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23 states file comment opposing DOL's proposed rule that "promotes a social activist agenda over the interests of employees, retirees, and other retirement fund beneficiaries"

H/T: Stefan Padfield:

You can read the full comment letter here.  For additional background on the proposed rule, go here.  An excerpt from the letter:

It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one....

What I need are some really rich conservatives to finance a Rule 14a-8 shareholder proposal campaign

I have a splendid idea to advance the pro-life cause while calling attention to the SEC's recent liberalization of the shareholder proposal rule. It came up in a Twitter conversation with SEC Commissioner Hester Peirce:

I'm still hoping there's an anchor in common sense--a company's proxy should be about the company. We'll have to evaluate, though, at the end of the proxy season.

— Hester Peirce (@HesterPeirce) November 30, 2021

Plus, imagine the havoc if some concerned law professor could persuade wealthy conservatives to mimic James McRitchie and John Chevedden. If there is no nexus, we could bombard companies with anti-abortion proposals and dare the SEC to say they lack social significance. pic.twitter.com/CwXTpKPMaW

— Steve Bainbridge (@PrawfBainbridge) November 30, 2021

Will the SEC now allow shareholder proposals on abstract political, social, and economic questions?

The SEC's latest guidance on Rule 14a-8 (the shareholder proposal rule) abandoned an important limitation on the scope of permissible shareholder proposals:

Rule 14a-8(i)(7), the ordinary business exception, is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8. It permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” ...

... staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

It has been speculated that this announcement "represents a wholesale abandonment of any assessment of relevance of a proposal to a company’s business (as compared to relevance to society at large)." If so, it would represent an abandonment of longstanding rules, including "the “nexus” concept was embedded in the 1998 Release, as stated in Staff Legal Bulletin 14E (Oct. 27, 2009), at footnote 4 (citing the 1998 Release), and reaffirmed in Staff Legal Bulletin 14H (Oct. 22, 2015)."

I am reminded in this regard of a 1945 SEC opinion, which concluded that "the phrase “proper subject for action” to mean proposals which relate directly to the affairs of the particular corporation and concludes that proposals which deal with general political, social or economic matters are not, within the meaning of the rule, 'proper subjects for action by security holders.'" The Sec Today Released an Op. of Baldwin B. Bane, Release No. 735 (S.E.C. Release No. Jan. 3, 1945). Has the SEC now abandoned that position, such that "proposals which deal with general political, social or economic matters" unrelated tp the company's business will now be includable?

This makes no sense. As the 1945 release explained, the purpose of the shareholder proposal rule is "to place stockholders in a position to bring before their fellow stockholders matters of concern to them as stockholders in such corporation ...." The clear implication is that there must be some nexus between the proposal and the company's bison's activities:

... in 1945 the Commission issued a release containing an opinion of the Director of the Division of Corporation Finance that was rendered in response to a management request to omit shareholder resolutions which bore little or no relationship to the company's affairs; for example, these shareholder resolutions included proposals "that the anti-trust laws and the enforcement thereof be revised," and "that all Federal legislation hereafter enacted providing for workers and farmers to be represented should be made to apply equally to investors." The Commission's release endorsed the Director's conclusion that "proposals which deal with general political, social or economic matters are not, within the meaning of the rule, ‘proper subjects for action by security holders.'"

Med. Comm. for Human Rights v. Securities and Exch. Commn., 432 F.2d 659, 677 (D.C. Cir. 1970), vacated, 404 U.S. 403 (1972). Are shareholder proposals "that the anti-trust laws and the enforcement thereof be revised" now admissible? It seems possible:

“By repealing longstanding guidance about treatment of shareholders proposals, the SEC has stated its preference to turn board rooms and shareholder meetings into political debate societies on issues the SEC admits have no nexus to the actual business of the company,” Tom Quaadman, an executive vice president with the Chamber, said in a statement. “This will all come at the expense of companies' ability to focus on long-term performance, including the welfare of their employees, customers, and shareholders.”

Commissioners Criticize New SEC Staff Interpretation on Rules Governing Shareholder Proposals, WGL-ACCTALERT VOL 15 NO 213.

