EPISODE SUMMARY

A common theme on our podcast is whether shareholders have too much power. But if we were going to redistribute that power, to whom should it go? Two recently proposed rule changes at the SEC would transfer more power to CEOs. But do we really want to empower managers to operate with less checks and balances? This week, Kate and Luigi sit down with SEC Commissioner Rob Jackson to talk through these issues and debate the proposed SEC rules.

The U.S. Securities and Exchange Commission’s proposed revisions to the shareholder voting process, including new regulations on proxy advisory firms and stiffer rules on corporate ballot proposals, are facing pushback from investor groups ahead of a potential showdown in 2020.

Both rule proposals, though separate, have in common an attempt by the SEC to reform key elements of the shareholder voting system that haven’t changed for decades. Whether the proposed changes are for better or worse is a question that divides market participants. Several shareholders groups worry the SEC’s efforts favor corporations at the expense of investors.

“We think both rule proposals undercut important shareholder rights and appear to be aimed at muffling the voice of investors at U.S. public companies,” said Amy Borrus, deputy director of the Council of Institutional Investors, which represents pension funds and other large investors.

By contrast, the SEC’s actions have received support from business interests who have argued that proxy firms have grown to become influential arbiters of corporate governance without regulatory oversight and that the shareholder proposal process is prone to abuse by small groups who don’t have a meaningful long-term commitment to a company.

The U.S. Chamber of Commerce and the National Association of Manufacturers have vocally supported both ideas, which a divided SEC proposed on Nov. 5 and may decide next year. NAM has lobbied the SEC to take action for years, saying it wants to “make the proxy process more responsible to Main Street investors and more reflective of business realities.”

“We intend to keep working with the SEC to ensure that both proposals are finalized and implemented appropriately in the weeks and months ahead,” Charles Crain, director of tax and domestic economic policy at NAM, said in a recent statement.

The push for action follows more than a decade of back and forth between regulators and market participants. The SEC in 2010 issued a concept release seeking comment on whether it should intervene to improve the proxy system, though it took no subsequent action.

SEC Chairman Jay Clayton revived interest in these topics. The agency hosted a roundtable on proxy issues last November and followed in August by publishing guidance stating its views on proxy-related matters, just months before releasing its latest rules proposals.

Both matters could be voted on in early 2020, sometime after the deadline for public comments.

But several market participants, including CII, New York City Comptroller Scott Stringer and other shareholder advocates, are concerned that regulators may be rushing. They are urging the SEC to double the time allowed for comments from the expected 60-day period to 120 days given the scope of both proposals, which total 320 pages and invite readers to respond to many questions.

“The two proposals are, in effect, a two-pronged attack on rights — proxy voting and shareowner proposals — that form the heart of the New York City Retirement Systems’ corporate governance program,” Stringer said in a Nov. 20 letter.

The SEC plans to allow 60 days of comments once the proposals are published in the Federal Register. Asked if it would consider extending that time frame, the agency declined to comment. As of Wednesday, the proposals had not been published in the Federal Register.

First, the SEC is proposing to increase scrutiny on proxy firms, which sell voting advice to institutional investors on matters like corporate elections, mergers, and executive pay. Proxy firms also provide voting advice on climate-change policies and other hot-button social issues.

The proxy advisory business has grown more influential given the outsize role that institutional investors — which own between 70 and 80 percent of the market value of U.S. public companies by some estimates — play in modern capital markets. As such, asset managers that own shares in hundreds or more public companies often rely on dominant proxy firms like Institutional Shareholder Services Inc. and Glass Lewis & Co. for advice on voting matters.

But business interests have argued that ISS and Glass-Lewis provide advice that is conflicted and error prone — criticism that the proxy firms and clients who rely on their advice dispute.

Among the SEC’s proposed revisions, proxy advisers will be required to increase disclosure about conflicts of interest if they wish to remain exempt from securities filing requirements.

Proxy advisory firms will also be required to give corporate management an opportunity to review and respond to the firms’ voting recommendations — provided that issuers file their proxy materials 25 days before a shareholder meeting. The proxy firms won’t be obligated to change their recommendations in accord with a corporation’s response.

Issuers will also be able to request that proxy firms include a hyperlink or some similar tool on their materials that directs readers to management’s response to its recommendations.

“From the issuer’s perspective, this is all reasonable,” said Simpson Thacher & Bartlett LLP partner Karen Hsu Kelley, who heads the firm’s public company advisory practice. “How can you argue with including disclosure of material conflicts of interest? And doesn’t it seem reasonable that companies should be given the opportunity to review and provide feedback, especially with respect to errors?”

CII says that its own analysis shows weak evidence for issuer’s concerns that proxy firms publish advice rife with errors, arguing that most claims of errors are actually methodological differences. CII also worries that allowing corporate managers to become more involved in the furnishing of proxy reports could hurt the ability of those firms to issue objective advice. Borrus called the SEC proposal an “unprecedented interference with the private market.”

“We think the rule proposals would bias proxy adviser reports and recommendations toward management,” Borrus said.

ISS is battling the SEC on its own front. The firm sued the agency in October, alleging that SEC guidance on proxy matters that was published in August just before the new rules proposals was “arbitrary and capricious” and could impede its ability to deliver independent research.

“It speaks volumes that the institutional investors which hire proxy advisers are not the ones calling for new, more onerous rules such as those now being contemplated,” ISS CEO Gary Retelny said in an emailed statement to Law360.

ISS insists that it manages conflicts of interest. The company has a subsidiary, ISS Corporate Solutions, which advises companies on how to improve their corporate governance and executive compensation policies. ISS maintains that its subsidiary’s business remains separate from the voting recommendations the parent company provides to shareholders.

Glass-Lewis, which is mostly owned by the Ontario Teachers Pension Plan, did not respond to requests for comment. The firm has said it manages and disclose conflicts and corrects errors when they happen.

The SEC has also codified in its proposal the agency’s prior interpretation that voting advice provided by proxy firms is considered a solicitation under federal proxy rules, meaning that such firms could be held liable if their advice is found to be false or misleading.

Separate from the SEC’s bid to regulate proxy firms is a proposal that would raise the bar on investors who want to submit items for vote at shareholder meetings. Among other things, the new proposal would toughen resubmission rules for ballot items that have failed by large majorities in prior votes.

Current rules require a proposal to gain at least 3% support to be resubmitted if voted on once, at least 6% support if voted on twice, and at least 10% support if voted on three times. The new proposal would respectively raise those resubmission requirements to 5%, 10% and 25%.

Business interests for years have argued that those thresholds should be raised on the premise that “zombie proposals” — meaning proposals that are continually rejected by large majorities of shareholders — are too easy to resubmit, costing companies and investors time and money.

