Proxy Voting and the Future of Corporations
Bottom Line: There is renewed interest in the role of the corporation, the importance of shareholder interests, and how the regulatory environment affects both of them. With the increased role of institutional investors, proxy advisors, which advise on corporate governance issues, have taken on a major role in the social agenda of corporations. This development runs counter to the traditional view of the corporation: to maximize shareholder returns. Reforms to make proxy advisors more transparent should occur.
A recently released framework for public discussion in the British Academy, “The Future of the Corporation: Towards Humane Business,” espouses that corporations' purpose is not only to maximize shareholder value but also align their public and social functions with their business purposes, and that regulations should be passed to ensure this.
Under such expanded view of corporate purpose, the shareholder vote would become a regular opportunity for shareholders to express their values rather than simply their opinion as to how best to maximize value. It is already common for shareholder votes to address a wide array of social issues such as board composition and environmental concerns, which do not directly affect a company’s financial performance during the time horizon of its strategic plan.
There is an unprecedented consolidation of ownership in the U.S. equity market, with over 80 percent of the market value of the Russell 3000 and the S&P 500 now held by institutional investors. The upshot of this concentration is that a small number of governance experts and fund managers are making voting decisions that have enormous impact across the corporate landscape. In this context, proxy advisors have become increasingly important, and correspondingly controversial, components of the proxy process.
Under the competing new paradigm of corporate theory, the act of investing, even in broad index funds or companies without public or social purposes, would not be separable from agenda-driven activism, due to the pressure generated by powerful proxy voters. This may be unattractive and disadvantageous to the vast majority of investors who use index fund investing simply as a financial tool and have widely divergent social views, including perhaps the view that businesses should not adopt social agendas.
The much-anticipated SEC staff roundtable on the proxy process that was held in November included the perspectives of proxy advisors, issuers, investment firms, index funds, institutional investors, academics, and policymakers. All seemed to agree that, from a logistical standpoint, proxy advisors have become an essential component of the annual proxy season process. None of the panelists advocated for further regulation of proxy advisors. The general view of most panelists was that additional regulation likely would be burdensome and costly for the clients of proxy advisory services, which ultimately would increase the expense of the proxy process to the detriment of shareholders.
Proponents of broadening the definition of corporate purpose as a defense against short-term profit-seeking should be wary of going too far in the other direction. A balanced approach, in which informed investors evaluate and support chief executives as they pursue wealth-maximization over the company’s strategic timeframe, would be optimal.
The current debate over social purposes, and the ramifications for the long-term financial interests of public company shareholders—particularly in the context of large-scale institutional proxy voting—deserve the attention of Main Street and institutional investors. An excellent result would be greater transparency and proxy process reforms that promote the interests of shareholders.
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