All of which strikes me as problematic. After all, shareholders have a “First Amendment interest in not being forced to be associated with political speech that they do not support." Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev. 83, 113 (2010). If that's true about political speech by the corporate, as Bebchuk and Jackson claim, should it not be even more true with respect to political speech foisted upon the corporation by government fiat regardless of whether the speech has any meaningful relationship to the company's business?

Milbank ducks the hard question: Why does the SEC get to decide what issues have social significance?

In an otherwise very useful post on the new SEC shareholder proposal rule guidance, Milbank ducks the really hard question:

As a result of the SEC’s most recent Staff Legal Bulletin[1] (“SLB”), shareholder proposals that focus on a “significant social policy” will not be excludable simply because the policy issue is not, in fact, “significant” to the company receiving the proposal. The SEC has decided it will no longer “focus on the nexus between a policy issue and the company.”  Previously, shareholder proposals that did not raise a “policy issue of significance for the company” were excludable under the “ordinary course of business” exception to Rule 14a-8.[2] The new Staff Legal Bulletin is a departure from past SEC practice, and led the SEC to simultaneously rescind three previous Staff Legal Bulletins on the same subject.

Leaving aside the issue of why the SEC – which is presumably dedicated to the regulation of securities – should be determining in the abstract which social issue are “significant,” it is clear from the new bulletin that climate change and human capital management are issues that will be considered “significant.” Beyond that specific guidance, the SEC promises only that “in making this determination [regarding significance], the staff will consider whether the proposal raises issues with a broad societal impact.” This is a standard that doesn’t exactly hem in the SEC or limit the imagination of activists and gadflies.

Given the new woke majority at the SEC led by wide awake Gary Gensler, we can expect firms to be forced into including all sorts of progressive proposals having no meaningful nexus to their business. In a world in which the First and Seventh Amendments had teeth, this would be a regulatory taking by compelled speech.

Expect the SEC to Favor Woke Shareholder Proposals: The SEC's Appalling New 14a-8 Guidance

Wachtell Lipton reports:

The SEC Staff has issued revised guidance rescinding prior Staff Legal Bulletins addressing the exclusion of Rule 14a-8 shareholder proposals based on the social significance to a company, “micromanagement” or  “economic relevance.”  The changes will likely facilitate a larger number of shareholder proposals, including ESG proposals, coming to a shareholder vote. ...

The new guidance revises the SEC’s application of the “ordinary business” exclusion, which considered whether a proposal was of social policy significance or sought to micromanage a company.  While the Staff has previously focused on the significance of a social policy issue to a particular issuer, they will now focus on the proposal’s “broad societal impact.”  

This is appalling. In effect, the SEC is saying that corporate proxy statements can be conscripted by somebody owning a trivial amount of stock to solve "societal problems" that may have virtually no nexus to the company.

In addition, the SEC is encouraging shareholders to micromanage the company when it comes to woke issues:

For example, a proposal requesting a company set greenhouse gas emission targets, but providing the company with discretion on a method for its implementation, will no longer meet the threshold for exclusion based on micromanagement.  

How is deciding corporate environmental policy not micromanagement?

Wachtell concludes:

it is not clear which social issues the Staff will deem broad enough to “transcend the ordinary business,” beyond the Staff’s examples of proposals relating to human capital management with a broad social impact or to greenhouse gas emissions targets without specific methodologies.  

Piffle. It is perfectly obvious that the SEC has become a tool of the Warren/Sanders/AOC wing of the Democratic Party and is now leading the charge towards woke capitalism. I feel confident in predicting that woke shareholder proposals will breeze through the process. In the unlikely event that conservatives emulated progressives and started using the shareholder proposals to effect their policy goals, however, I'd bet the SEC allows their exclusion.

 

Dan Loeb wants Shell to split its brown and green assets

Dan Loeb has been my favorite hedge fund manager ever since his campaign against Warnaco, during which he famously compared Warnaco's CEO to Burt Reynolds’ character, the pornographic producer, in the film "Boogie Nights.”