The resubmission rules haven’t been updated since 1954, an era when most shareholders were retail investors. Clayton, who voted for both proposals, cited the market’s shift toward institutional investors as reasons for why be believes changes are needed.

“A lot of people see the resubmission threshold as ripe for updating,” said Covington & Burling LLP senior counsel David Martin, a former director of the SEC’s Division of Corporate Finance.

The SEC also wants to raise the minimum requirements for an initial shareholder proposal.

Shareholders are currently required to own at least $2,000 in company stock for one year before submitting a proposal for vote. Under the revision, shareholders who own $2,000 in company stock would have to wait three years before they could submit a proposal.

If a shareholder only owns company stock for two years, they would be required to own $15,000 worth of shares in order to submit a proposal, or $25,000 if they only owned stock for one year. The SEC said it wants to raise the initial criteria, which has not changed since 1998, to ensure proponents own a meaningful stake in a company or demonstrate a long-term commitment.

The SEC’s proposal also contains a “momentum” requirement that would let a company exclude a shareholder proposal even if it surpassed 25% support under certain conditions if the proposal’s support declined by 10% compared with the last time it was voted on.

The SEC’s two Democratic appointees, Robert Jackson and Allison Herren Lee, voted against both proposals regarding proxy firms and shareholder submissions, describing them as an affront to investor rights. Lee has called the new shareholder proposal requirements “stifling,” noting that many successful reforms to corporate governance take years to gain traction.

“While Chairman Clayton claims to be out to protect the Main Street investors, the proposed rules further disenfranchise us,” shareholder advocate James McRitchie said in a comment letter to the SEC.

Mayer & Brown LLP counsel Laura Richman, who advises public companies, described the SEC’s approach is balanced. She noted that submitting a proposal is an inexpensive way for shareholder proponents to publicize their issues while the company assumes the cost.

“Nobody is being silenced,” Richman said. “They [the SEC] are trying to update the threshold to modernize it.”

Clayton has said the proposal is meant to provide greater alignment between the proposing shareholders’ interests and the remaining shareholders, pointing to a 2018 study that said five individuals were responsible for 78% of all shareholder proposals between 2003 and 2014.

Clayton’s broader aim since taking the helm at the SEC has been to make capital markets more hospitable to public companies, which have dwindled in recent decades. Next year could represent the last opportunity for Clayton to shape the SEC’s agenda given the looming presidential election and potential for change in leadership in 2021.

However the proxy firm and shareholder proposals pan out, lawyers expect action next year.

“It’s clearly going to be on the SEC’s plate for 2020, both of these,” Richman said.

American companies are under pressure to be more responsive to their workers, communities and the environment. But US business groups and regulators are trying to gut one of the main tools that shareholders have used to hold them accountable on issues including climate change, pay, diversity, political spending and gun control.

Over the past two decades, shareholder proposals to put specific questions to a vote as part of the annual proxy process have served as a driving force for greater corporate awareness of environmental, governance and social risks. Research by proxy advisers Institutional Shareholder Services credits such campaigns with helping bring about important major shifts in corporate governance practices.

But the US Securities and Exchange Commission is pressing forward with proposals that would make it much harder to use the proxy process to call for investor votes on specific issues. The rule changes would disproportionately hit small investors and their ability to wage multiyear campaigns for improved disclosure and policy changes.

This radical shift would undermine the way shareholders have historically pushed public companies to adapt to evolving demands and manage new risks. This means of gentle engagement has worked effectively since 1942, but it is now under threat.

The SEC voted 3-2 earlier this month to propose changes that would make it far more difficult to resubmit questions to a shareholder vote if they have failed the first time. This strikes a sour note given the long history of low-vote proposals that win acceptance in subsequent years. Would we ever accept a stricture that prevents candidates from running for office again if they do not win on the first try?

The SEC has also proposed setting higher investment requirements for shareholders who want to submit proposals for a vote. Rather than a simple ownership threshold of $2,000 in company stock, the new rule would require investors to hold that much for three full years before trying to put a question to a vote. Big investors, who have $25,000 worth of shares, would be able to submit proposals after only one year.

The rule changes have drawn support from the US Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable. That last group is seeking to disenfranchise shareholders even as it touts plans to promote “an economy that serves all Americans”.

Ironically, the SEC’s move comes at a time when shareholders are engaging with more US companies, and many board members have become more responsive to investor perspectives. There is no need to undercut a long-held shareholder right when it has provided companies the benefit of lower risks and better investor relations.

As someone who has worked with shareholders on convincing companies to become more politically accountable, I am deeply concerned. Our campaign to push companies to disclose the hundreds of millions of dollars they spend to influence elections has made big inroads since it started in 2003. Thanks in part to the proxy proposal process, these disclosures are becoming a corporate governance norm and are a positive example of campaign finance reform achieved through private, not public, channels.

The SEC’s shareholder proposal process has borne strong dividends for companies. It provides an early warning system for management, alerting them to problems or issues that may have evaded their radar. The process also serves as a pressure release valve, allowing investors to push for incremental change without the burden and costs of newly imposed regulation.

The proxy process also allows companies to engage with shareholders on specific issues, helping to avert unhealthy escalation of conflict.

The SEC rule changes are out for public comment until January. If they are approved without changes, investors will be deprived of an effective voice. That would not only strip them of an important shareholder right, but also throttle the future of capitalism. If shareholders cannot effect change, public pressure for costly new regulation of business will rise. Undermining the proxy process would also remove an important non-legislative avenue for starting to address some of society’s most vexing issues.

Given these dangers, the SEC and trade organisations must stand down and back off before they cause irreparable damage.

When Securities and Exchange Commission Chairman Jay Clayton handed a policy win to corporate executives this month, he pointed to a surprising source of support: a mailbag full of encouragement from ordinary Americans.

To hear Clayton tell it, these folks are really focused on the intricacies of the corporate shareholder-voting process. “Some of the letters that struck me the most,” he said at a commission meeting in Washington, “came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” Each bolstered Clayton’s case for limiting the power of dissenting shareholders.

But a close look at the seven letters Clayton highlighted, and about two dozen others submitted to the SEC by supposedly regular people, shows they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.

That retired teacher? Pauline Yee said she never wrote a letter, although the signature was hers. Those military vets? It turns out they’re the brother and cousin of the chairman of 60 Plus Association, a Virginia-based advocacy group paid by corporate supporters of the SEC initiative. That single mom? Data embedded in the electronically submitted letter says someone at 60 Plus wrote it. That retired couple? Their son-in-law runs 60 Plus.

“I never wrote a letter,” said one of the retirees, Vytautas Alksninis, reached by phone at his home in Connecticut. “What’s this all about?”

Then there’s the public servant Clayton mentioned. Marie Reed’s letter has sharp words for proxy advisers, firms that counsel fund companies on how to vote at shareholder meetings. But when reached by phone in California, the retired state worker said she wasn’t familiar with the term. She said the letter originated with a public-affairs firm that contacted her out of the blue.

