Ann Lipton posted a couple of weeks ago about proposals to encourage retail investor participation in corporate governance (I'm a little behind).
A while back, Jill Fisch proposed that retail shareholders be given access to the type of electronic tools available to institutional shareholders so that they could create standing voting instructions, allowing them to cast ballots in corporate elections automatically according to predefined preferences. That vision appears to close to realization; today, there are new programs that make it easier for retail shareholders to cast ballots, including in accordance with preset preferences. As I understand the Iconik service, for a monthly fee, you can set your preferences and have the app automatically vote them – or you elect to follow the instructions provided by a third party provider like As You Sow or Third Act. If you do that, it’s free.
And of course, we know that mutual fund companies are proposing to give more voice to retail shareholders through various kinds of pass-through voting experiments. There are now voting platforms being developed that allow automatic voting in this context, as well.
I am deeply skeptical. In the first place, there are lots of sound theoretical reasons to limit participation by all shareholders--retail or institutional--in corporate governance. See my article The Case for Limited Shareholder Voting Rights: https://ssrn.com/abstract=887789.
Second, retail investors have strong incentives to be rationally apathetic--i.e., to refrain from exercising their voting rights:
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Lack of Information: Retail investors may not always have access to comprehensive and timely information about the companies they invest in. This can make it challenging to make informed voting decisions. Additionally, the sheer number of companies in which retail investors may hold shares can make it difficult to keep up with all the voting matters.
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Limited Influence: Individual retail investors often own a relatively small percentage of a company's shares, which can lead to a perception that their votes may not significantly impact the outcome. As a result, some may feel that their vote will not make a meaningful difference.
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Time and Effort: Voting requires time and effort, especially for retail investors who hold shares in multiple companies. Researching the issues, reviewing the proxy statements, and casting votes can be time-consuming, and some investors may prioritize other aspects of their investment activities.
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Trust in Management: Some retail investors may trust the management and board of directors of the companies they invest in to make decisions in their best interest. They may believe that voting is unnecessary or that management will act in accordance with shareholder interests without their active participation.
Historically, retail investors have been apathetic. In 2017, for example, the NY Times reported that " 91 percent of the shares owned by institutional investors — but only 29 percent of those held by individuals — were voted."
There are several reasons why we might want to let there sleeping dogs lie. First, as Ann points out, we are currently observing in real time retail investors in action--i.e., the objections being filed in connection with the proposed settlement of the AMC Entertainment litigation. (For background on that litigation see my posts AMC APEs, Retail Investor Rational Apathy, Blank Check Preferred Stock, Class Voting, and Blasius and Chancery Daily, AMC, DGCL 242, and the Delaware Legislature.) As Ann delicately puts it:
a lot of the comments are, well, uninformed, to put it mildly. There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting. Many of the objecting shareholders buy into those theories.
I've read a lot of these objections and the vast majority do not inspire confidence in the knowledge or judgment of the objectors.
Second, as Ann also pointed out, many retail investors are now day traders and meme stock traders who are very different from the traditional perception of retail investors who are long-term shareholders. Research examining "how the influx of retail shareholders has directly affected the governance outcomes at the meme stock companies" concluded that "meme stock companies have experienced a significant decrease in participation by their shareholders with respect to voting. Shareholder proposals under Rule 14a-8 have also been extremely limited, with most meme firms seeing no proposals brought after the rapid increase in retail ownership."
The same research also concluded that meme stock companies' "ESG scores have gotten worse subsequent to the meme surge.
Predictions that retail investors will "revolutionize corporate governance and make public companies more responsive to social concerns" thus seem unfounded.
Third, many retail investors are deeply engaged with social media and increasingly exhibit the pathologies associated with social media. In the AMC Entertainment litigation, for example, one of the two lawsuits challenging the plan was filed by an individual Usbaldo Munoz. The AMC Apes have been viciously attacking Munoz. Things apparently got so bad that Munoz has now ghosted his own lawyers, leaving them without guidance as to how to proceed.
Today, the WSJ reported that:
... the ticker MMTLP has become a rallying cry for people angry at the Financial Industry Regulatory Authority and, by extension, the entire financial system. Market veterans say the investors’ rage is misguided.
The episode is the latest example of how social media is a double-edged sword in today’s stock market. Online communities allow individual investors to connect and share trading tips, but they can also fan conspiracy theories and lead to disastrous investing decisions.
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Some Finra employees and market veterans caught up in debate around MMTLP have received death threats. In one anonymous message to a market veteran seen by The Wall Street Journal, the sender alluded to mass shootings and vowed to come “piss on your casket.”
In sum, maybe it'd be best to leave things alone.