Loeb is now making a run at Shell, arguing for breaking Shell up into "multiple standalone companies:

For example, a standalone legacy  energy  business  (upstream,  refining  and  chemicals)  could  slow  capex beyond what it has already promised, sell assets, and prioritize return of cash to shareholders (which can be reallocated by the market into low-carbon areas of the economy).  A standalone LNG/Renewables/Marketing business could combine modest cash returns with aggressive investment in renewables and other carbon reduction technologies (and this business would benefit from a much lower cost of capital).  Pursuing a bold strategy like  this  would  likely  lead  to  an  acceleration  of  CO2  reduction  as  well  as  significantly increased returns for shareholders, a win for all stakeholders.

Ann Lipton has a post discussing the issues raised. She points out that:

Shell argues – and apparently some of its large investors agree – that you can’t split them up that easily.  Part of the claim has to do with how the different sides of the business are integrated, and part of it has to do with cash flows, namely, that the brown assets are funding the green ones.  As Matt Levine points out, though, investors themselves could do that if they wanted to – they could take the cash they make from the brown assets and plough it back into green investments ....

This strikes me as plausible. It's basically the same argument that was made to show why conglomerate mergers are value destroying; namely, that diversification at the investor level will almost always be superior to intra-company diversification. 

The even more interesting and provocative part of Ann's post, however, is her argument that Loeb is purporting "to appeal to ESG strategists and possibly take a leaf out of Engine No. 1’s playbook." As she explains, however, "that’s actually not the strategy at all.  Loeb is in no way trying to make energy 'greener.'"

All of this relates to the question of whether traditional shareholder activists like Loeb are going to advance or oppose the ESG movement. Count me as dubious.

New SEC Proxy Voting Disclosure Proposal

This tweet kicks off a string of 8 tweets on the new proposal:

1/ The @WSJ reported today that the SEC plans to require asset managers to provide more extensive disclosures about how they vote the shares of portfolio companies. https://t.co/4XIT2JQLAC #lawtwitter This annoys me.

— Steve Bainbridge (@PrawfBainbridge) October 1, 2021

Why do boards get to spend corporate money to fight off proxy contests?

A friend of mine who teaches constitutional law took an interest in more important matters when he read about the recent proxy fight at ExxonMobil. He asks:

Why is it legal for Exxon’s management or the majority of Exxon’s current board to spend shareholder dollars to tell shareholders not to vote for other candidates?

On level, the answer is "because the courts say so." As I explain in my book Corporate Law (Concepts and Insights):

In theory, incumbent directors do not have unbridled access to the corporate treasury. In practice, however, incumbents rarely pay their own expenses. Under state law, the board of directors may use corporate funds to pay for expenses incurred in opposing the insurgent, provided the amounts are reasonable and the contest involves policy questions rather than just a “purely personal power struggle.” [E.g., Rosenfeld v. Fairchild Engine & Airplane Corp., 128 N.E.2d 291 (N.Y.1955), reh’g denied, 130 N.E.2d 610 (N.Y.1955).] Only the most poorly advised of incumbents find it difficult to meet this standard. The board merely needs have its lawyers parse the insurgent’s proxy materials for policy questions on which they differ. Such a search is bound to be successful: if the insurgent agrees with all of management’s policies, why is it trying to oust them?

In contrast, insurgents initially must bear their own costs. Insurgents have no right to reimbursement out of corporate funds. Rather, an insurgent will be reimbursed only if an appropriate resolution is approved by a majority of both the board of directors and the shareholders. [E.g., Steinberg v. Adams, 90 F.Supp. 604 (S.D.N.Y.1950); Grodetsky v. McCrory Corp., 267 N.Y.S.2d 356 (Sup.Ct.1966).] If the incumbents prevail, of course, they are unlikely to look kindly on an insurgent’s request for reimbursement of expenses. In effect, the insurgent must win to have any hope of getting reimbursed.

On a deeper level, the question is why have the courts so held? The Rosenfeld court explained that:

If directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum, where there is no contest. In the event of a proxy contest, if the directors may not freely answer the challenges of outside groups and in good faith defend their actions with respect to corporate policy for the information of the stockholders, they and the corporation may be at the mercy of persons seeking to wrest control for their own purposes, so long as such persons have ample funds to conduct a proxy contest.

Id. at 293.