“They wrote it, and I allowed them to use my name after I read it,” she said. “I didn’t go digging into all of this.”

The SEC declined to comment on any irregularities with the letters. In a Tuesday interview, Clayton sidestepped a question about how the agency ensures comment letters are genuine. He did emphasize that the regulator’s potential revamp of shareholder voting rules are proposals, adding that there will be ample time for people on both sides to weigh in before any changes are finalized.

“We welcome input in all ways,” Clayton said in the interview with Bloomberg Television’s David Westin. “On this issue, where there are a lot of different views and a lot of different interests, we encourage people to come in and talk to us, send us their comments.”

Unusual Error
Even a casual reading of the letters shows something amiss. Four of the seven bear the same unusual error — an out-of-context phrase inserted into the SEC’s mailing address. The same mistake turns up in at least 20 other letters submitted by supposedly ordinary Americans in support of the change. It’s an inadvertent digital fingerprint revealing the scope of the campaign.

At issue is the proxy process, the rules for how corporations conduct shareholder votes, such as when directors stand for re-election at annual meetings. Most of the time, management wins in a landslide. But shareholders occasionally revolt over excessive pay or mismanagement, or a small investor forces a vote on an issue that management doesn’t endorse.

In recent years, more small shareholders have been proposing resolutions about social or environmental issues such as climate change. And investment managers that control large numbers of votes, such as BlackRock Inc., have begun prioritizing these topics as well, arguing that they’re relevant to the long-term sustainability of business models. That’s an unwelcome change for some corporate boards, especially in the fossil-fuel industry.

Last year, the National Association of Manufacturers helped form the Main Street Investors Coalition to oppose what it calls the “politicization” of the investment process and to argue that fund managers and boards should focus on maximizing profits. One of its priorities is changing shareholder voting rules.

Although the coalition has other members, NAM provided most of its initial funding, according to a person with knowledge of the arrangement who spoke on condition of anonymity. The manufacturers’ association represents corporate giants such as Exxon Mobil Corp. and Chevron Corp.

NAM said in a statement that it didn’t fund 60 Plus or direct any advocacy efforts on the SEC issue. Chevron wouldn’t comment on the coalition but acknowledged in a statement that it sometimes works with trade associations to “help inform their understanding of issues.” Exxon Mobil said it had no immediate comment.

Public Comments
Last year, Clayton signaled he was considering changes to the rules and issued a call for public comments. Letters poured in. Most were from investment firms, corporations, trade groups and other interested parties that openly identified themselves. Many fund managers wrote to say some of the changes under consideration would be counterproductive.

The National Association of Manufacturers, Exxon Mobil and Chevron all called for new limits on shareholders’ proposals. So did two ordinary citizens who identified themselves as members of Main Street Investors. Other letters were ostensibly written by regular folks.

But more than two dozen of them appear to have ties to 60 Plus, a member of the Main Street Investors Coalition. While the nonprofit group calls itself an advocate for senior citizens’ issues, it routinely takes money from corporations and advocates for their causes on issues as varied as sugar subsidies and Alabama utility commissioners.

The group didn’t cast a wide net in recruiting letter-writers. Names included those of a woman who used to work at 60 Plus’s accounting firm; a former secretary at 60 Plus; and various friends and relatives of Saul Anuzis, the 60 Plus president. None mentioned a connection to the organization.

One letter bore the name of Chad Connelly. In an email, Connelly acknowledged being friends with Anuzis but disavowed the letter. “Someone apparently used my name,” he wrote. “That’s not a letter I’ve ever even seen.”

Even Scott Hogenson, a contractor for 60 Plus who has appeared in the press as its spokesman, submitted a comment. The letter gives his name as S. Alan Hogenson and doesn’t mention his relationship to the group. In an interview, Hogenson said he wrote the letter and stands by it.

Anuzis, the 60 Plus president, acknowledged that his group recruited submitters, provided drafts and, in two cases, sent letters on members’ behalf. He also acknowledged getting money from members of the coalition. “We don’t get paid for specific projects,” he said in an interview. “We get contributions from members who are part of the coalition. We’re not getting paid for a specific letter.”

Anuzis said the project aligns with 60 Plus’s policy goals and that no names were used without permission. Those who said they hadn’t agreed, such as his in-laws, were mistaken. “They are 80-some-years old,” he said. “This happened months ago. I’m sure it’s not top of their minds.”

Clandestine Aid
Two letters point to another source of clandestine aid for the coalition. Reed, the retired state worker from California whose letter was cited by Clayton, said the man who provided her with a letter worked at FSB Core Strategies, a California public-affairs shop, and said he was working on behalf of a group called Protect Our Pensions. Another SEC letter containing similar phrases, also cited by Clayton, came from a California sheriff who said in a 2017 interview that he was introduced to Protect Our Pensions by the same FSB staffer. An FSB executive didn’t respond to requests for comment.

Protect Our Pensions, whose talking points align with those of the fossil-fuel industry, was the subject of a 2017 Bloomberg Businessweek article showing it was put together by corporate public-affairs employees and that some of its alleged members, including the retired firefighter identified as its founder, said they had nothing to do with it or couldn’t remember agreeing to join.

Opponents of changes to the voting system stuffed the SEC’s mailbox too. The agency reported getting more than 18,000 identical form letters supporting the current rules. Those letters were obvious duplicates and are grouped together on the SEC’s comments page. Clayton’s speech didn’t mention them.

In his Nov. 5 remarks, Clayton unveiled proposals along the lines of those pushed by Main Street Investors Coalition and its corporate backers that would shift power from investors to corporate boards. In addition to Clayton, who was appointed by President Donald Trump, the changes are backed by two Republicans on the five-member commission. For the changes to take effect, the SEC will have to vote again to finalize the rules after a 60-day public comment period.

The SEC’s proposal would increase the amount of stock newer shareholders must own to get a proposal on the ballot, aligning with corporate claims that many resolutions are wastes of time and money. Under current rules, investors must have owned at least $2,000 of stock for a year before they can submit resolutions. The SEC’s proposal would raise that dollar threshold to $25,000 for shareholders of less than two years and $15,000 for shareholders of less than three years, while leaving the $2,000 threshold in place for longer-term holders.

The proposal also would impose new restrictions on proxy-advisory firms, whose recommendations are often decisive on shareholder votes. Corporations complain that their advice is sometimes poorly reasoned or inscrutable. Clayton would require the firms to show their recommendations to companies before issuing them.

Fund managers warn the measure may have a chilling effect on proxy advisers, because a corporation could threaten a lawsuit if a draft recommendation isn’t revised.

