The push for shareholder democracy should be accelerated

It is still too hard for small shareholders to be heard

This article was originally published by The Economist on 23 April, 2022

Keeping shareholders satisfied used to be straightforward. If a firm could announce juicy profits, healthy cashflow and a perky dividend at the annual general meeting (agm), applause was assured and few hard questions would be asked. But in recent years these meetings have shifted from routine talk of balance-sheets to loud battles over companies’ broader purpose. Where once it was enough for bosses to nod to some vague notion of “stakeholder capitalism”, now some investors demand that they present detailed strategies on everything from the environment to racial justice and even abortion. More, too, are highlighting the dissonance between companies’ stated values and their political donations. Shareholders at American firms face a record volume of proposals on environmental and social issues: 576 resolutions as of April 12th, up from 499 last year. In the coming weeks an unprecedented number will be put to a vote.
 

This reflects investors’ growing and understandable interest in mitigating risks that could threaten a wide variety of firms, such as climate change. It is also a side-effect of gridlock in Washington. Frustrated at the near-impossibility of getting bills through Congress, many activists are seeking change by passing motions at agms instead. This year the number of climate-related proposals faced by American firms has jumped by more than 40%. This is not the only lever that environmentalists can pull. In Europe they are increasingly using the courts to sway fossil-fuel firms and other big emitters. In California the state government is seeking to re-establish its credentials as a green pioneer. Nonetheless, shareholder activism is potent, and likely to intensify.
 

This is partly because it has become simpler. The past decade has seen a concentration of voting power among managers of large index funds. Three asset managers—BlackRock, State Street and Vanguard—together own over a fifth of the average company in the s&p 500, but wield even greater clout, because only 30% of retail investors bother to vote their shares. So the decision to approve a shareholder resolution often rests with just a few managers and pension trustees overseeing assets owned by millions. That means activists can concentrate their lobbying on a few big decision-makers, rather than having to track down and cajole lots of small ones.
 

 

Most green and social proposals at American agms still fail, but they are gaining support. On average last year they won 34% of the vote, up from 19% a decade ago. Conservatives are worried. If managers decide their job is to pursue a long list of social goals, rather than to boost returns, capitalism will grow less efficient. Resistance is mounting. A new law in Texas bans that state from signing contracts with firms or investing in funds that shun fossil fuels. Other Republican-led states are considering bills to make it harder for pension funds for public workers to favour social goals over returns for pensioners.
 

Regardless of the merits of any individual proposal, it is reasonable to be uneasy that such a tiny group of asset managers exerts so much power over America’s companies and, by extension, its economy. Fortunately, there are hints of democratisation. Startups and fintech firms are devising tools to make it easier for retail investors to vote their shares. The Securities and Exchange Commission has drawn up new rules, which will take effect later this year, allowing shareholders to appoint directors individually rather than as a slate supported by either management or dissidents. Most important is a push to allow investors in index funds, who currently can neither sell their holding of a given firm within an index, nor influence that firm via the fund’s vote, to vote their shares directly. BlackRock has started letting some institutional clients do something similar already.
 

Such reforms are technically and legally fraught. Nonetheless, they are necessary. Firms should answer to all their shareholders, not just the well-organised few. Today most investors have little chance to turn ownership into a proportional share of influence. Efforts to make it easier for them to voice their priorities should be welcomed and accelerated.