The Delaware Chancery Court similarly explains that:

The report of the case of Pell v. London & North Western Ry. Co., [1907] 1 Ch. Div. 5, contains discussions by the three Lord Justices who sat in the case, which very persuasively demonstrate that such expenditures are entirely proper. The underlying reason is given by them as this-that inasmuch as the stockholders are called upon to express their judgment upon the soundness of a questioned policy, it is in the interest of an intelligent decision by them that they should be advised by the responsible managers of the corporation who formulated the policy what were the considerations which induced their approval; and that it would be highly unreasonable to require that the directors should personally defray the expense incident to the performance of a duty which rested upon them to lay before the stockholders the information which is requisite for an informed decision in turn on their part. Where the question in one of a policy to be adopted, the judges in the English case just cited took the view, and very reasonably so, that the corporation was under a duty to advise the stockholders, whose approbation or disapproval was to be determinative, of the reasons for the policy's adoption, and that in such a case the directors are to be regarded as having that corporate duty laid upon them. Any expense incident and reasonably necessary to perform that duty, is an expense incurred in the interest of the corporation and therefore properly chargeable to it.

Hall v. Trans-Lux Daylight Picture Screen Corp., 171 A. 226, 227 (Del. Ch. 1934).

Professor Melvin Eisenberg offered a slightly different explanation:

In considering this problem two economic facts must be viewed in conjunction: (1) Proxy fights involve a lot of money ... and most of the expenses are probably incurred in connection with just those techniques that have the least informational content; (2) While corporate directorships are unquestionably valuable, in themselves they do not normally pay very much money. ... Putting these two facts together, most outside directors and many inside directors ordinarily could not be expected to defend a proxy fight out of their own pockets. Thus a rule which precluded management from using corporate resources for such campaigns might tend to drive corporate offices into the hands of those who are ready and able to pay for such campaigns. Management access to the corporate proxy machinery may therefore be justified, not because the election of directors is a board function — it is not; and not because typically the issues are policy issues and the expenses are incurred for the purpose of informing the shareholders on these issues — they are not; but because in the long run the shareholders and the entire economy might suffer if management had to choose between paying for proxy campaigns out of its own pocket or throwing in the towel.

Melvin Aron Eisenberg, Access to the Corporate Proxy Machinery, 83 Harv. L. Rev. 1489, 1499–500 (1970).

So take your pick:

1. Allowing the board to spend corporate funds allows them to defend the corporation from potential bad actors.
2. It ensures that shareholders are fully informed.
3. It allows persons of modest means to serve as directors.

Shareholder gadflies annoyed because SEC required them to have some skin in the game in order to use the shareholder proposal rule file suit to eviscerate long overdue reforms

Bloomberg reports:

A recent change to an SEC rule governing shareholder proposals “guts” the process in return for “minuscule and largely hypothetical cost savings,” a group of institutional investors say in a federal complaint filed Tuesday in Washington.

The amendments to the Securities and Exchange Commission’s Rule 14a-8 “dramatically increase” how much stock shareholders must own to submit a proposal, and the agency’s “purported justifications for the amendments were flawed at every turn,” according to the complaint filed in the U.S. District Court for the District of Columbia.

Shareholder advocate James McRitchie, the Interfaith Center on Corporate Responsibility—a coalition of more than 300 institutional investors—and corporate engagement and shareholder advocacy nonprofit As You Sow filed the lawsuit challenging the rule.

We're dealing here with groups who dump masses of "social justice" proposals onto company proxy statements, presumably because they have nothing better to do with their time.

As I wrote last year, the changes to SEC Rule 14a-8 were minor and long overdue reforms intended to preserve legitimate use of the shareholder proposal rule while requiring the sort of hobbyists who filed this suit to have a little more skin in the game.

It used to be that a shareholder needed to own a mere $2,000 for just one year in order to make use of Rule 14a-8. A shareholder now must demonstrate continuous ownership of at least:

• $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
• $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
• $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
• Aggregation of holdings for purposes of meeting the ownership requirements will no longer be permitted.

These tweaks ought to be unobjectionable. The previous $2,000 limit was adopted in 1998 and has never been adjusted for inflation:

Under the new rule, as long as the shareholder is a long-term investor, you actually need a smaller investment—in real dollars—than you did in 1998.