Anuzis said he was glad to hear that Clayton had cited letters generated by his organization. “I’m extremely proud that we were very effective,” he said. “If four of our letters were quoted, that means we did a great job.”

— With assistance by Benjamin Bain

Emily Cunningham, a user experience designer, is just one of 750,000 people who work for Amazon. Like most rank-and-file employees in corporate America, she doesn’t have a direct line to the CEO; nor does she usually have much sway over what the company does.

But Cunningham does own more than $2,000 in Amazon stock, and at the company’s annual shareholder meeting this May, that little slice of ownership entitled her to a voice. So she stood up to use it.

“I would like to ask for Jeff Bezos to come out on stage so that I can speak to him directly,” Cunningham began, speaking into a cavernous auditorium in Seattle. She hadn’t been able to get through the words during a practice session the night before, breaking down in tears every time she tried. This time, however, it came out smoothly, as she drew strength from a group of colleagues in the audience, all clad in white.

“Mr. Bezos will be out later,” said the event’s emcee, Amazon General Counsel David Zapolsky.

“Will he be hearing this speech?” Cunningham asked.

Emily Cunningham and other Amazon employees filed a shareholder resolution, asking Amazon to create a plan to cut its reliance on fossil fuels. (Jovelle Tamayo for CNN)
“I assume so,” Zapolsky replied.

Cunningham never did find out whether Bezos had been there to hear her speech, which was about climate change — but it didn’t matter. She and other Amazon employees had filed a formal shareholder resolution, asking Amazon to create a plan to cut its reliance on fossil fuels. The proposal secured support from 31% of the shares that were voted.

That may not sound like a win, but in the world of shareholder resolutions, in which votes are symbolic and not binding, it was a resounding result — the kind of message even a $900 billion company couldn’t ignore. Four months later, amid growing scrutiny from shareholders and employees, Bezos announced a pledge to make Amazon carbon neutral by 2040.

Cunningham is just one person in a long line of shareholders who have used their stakes to push corporations to address social and environmental issues. But on Tuesday, the US Securities and Exchange Commission took a significant step to curtail their power.

Raising the thresholds

The rules around how shareholders engage with the companies they own are complicated and may seem arcane, but the stakes are high. It’s a battle about the nature of capitalism and public markets, who controls the engines of commerce, and by what standards they should be judged.

On Tuesday, five SEC commissioners passionately debated those points in an open meeting. The regulators, led by Chairman Jay Clayton, voted 3-to-2 to propose new rules that, among other things, would make it harder for small investors to get a proposal on a shareholder ballot.

Corporate America was pleased. The Business Roundtable, US Chamber of Commerce and the National Association of Manufacturers all applauded the decision. The Chamber has in fact been banging this drum for more than a decade. “Shareholder activism that elevates one group’s agenda over the goals of other investors doesn’t just ruin companies — it ruins a country,” Chamber CEO Thomas Donohue said in a speech in 2006.

Companies have been speaking out against shareholder rights for a long time, but recently, they’ve picked up the megaphone again. For the last year, companies in the oil and gas industry, along with conservative think tanks, the NASDAQ stock exchange and pro-business lobbying groups have been pressuring the SEC to make changes that could dampen shareholder rights.
Why now? Shareholders have been filing more environmental and social proposals than ever before.

The power of a proposal
Over the years, small investors have used shareholder proposals as a tool to advocate for change on many issues, ranging from board nominations and executive compensation to social and environmental causes. Among them: General Motors’ exit from apartheid South Africa. The phaseout of styrofoam cups at McDonald’s. The end of assault rifle sales at Walmart.

Since the 1940s, shareholders have had the right to pose questions and propose changes to the directors of public companies, and to put those proposals up for a vote by their fellow investors. And the bar to propose a resolution has been relatively low. Since 1998, it’s been set at just $2,000 in stock or 1% of a company’s shares — whichever is lower. (For most publicly-traded companies, $2,000 is, by far, the lower threshold.) Currently, a shareholder must own at least that much stock, continuously, for at least a year to qualify.

The proposals, which are sometimes called “proxies” because shareholders can delegate their votes to others, come from a variety of sources: individual investors, large asset managers, labor unions, public pension funds, or activist Catholic nuns.

For Natasha Lamb, it’s a job. As managing partner of Arjuna Capital, a socially-oriented investment fund, she’s leveraged shareholder proposals to push for gender equality at companies ranging from Facebook to Citigroup, and prompted meaningful change.

After an Arjuna-backed campaign between 2016 and 2018, 22 companies agreed to disclose the pay gap between their male and female employees, adjusted for job titles.
Those wins came when a resolution didn’t earn the majority of votes.

That’s because shareholder proposals are not won by a majority. In fact, they’re not really won at all — even if a proposal earns a majority of votes, the company is generally not required to make a change. But they are meaningful in a symbolic way, serving as both a battle cry and negotiating tool from shareholders who want to agitate for corporate accountability.

That’s because companies know that if the shareholders don’t feel heard, they can wield power in other ways: they can oust members of the board, vote down executive pay packages and, ultimately, divest from the company. To keep them happy companies have to pay attention to what they want.

Sometimes, wins can be achieved even when the proposal didn’t make it onto a shareholder ballot. Lamb has at times found that just the threat of a high-profile shareholder battle can prompt a company to preemptively make changes behind closed doors. For the companies, negotiating with activist shareholders behind the scenes can keep the shareholders’ complaints out of the news and potentially stave off a public relations crisis.

“The shareholder proposal itself is a critical piece on the board, if you think about it in terms of chess,” Lamb said. “But the win is if you have a productive dialogue with the company … that’s success.”
Lamb sees shareholder proposals as a way to guide companies toward better returns, noting that Arjuna encourages companies to act within their “enlightened self interest.” After all, Arjuna Capital manages clients’ money, and higher financial returns are the goal. She sees equal pay and climate change initiatives as a way to boost those returns.

Shareholder resolutions can be used to advance a wide range of positions — not just traditionally liberal causes. Justin Danhof, general counsel for the National Center for Public Policy Research, has used them to try to push companies to the political right, leading a team that took “the model of liberal shareholder activism and did a 180.”

He has filed a number of proposals urging companies like Starbucks, Apple, Amazon and Facebook to consider adopting “true diversity.” In his view, this means adding conservative directors to corporate boards.
Danhof targets corporations because they’re “much more amenable to pressure than most politicians,” he explained. “I consider filing a shareholder resolution the opening salvo in a negotiation.”

Sounding the alarm

Companies have never loved dealing with their shareholders. But for some, the last two years of mounting activism have been downright alarming.

