what is good for them, which coincidentally happens to coincide with less oversight of corporate executives. Unless and until MSIC answers our questions and comes out with a clear statement of exactly what actions it proposes to empower investors on issues like climate change and CEO pay, we will continue to believe that they are advocating on behalf of CEOs, not shareholders.
We agree with MSIC that decisions should be left to those with the most direct economic interest. In this case, that is the investors, whether directly or via the fund managers with both economic and legal incentives to act on their behalf. Sharfman is asking shareholders to believe that corporate executives are funding a group to promote our interests, not theirs. This would be like students forming a group to advise teachers on how to grade their papers. In other words, the agency costs of MSIC and its affiliate, the American Council on Capital Formation, are insurmountable.
We are grateful to Jim McRitchie for bringing Sharfman’s essay to our attention.