In addition, the new thresholds are still set so low that owners of minuscule percentage of a company's stock get to force a vote on their pet proposal:

Are the hobbyists so broke that they can't afford to hold the very modest amount of stock the rule requires?

In my humble opinion, this suit not only deserves to be tossed for failure to state a claim but slapped with Rule 11 sanctions. 

The ExxonMobil Proxy Fight Was Not a Triumph for Woke Capitalism

Some have pointed to the 2021 proxy fight at ExxonMobil as evidence that shareholders are willing to put environmental concerns ahead of profit. Engine No. 1 is a small hedge fund that purports to be focused on advancing EZSG issues, especially with respect to climate change. Engine No. 1 nominated a short slate—four director candidates—in opposition  to the candidate slate put forward by the incumbent board. Three of Engine No. 1’s candidates were elected, which the New York Times proclaimed as a “major triumph” for climate activists. Matt Phillips, Exxon’s Board Defeat Signals the Rise of Social-Good Activists , N.Y. Times, (June 9, 2021), https://www.nytimes.com/2021/06/09/business/exxon-mobil-engine-no1-activist.html.

On closer examination, however, the ExxonMobil result actually supports the hypothesis that today’s investors remain focused on profit. Two of the successful three Engine No.1 were longtime oil industry executives. Engine No.1’s arguments were focused on ExxonMobil’s subpar financial performance, emphasizing that over the preceding ten years ExxonMobil had lost money while stock market indices had tripled. ExxonMobil was persistently investing in expensive projects that could only pay off if oil prices increased substantially and on a sustainable basis. Finally, Engine No.1 highlighted ExxonMobil CEO Darren Woods $75 million pay over the preceding four tears. In sum, the “fight wasn’t about being woke, it was about capitalists holding other capitalists responsible for results.” David Nicklaus, Exxon Board Fight, St. Louis Dispatch (June 6, 2021), https://www.stltoday.com/business/subscriber/article_53207bb5-a365-5642-b347-39ff623c030a.html (behind a paywall).

The Corporate Governance Mechanics of How ExxonMobil lost the Proxy Contest

A friend emailed this morning to ask:

Do you know what the mechanism was by which the dissidents were able to get two people on the Exxon board?

Of course I do.

As background, the WSJ reports that:

Exxon’s loss came at the hands of Engine No. 1, an upstart hedge fund owning only about 0.02% of the oil giant’s stock. It had waged an aggressive campaign challenging the company’s energy transition strategy and response to climate change, depicting it as a corporate dinosaur.

The vote at the company’s annual meeting capped a pitched, monthslong battle between the company and the activist to persuade Exxon shareholders, that turned into one of the most expensive proxy fights ever. ...

Engine No. 1 ran what is known as a short slate contest in which it nominated 4 candidates for election to Exxon's 12-member board of directors.

Exxon Bylaw Article 1 sec. 5 is a majority vote provision:

At a meeting of shareholders at which directors are to be elected and a quorum is present, a nominee for director shall be elected to the Board of Directors if the number of votes cast “for” such nominee’s election exceed the number of votes cast “against” such nominee’s election, excluding abstentions; provided, that directors shall be elected by a plurality of the votes cast if the number of nominees exceeds the number of directors to be elected at such meeting.

Exxon’s proxy statement explains that it worked as follows in this election:

Under ExxonMobil’s by-laws, in a non-contested election a director nominee must receive a majority of votes cast in order to be elected to the Board of Directors. However, the 2021 election is contested by Engine, which nominated four directors. As a result, there are 16 director nominees which exceed the number of directors to be elected, which is 12. In such a case, our by-laws provide for a plurality voting standard, which determines that the 12 persons who receive the greatest number of votes are elected to the Board for the following year.

Exxon has announced that:

Re-elected ExxonMobil directors were Woods, Michael Angelakis, Susan Avery, Angela Braly, Ursula Burns, Kenneth Frazier, Joseph Hooley and Jeffrey Ubben. Elected from Engine No. 1’s nominees were Gregory Goff and Kaisa Hietala.

The outcome was not yet determined for ExxonMobil director candidates Steven Kandarian, Douglas Oberhelman, Samuel Palmisano and Wan Zulkiflee, and for Engine No. 1 candidate Alexander Karsner. A fourth Engine No. 1 candidate, Anders Runevad, was not elected.