As asset managers like BlackRock, State Street and Vanguard have become increasingly willing to throw their considerable heft behind environmental and social resolutions, companies have started seeing proxy votes as threats. In 2019, average overall support for environmental and social shareholder resolutions reached an all-time high of 28%, buoyed in part by “yes” votes from institutional investors, noted an analysis from the EY Center for Board Matters. Once shareholder resolutions achieve 30% support, the report explained, companies tend to pay attention. If a proposal reaches 50%, and investors feel that the company hasn’t sufficiently responded, they tend to consider voting directors out.

This year, Amazon alone received 14 shareholder resolutions — more than any other company, according to a count by Alliance Advisors. Though a couple were either withdrawn by their proponents or excluded with the permission of the SEC, 12 measures on issues ranging from food waste to hate speech made it onto ballots.

Corporate America has had enough — and it’s using its full toolkit to fight back.

In addition to negotiating behind the scenes and asking the SEC to exclude shareholder resolutions from proxy ballots, corporations are pressing for changes in laws and regulations that could stop troublesome shareholder campaigns before they start.

That’s where Tuesday’s SEC meeting comes in.

The regulator proposed that shareholders be required to hold at least $25,000 in a company’s stock if they want to file a resolution after just one year of ownership.
Smaller shareholders with just $2,000 in stock would have to own it for at least three years before they become eligible to file a resolution.

That higher threshold could shut small investors out. SEC Commissioner Allison Herren Lee, who dissented against that change, noted the $25,000 threshold is prohibitive for most retail investors, who have a median stock portfolio of $27,700.

“Main Street investors would generally have to invest virtually their entire portfolio into one company — something we strongly discourage — to enjoy the same rights as Wall Street investors, or they would have to wait three years to catch up to them,” she said.

Large companies, however, argue that small shareholders should not be allowed to exert an outsized influence. The Business Roundtable has said that shareholders may use proposals as a form of “social commentary or to advocate for a social aim, regardless of the proposal’s financial impact on the company.” Corporations also say they end up racking up significant legal costs to respond to each proposal — ExxonMobil, for example, notes that it incurs more than $100,000 in costs per proposal, adding that “our experience is that the costs can greatly exceed this amount based on the significant board and senior management time dedicated to each proposal.” (Assuming a cost of about $100,000 per proposal, even a dozen proposals, amounting to $1.2 million, wouldn’t put much of a dent in the company’s budget — Exxon reported $21 billion in earnings in 2018.)

Companies also don’t like that just a handful of particularly-active shareholders — four people in total — file more than a quarter of shareholder proposals every year.

Other rule changes proposed by the SEC would make it harder for shareholders to resubmit repeat proposals and could make proxy advisory firms that vet shareholder resolutions more beholden to the companies they analyze. It can take time for shareholders to raise awareness and build support for an issue that eventually hits the main stream, like pay parity, and higher resubmission thresholds could shut out meaningful proposals as they gain steam.

It’s hard for experts to predict exactly what changing the ownership threshold and rules around resubmission would do to shareholder activism. What’s clear is that tighter regulations could very well shut people out, and make it easier for companies to ignore their shareholders — possibly to the detriment of other stakeholders.

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, noted that restrictions on shareholder rights could end up hurting companies, as well.
“If you try to attempt to limit [shareholder resolutions], in one way or another, inadvertently you may remove from consideration a resolution that has greater core significance to the company,” he said. “A rule that is less restrictive is probably the better rule.”

The updates are now subject to a 60-day open comment period, which means the public can push for fewer restrictions — and that corporate America can ask for more.

Acting like an owner

At Amazon’s shareholder meeting, Cunningham wasn’t the only one asking uncomfortable questions about climate change. During the Q&A session, when Bezos actually had come out on stage, another audience member asked why the company wasn’t moving faster to reduce its carbon emissions.

“It’s hard to find an issue that is more important than climate change. The science is super compelling on this, there’s no doubt,” Bezos said. “There are a lot of initiatives underway, and we’re not done. We’ll think of more, we’re very inventive.”

That kind of public commitment can re-order a company’s priorities, changing environmental impact from a side concern to one that could pose a real risk to the company’s stock price. In September, Amazon released an analysis of its carbon footprint — an effort that had been requested by three successive shareholder resolutions in the early 2010s — and the Amazon employees say they’ll be back next year.
For them, it’s a way of literally living up to the company’s “leadership principles,” which emphasize acting like an owner.

“Fighting climate change seems like ownership in spades,” said Maren Costa, a member of the group who has worked at Amazon since 2002. Doing it through her stock portfolio, rather than simply internal pressure, “was a real lightbulb for me,” Costa said in an interview in May. “I wish we’d been doing this forever.”

Proxy advisers

There are two basic ways to regulate people who try to give other people suggestions on what to do with their investments. We can call them “fraud” and “fiduciary duty,” without insisting too much on the technical meanings of those terms. Some people who give suggestions are advisers, and give advice to clients, and have duties to those clients to be careful and loyal and honest. If I am your retirement financial adviser I have certain fiduciary duties to you; if I manage a mutual fund I have certain fiduciary duties to that fund (and, thus, its investors). I have to do the best job I can for you, rather than putting my own selfish interests first, that sort of thing.[1]

Other people who give suggestions are strangers, and give their advice to strangers. Often they aren’t in the business of giving advice at all; telling other investors what to do is just a byproduct of their own investing. If I am an activist short seller who thinks that Company X is a fraud, I will short Company X’s stock and hope to make money when everyone else discovers the fraud. To speed that along I might put out research reports telling everyone what a fraud Company X is. Anyone can read those reports, and I hope that everyone will. Those readers aren’t my clients; I have no relationship with them, no duty of care or loyalty. But I can’t just write anything. I can’t lie. If I try to drive down Company X’s stock by saying that it is selling poisoned candy, and I am lying, I will get in trouble.[2]

It is conventional to think that the fiduciary regime is stricter than the fraud regime. There are things that a stranger can say and do that a fiduciary can’t: Outright fraud is off-limits for strangers, but anything else is fine, whereas fiduciaries have all sorts of affirmative obligations to be careful and avoid conflicts and do what is right for their clients. We talk a lot around here about a Wall Street theme in which banks think that they have arm’s-length sales relationships with customers (regulated by fraud rules), while the customers think they have advisory client relationships (regulated by fiduciary rules).

But it is not always, entirely true that the fiduciary regime is stricter. Fiduciary advisers have one important advantage: Their duties are essentially to their clients, and if the clients are happy with their work then no one else has all that much standing to complain. The fraud regime is sort of neutral and public-facing: If you have no clients, then anyone can complain.

That is vague and fuzzy, but let me sharpen it with an example. If I am an activist short seller, and I think Company X is a fraud, and I short the stock and then publish research reports saying it’s a fraud, and I get a few facts wrong in my research report, then Company X can sue me. Even if I say some subjectively debatable—not objectively wrong—things, it might sue me. It might call up regulators (or prosecutors) and lobby them to investigate me for securities fraud. “Fraud” is a harsh word, but it has a pretty broad reach; all sorts of factual errors or failures of disclosure can at least arguably be counted as fraud and can at least give someone a basis to sue me. If my advice is bad for Company X, I will have a large focused adversary who can use the fraud regime to make life annoying and expensive for me.