The interesting thing is that Exxon’s proxy card only listed its 12 candidates, while Engine No. 1’s proxy statement only listed its 4 candidates. If a shareholder returned an Exxon blue proxy card voting for 10 directors and also an Engine No. 1 white proxy card voting for two directors, only one would count. Engine No. 1’s proxy statement explains that:

THE ONLY WAY TO SUPPORT ALL FOUR OF ENGINE NO. 1’S NOMINEES IS TO SUBMIT YOUR VOTING INSTRUCTIONS “FOR ALL” THE NOMINEES USING THE WHITE PROXY CARD. PLEASE DO NOT SIGN OR RETURN A BLUE PROXY CARD FROM THE COMPANY, EVEN IF YOU INSTRUCT TO “WITHHOLD” ON THEIR DIRECTOR NOMINEES. DOING SO WILL REVOKE ANY PREVIOUS VOTING INSTRUCTIONS YOU PROVIDED USING THE WHITE PROXY CARD.

In order for the vote to come out as it did, I assume that a substantial number of shareholders returned the blue card voting for less than all 12 of Exxon’s candidates and a substantial number of other shareholders returned the white card voting for less than all of Engine No. 1’s candidates. As the WSJ reported, for example, "BlackRock Inc. backed three of Engine No. 1’s candidates" presumably by submitting the white proxy card with "for votes" for three of Engine No. 1's candidates. Interestingly, ISS had recommended a vote for three of Engine No. 1's candidates, but not all 4.

Many commentators argue that the process should be simplified by mandating a universal proxy card.  The Council of Institutional Investors explains:

When a director election has more nominees than available board seats, shareowners typically receive two versions of the proxy card: one from the company and one from the shareholder who nominated the alternative candidate(s). Each card provides a unique list of nominees, neither list is complete, and shareowners are prohibited from using both cards to vote. Thus, depending on the combination of candidates a shareowner supports, he or she may be disenfranchised.

"Universal" proxy cards solve this problem by listing all duly nominated board candidates, allowing shareowners to vote for the precise combination of nominees they wish to represent them. That precision is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake. 

As of April 2021, the SEC appears to be on the verge of adopting a universal proxy rule. The SEC proposed a rule in 2016, about which CII has made available a brief FAQ. Since then the SEC Investor Advisory Committee and a special working group have added further support to the proposal's finalization. 

The Business Roundtable has offered 4 arguments against a universal proxy card:

1. The Proposed Rules May Disenfranchise Shareholders While Favoring Activist Shareholders Who May Be Driven By Self-Interest.

2. The Proposed Rules Will Likely Increase the Number and Frequency of Proxy Contests and Impede the Ability of Corporate Directors to Make Long-Term, Value-Driven Decisions.

3. The Proposed Rules Represent a Significant and Fundamental Shift Away From the Traditional Method of Electing Public Company Directors and Towards a Short-Term Focused Model. 

4. The Proposed Rules Exacerbate the Risk of "False Equivalency" Between Incumbent Directors and Candidates Nominated By Dissident Shareholders.

Putative "ESG" funds hold portfolio firms with worse track records for compliance with labor and environmental laws relative to portfolio firms held by non-ESG funds

Raghunandan, Aneesh and Rajgopal, Shivaram, Do ESG Funds Make Stakeholder-Friendly Investments? (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3826357 or http://dx.doi.org/10.2139/ssrn.3826357

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds in the US from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. We find no evidence that these funds are buying firms based on expectations of future improvement and that increased monitoring by ESG funds does not correlate with any improvement in portfolio firms’ future compliance with stakeholder-centric regulations. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year and charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.

Greenwashing. It's a thing.

Recommended Reading: Professors Mahoney on Institutional Investors and ESG

Mahoney, Paul G. and Mahoney, Julia D., The New Separation of Ownership and Control: Institutional Investors and ESG (March 22, 2021). Columbia Business Law Review, Forthcoming, Virginia Law and Economics Research Paper No. 2021-09, Virginia Public Law and Legal Theory Research Paper No. 2021-18, Available at SSRN: https://ssrn.com/abstract=3809914

Scholars and policy makers have long debated whether corporations should serve social purposes at the expense of shareholder wealth. The SEC has recently been drawn into the debate as it faces calls to mandate environmental, social, and governance (ESG) disclosures. This Article urges the SEC to proceed with caution. The adoption of ESG disclosure mandates in order to serve environmental or social goals is not well-aligned with the SEC’s stated mission of protecting Main Street investors and maintaining fair, orderly, and efficient markets. Accordingly, the SEC should decline to act absent a showing that ESG disclosures will serve the financial interests of the households for whom institutional investors are fiduciaries and whose retirement and other savings they manage.

The Democrats in Congress want to empower three shareholder gadflies to harass corporate boards to no useful purpose

As I reported last year, the SEC finally made some long overdue reforms that limit who can make proposals but do not change the subject matters to which proposals can be addressed:

• Amend the criteria that a shareholder must satisfy to be eligible to have a proposal included in a company’s proxy statement. A shareholder now must demonstrate continuous ownership of at least:
  
  • $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
  • $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
  • $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
  • Aggregation of holdings for purposes of meeting the ownership requirements will no longer be permitted.
• Modify the rule limiting the number of proposals that may be submitted for a particular company’s shareholders’ meeting (the “one-proposal rule”) to establish that a single person may not submit multiple proposals at the same shareholders’ meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder.
  • Under the existing rule, some activists tried to get around the one proposal per company limit by advancing a proposal in their own name while advancing a second proposal purportedly while acting as a representative of another shareholder. The change shuts down that loophole.
• The proponent must state in writing that it is available to meet with company management (at the latter's option) at specified times not less than 10 days or more than 30 days after the proposal is submitted.
  • This is purported to increase the likelihood of shareholder-management engagement.
• Revise the levels of shareholder support a proposal must receive to be eligible resubmit the same proposal at the same company’s future shareholders’ meetings.
  • A shareholder proposal will be excludable from a company’s proxy materials if it addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was:
    • Less than 5 percent of the votes cast if previously voted on once;
    • Less than 15 percent of the votes cast if previously voted on twice; or
    • Less than 25 percent of the votes cast if previously voted on three or more times.

Predictably, these rather modest changes produced ferocious complaints from activist shareholders and their allies in both the academy and politics.

Now Bloomberg reports that the new chair of the Senate Banking Committee--far-left Senator Sherrod Brown--wants to repeal those common sense rules. 

This is absurd. As I documented last year:

First, the previous $2,000 limit was adopted in 1998 and has never been adjusted for inflation:

Under the new rule, as long as the shareholder is a long-term investor, you actually need a smaller investment—in real dollars—than you did in 1998.

In addition, the thresholds are set so low that owners of minuscule percentage of a company's stock get to force a vote on their pet proposal:

If Senator Brown did any investigation he would discover--although he probably would never admit it--that the retail investors who do use the shareholder proposal are mainly just three longstanding gadflies who have abused the system for years (charts from Proxy Monitor):

In fact, when you break it down, basically what Senator Brown is doing here is protecting one person:

John Chevedden is an interesting fellow. In any case, however, add in his less vigorous compatriots, Ken Steiner and James McRitchie, and the three of them "sponsored 38% of all shareholder proposals."

Why is Senator Brown so bound and determined to ensure that these three hobbyists get to keep being gadflies with no skin in the game? 

 

If Senator Brown did any investigation he would discover--although he probably would never admit it--that the retail investors who do use the shareholder proposal are mainly just three longstanding gadflies who have abused the system for years (charts from Proxy Monitor):

In fact, when you break it down, basically what Senator Brown is doing here is protecting one person:

John Chevedden is an interesting fellow. In any case, however, add in his less vigorous compatriots, Ken Steiner and James McRitchie, and the three of them "sponsored 38% of all shareholder proposals."

Why is Senator Brown so bound and determined to ensure that these three hobbyists get to keep being gadflies with no skin in the game? 

Is Having Your Principal Executive Office in California a Risk Factor?

The risk factors section of a prospectus is often one of the most interesting parts. Keith Paul Bishop reports that at least one company is now treating having its principal executive office in California as a disclosable risk factor.