On the other hand, if I am an investment adviser or a mutual fund manager, and I think Company X is a fraud, I can advise my clients to sell it (or cause my mutual fund to sell it). If I do this in good faith, after careful due diligence, in the genuine disinterested belief that it’s good for my clients, and if they are satisfied with my advice, then that is good enough; I have, for practical purposes, fulfilled my fiduciary obligations. Company X might find some ways to retaliate—it might freeze me out of management meetings, or not let me manage its pension, or say mean things about me to the press—but it is harder for Company X to use the fiduciary regime to punish me.[3] My advice is essentially client-facing rather than public-facing, so people who are not my clients—but whose interests might be affected by my advice—will have a harder time challenging it.

Yesterday the U.S. Securities and Exchange Commission released new proposed rules regulating proxy advisers, which are companies—Institutional Shareholder Services and Glass Lewis are the big ones—that advise institutional investors how to vote on corporate matters. The new rules would require them to run their advice past corporate managers before sending it to their investor clients, and give management a chance to respond. We talked about proxy advisers, and about some of the SEC’s proposals, last week.

Here though I want to talk about the central conceptual point, which is that proxy advisers have historically been regulated under a fiduciary-type regime as advisers, and now the SEC wants to regulate them under a fraud-type regime. The SEC actually made that clear back in August, when it released a “Commission Interpretation and Guidance” announcing that “proxy voting advice provided by a proxy advisory firm constitute[s] a solicitation under the federal proxy rules.” Yesterday’s proposed rule would formalize that interpretation.[4]

If you are soliciting proxies, then you are subject to rules including Rule 14a-9, which prohibits you from making any statements that are “false or misleading with respect to any material fact,” the classic language of securities fraud.

A “solicitation” of proxies is the sort of thing that activist shareholders do: If Carl Icahn is mad at a company and wants to throw out its board of directors and elect a new board, he will run a proxy fight and solicit proxies from other shareholders to try to get them to vote against the incumbent board and for his nominees. He will send out his own proxy statement trying to convince shareholders to vote with him. He is, in my terms, a stranger; he is not in the business of advising the other shareholders, and they are not his clients; he is trying to persuade them as part of his own self-interested strategy. The management of the company, meanwhile, will find all of this very upsetting, and will do what they can to stop him. It is not uncommon, in proxy fights, for the two sides to sue each other claiming securities fraud over debatable claims in their proxy statements, or to “bedbug” each other by calling up the SEC and arguing that the other side’s disclosures are wrong.

It’s all unpleasant! Carl Icahn puts up with it, but he has his reasons. For one thing he is just sort of temperamentally suited to being an activist shareholder. For another thing, he only gets involved in a few activist situations, and can concentrate his energy on them. Also if it works out for him—if he fends off the company’s attacks and gets his nominees elected—he can make many many millions of dollars.

Proxy advisers, meanwhile, advise institutional investors on how to vote on every boring proposal in every company’s proxy statement, thousands and thousands of votes each year. Every company asks its shareholders to vote to approve management’s compensation, and so proxy advisers have to come up with a recommendation for each one of those votes. They charge their clients a flat fee for doing that; they don’t get rich if shareholders vote the way they recommend. Under a fiduciary-type regime, they should advise their clients to vote for or against management depending on what they think is the right answer for those clients. Under a fraud-type regime, their incentives are different. Here is SEC Commissioner Robert Jackson dissenting from the SEC’s decision yesterday:

Consider a proxy advisor deciding how to advise shareholders in a proxy fight driven by poor performance. Recommending that investors support management comes with few additional costs under today’s proposal. But firms recommending a vote against executives must now give their analysis to management, include executives’ objections in their final report, and risk federal securities litigation over their methodology. Taxing anti-management advice in this way makes it easier for insiders to run public companies in a way that favors their own private interests over those of ordinary investors.

Last week ISS sued the SEC to try to invalidate the Commission’s guidance; here is its complaint, which argues essentially that proxy advisers should be regulated as advisers under the Investment Advisers Act rather than as proxy solicitors under the Securities Exchange Act—in my terms, that they should be under a fiduciary regime rather than a fraud regime.[5]

On its face this seems like a little bit of an embarrassing thing for ISS to argue. It sounds a little bit like “we should be allowed to commit fraud,” or “we should not get in trouble for making false or misleading statements.” It’s easy to reply “no, just get it right and you’ll be fine,” and in fact the SEC justifies the new rules in part by saying that they will “reduce the likelihood of factual errors or methodological weaknesses in proxy voting advice.”[6]

But I think it is not quite that simple: In the old regime, proxy advisers were answerable to their clients (institutional investors), and had to get stuff right by their clients’ standards. In the new regime, proxy advisers are answerable to everyone, which means in particular corporate managers, who have the strongest interest in the advisers’ recommendations.[7] And if they get stuff wrong by those managers’ standards, those managers can now make life hard for them. Whereas if they just do what the managers want there’s no problem.

“Uninvestable”

Well here’s one theory of how sovereign debt markets work:

Some of Argentina’s biggest bondholders say they are ready to negotiate with the incoming government led by Alberto Fernández over roughly $50bn they are owed in sovereign debt, but warn that too harsh a restructuring would make the country “uninvestable”. …

The group is pushing for a deal in which bondholders give the government more time to pay back its debts without so-called haircuts, or losses on the face value of the bonds — an approach previously endorsed by Mr Fernández. Investors see this as a good starting point, but warn there is a limit to what they will endure.

“If they attempt a major haircut or a deep restructuring on the debt like they did back in 2005, they are risking Argentina becoming really uninvestable,” said Carl Ross, a partner at fund manager GMO. “There may come a point where a lot of international bondholders may say there is no price at which they can own Argentina.”

Meanwhile in the world of historical reality, Argentina has famously defaulted on its bonds 8 times in 200 years. In this century, it defaulted in 2001, imposed 70% haircuts in 2005 and 2010 restructurings, was in default on interest payments on the new restructured bonds from 2014 until 2016 due to legal disputes, finally cleaned up its act and returned to the international bond markets in 2016, and then in 2017 issued a hundred-year bond that international investors lined up to buy. Now those bonds trade at about 40 cents on the dollar, and international bond investors have the gall to be like “well if you default nine times we won’t lend to you a tenth time,” come on. They bought 100-year bonds one year after the last default ended! “There is a limit to what they will endure,” sure, but after two centuries of diligent searching Argentina hasn’t found it. If Argentina does a 99% haircut and then comes back in six months with a perpetual zero-coupon bond, it will be multiple times oversubscribed.

Dimon on WeWork

One thing that I kind of think about WeWork is that there is an alternate universe where it could have gone public at a $60 billion valuation. Like if it had gone public a year ago, before Uber and Lyft were public and when giant fast-growing money-losing tech-adjacent companies were still in short supply on the public markets, people might have paid up for WeWork the way they initially did for Lyft. Or even just if its initial IPO filing hadn’t had such comically bad governance—if founder Adam Neumann hadn’t changed WeWork’s name to “We” and then charged it $5.9 million for the name—investors might have been like, eh, whatever, another big unicorn, wave it in.

It seems to me that the difference between the $60 billion-ish valuation that We’s bankers once told it it could achieve, and the $8 billion-ish valuation it ultimately got in a SoftBank Group Corp. rescue financing after the IPO cratered, is not mainly a factual dispute between different discounted cash flow models. The $60 billion number came from one psychological place of hype and momentum and market dynamics, and the $8 billion number came from a very different psychological place, one in which investors recoiled from WeWork all at once and its trouble raising money itself became a risk to the business.

In that sense I think that the $60 billion number doesn’t reflect too badly on WeWork’s underwriting banks. There is a perception that the banks took a thing worth $8 billion and tried to sell it to investors for $60 billion, and then were caught out on their fraud. I don’t think that’s right. I think that they took a high-risk, high-upside thing on which investors had very divergent opinions, and sounded out investors to see if enough of them had optimistic opinions. And then it turned out that, no, the more pessimistic opinions prevailed. But it’s not like now we have definitive proof that WeWork’s long-term fundamental value is $8 billion based on the last SoftBank round, any more than we had definitive proof that it was $47 billion based on the previous SoftBank round. The banks’ job was to tell WeWork’s story to investors, and to reflect the investors’ feedback to WeWork, and, you know, their performance as middlemen was perfectly fine. They found out how the market valued WeWork!

Obviously their initial estimates to WeWork were too optimistic, but it’s not like they tried to sneak those estimates by investors. They didn’t disguise any of the flaws in WeWork’s business. They knew that some investors would look past them, and hoped they could find enough investors like that. They did not.

Anyway here’s Jamie Dimon on the lessons of WeWork:

“I think there are lessons to be learned about these valuations, how you go public, how you treat the public shareholder — and those lessons should be learned by everyone who wants to go public,” Dimon, the CEO of JPMorgan Chase & Co., said in an interview Tuesday on CNBC. “I’ve learned a few myself.” …

“Just because a valuation prints at a certain level by one investor doesn’t mean it’s the right valuation,” Dimon said. “That’s not price discovery. Price discovery is when a lot of smart people around the world knowing all the facts can kind of buy and sell all the time.”

I have no problem with this. Sure, JPMorgan was the lead underwriter the IPO, and so there is a sense in which JPMorgan is on the hook for the “wrong” pre-IPO valuation. But I think Dimon’s view is correct: JPMorgan’s job as an IPO underwriter was to facilitate price discovery, and price discovery was facilitated, and no one was happy with what they discovered.

Dixon on WeWork

Surely one of life’s greatest and rarest pleasures is to see your nemesis become a global target of ridicule. Mark Dixon must be the happiest man on earth:

IWG Plc, the flexible-office company that owns the Regus brand, says the fallout from biggest rival WeWork’s botched initial public offering is creating opportunities for it to acquire smaller players.

“The biggest impact is the puncturing of an idea propagated by WeWork that somehow businesses like ours could be valued at 30 times revenue,” Chief Executive Officer Mark Dixon said in a telephone interview Tuesday following the firm’s third-quarter earnings update. “There were a lot of WeWork wannabes that are now getting into difficulty.”

I mean back when that idea was popular, it must have been tough to run a business that was valued at four times revenue! On IWG’s earnings call, Dixon remarked that a cab driver “was telling me about WeWork, and I’m not sure if that’s a good thing or a bad thing,” but I am sure it was a good thing for Dixon. He’s spent the last two years hearing constantly about how great and revolutionary and valuable WeWork is; it must have driven him nuts. Now he gets to bask in a few months of hearing constantly about how dumb WeWork is. It must feel amazing.

Things happen

SoftBank’s Son Defiant as WeWork Mess Triggers Loss. Xerox Considers Takeover Offer for HP. The $2 Trillion Question Hanging Over Aramco’s IPO. Germany will consider EU-wide bank deposit reinsurance. Mattel, PwC Obscured Accounting Issues, Former Executive Says. Lawyer Made Millions Laundering Money in Crypto Scam, U.S. Says. ‘Very Hungry Caterpillar’ Author Eric Carle Sells Company to Penguin Random House. What You Should Do if You’re a Professional Football Player and a Cat Runs on the Field.

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[1] If I am a retail broker, I might not technically have a fiduciary duty to my customers; I might have only “suitability” obligations. Those obligations probably look more like my “fiduciary duty” standard than my “fraud” standard, though they have some elements of the “fraud” standard. Again I don’t want to insist on the technical meanings of my terms. I just mean to point at broad categories here.

[2] If I am an institutional bond dealer, my dealings with my institutional customers are probably *pretty close* to this “fraud” standard, but again they have some elements of the “fiduciary duty” standard and again I don’t mean to suggest the boundaries are sharp and obvious.

[3] I’m sure there’s *some* way to do it; again, the text is meant to describe pretty rough approximate categories. I suppose it could send letters to my clients saying “hey that guy messed up his recommendation, you should sue him,” or even call up regulators and ask them to investigate me for violating my fiduciary duties. It just seems harder though. As always, of course, nothing here is legal advice.

[4] From the proposal: “The proposed amendment would add paragraph (A) to Rule 14a-1(l)(1)(iii)45 to make clear that the terms ‘solicit’ and ‘solicitation’ include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee. We believe the furnishing of proxy voting advice by a person who has decided to offer such advice, separately from other forms of investment advice, to shareholders for a fee, with the expectation that its advice will be part of the shareholders’ voting decision-making process, is conducting the type of activity that raises the investor protection concerns about inadequate or materially misleading disclosures that Section 14(a) and the Commission’s proxy rules are intended to address.”

[5] ISS general counsel Steven Friedman writes about the lawsuit: “Proxy advice is the antithesis of a ‘solicitation’ under the securities laws. Unlike a person or firm engaged in a proxy solicitation, ISS is indifferent to the ultimate outcome of a shareholder vote and does not seek to achieve a certain result in the shareholder action.  Our sole objective in providing analyses and recommendations is to inform and empower our clients, sophisticated institutional investors, who vote their shares in the way that they see fit. The solicitation of a proxy and the provision of proxy advice are fundamentally different activities.”

[6] Commissioner Allison Herren Lee, in dissent, argues that “as the comment file shows, assertions of widespread factual errors have been methodically analyzed and largely disproven.”

[7] Stronger than the clients’ interests, by the way! Corporate voting mostly isn’t that important for big institutional investors, which is exactly why they outsource so much of it to proxy advisers! A symbolic vote against some mid-cap company’s CEO’s pay package will not meaningfully change the returns of a giant index fund, but it will matter a lot to that CEO.

Proposals include stricter rules about proxy solicitation and shareholder proposals

In a pair of reform proposals introduced Tuesday that target the proxy voting process, the U.S. Securities and Exchange Commission (SEC) appears to be siding with issuers seeking to curb the power of proxy advisory firms and gadfly investors.

To start, the SEC voted to propose amendments to its proxy solicitation rules that, it said, are intended to improve the accuracy and transparency of the proxy voting process.

Among other things, the proposals aim to boost the disclosure about material conflicts of interest that proxy advisors provide their clients, and to give issuers and others the opportunity to review and correct alleged errors in proxy voting advice.

At the same time, the SEC also proposed amendments to its rules that would stiffen the test for shareholder proposals to be included in a company’s proxy statement.

The proposal would require that a shareholder has held their shares for at least three years “in order to demonstrate long-term investment in the company” before they can make a shareholder proposal that must be included in the proxy.

The proposal also aims to clarify that a single shareholder can’t submit multiple proposals at the same shareholder’s meeting on behalf of different shareholders, in addition to raising the thresholds of shareholder support that must be met for proposals to be included again in future meetings.

The SEC’s rule proposals follow controversial guidance issued by the regulator earlier this year that would curb the influence of proxy advisors, which is an objective supported by issuers and resisted by some in the investment community.

The response to Tuesday’s proposals was dividing along similar lines.

The Council for Investors Rights and Corporate Accountability (CIRCA) criticized the SEC’s proposals, stating, “The commission’s proposed rules would allow corporations too much influence over proxy advisers’ independent research.”

Conversely, the U.S. Chamber Centre for Capital Markets Competitiveness applauded the SEC’s proposed reforms. “These proposals will both ensure investors will have access to transparent and unconflicted proxy advice as well as improve the proxy submission process that has not been updated in over 50 years,” it said in a statement.

Recently, proxy advisory firm Institutional Shareholder Services Inc. (ISS) launched a lawsuit seeking to overturn the SEC’s new guidance in this area.

In response to today’s proposals, ISS president and CEO Gary Retelny issued a statement saying, “It speaks volumes that the institutional investors which hire proxy advisers are not the ones calling for new, more onerous rules such as those now being contemplated.”

Both sets of proposals are going out for a 60-day comment period.

“Rulemaking typically is a lengthy and deliberative process and one can hope the SEC listens to and addresses the concerns of the investors it is charged with protecting,” Retelny said.

“The commission should engage in a thoughtful and careful process to ensure new rules do not further diminish shareholders’ ability to vote on an informed basis and to demand accountability as owners,” CIRCA added.

Companies will have to prove they’re committed to goals beyond maximizing shareholder value.

For 47 years, the Business Roundtable has lobbied on behalf of corporate America. Much of that time, it maintained a fiction 1  — that the sole purpose of a corporation was to maximize profits on behalf of shareholders. This philosophy has been under assault for several years now, and this week the Business Roundtable announced it wants to put it to rest.

In a widely circulated memo, the 200-member organization reversed itself, writing that “shareholder primacy” is no longer the sole purpose of a corporation. Instead, corporations must include a commitment to “all stakeholders,” which includes customers, employees, suppliers and local communities.

Some kudos are in order for JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, and chairman of the Business Roundtable, for driving these changes. He has been discussing the need for a more inclusive form of capitalism, both in public speeches and in his letters to shareholders, for some time.

But turning this aircraft carrier around won’t be easy, in large part because of the group’s own history. Indeed, the Roundtable has spent most of the past four decades advocating against the interests of those exact stakeholders. To cite some of the more notable examples:

— It fought the rise of labor unions and pro-union legislation;

— Helped to defeat antitrust bills;

— Prevented the formation of the Consumer Protection Agency;

— Opposed corporate governance changes to make boards of directors and CEOs more accountable to stockholders;

— Fought proper accounting of stock options given as compensation to executives and insiders;

— Opposed increases in the national minimum wage (it now favors increases);

— Lobbied to prevent restrictions on executive compensation;

— Fought legislation that would create cleaner energy and address climate change;

— Pushed for corporate income-tax cuts;

— Supported anti-consumer Supreme Court decisions, including the fiction that corporations are legal people, and that campaign donations equal speech.

The Roundtable might respond that this is all in the past. Let’s hope so. But the organization has an even greater challenge: Scan the list of 181 signatories to the recent memo and it’s a Who’s Who of corporate behavior that has burdened and disadvantaged the very stakeholders they will now champion.

Consider a few of the signatories:

— Amazon.com Inc. and Apple Inc.:  Two of the most valuable companies in the world are famously effective at using various tax dodges to avoid paying their fair share. I can recall when the Internal Revenue Service went after maneuvers that serve no valid business purpose other than tax avoidance. Consider that what isn’t paid in tax by those who avoid them must be made up for by those who do — mostly average Americans who also happen to be customers of these companies.

The share of federal tax revenue paid by corporations has dropped by two-thirds in the past seven decades — from 32% in 1952 to 10% in 2013; and corporate income tax as a share of gross domestic product has fallen from about 6% in 1946 to about 1.5% today.

— Visa Inc., Mastercard Inc. and American Express Co.: Show good faith — working with card-issuing banks as needed — by simplifying the incomprehensible small print in the cardholder agreement and spell out in clear language the terms and penalties for late payment. Second, do the same for mandatory arbitration clauses that take away the right of customers to seek redress in public courts.

— Ameriprise Financial Inc., Morgan Stanley and Principal Financial Group Inc: The brokers and insurers on the list have been zealous opponents of the fiduciary rule. Instead, they prefer a less stringent rule that allows them to sell products that are better for them than for their customers. Until those firms — and Citigroup Inc. and JPMorgan are in this group — embrace a higher duty of care, their gestures toward stakeholders are hollow. Oh, and they should drop the requirement that customers agree to mandatory arbitration clauses as one of the conditions for opening a brokerage account.

— Coca Cola Co. and PepsiCo Inc.: For years these companies have been helping the American public achieve record levels of diabetes and obesityby selling health-damaging sugary drinks. They should acknowledge and warn customers of the consequences of consuming too much of their products, and accept the same kinds of taxes and health warnings now affixed to cigarettes.

— Deere & Co.: The maker of farm machinery has led the fight against customers, insisting that they not make repairs to the equipment they own, and denying them access to parts and instructions. Repairs can only be made by Deere service technicians in what has come to be known as a “repair monopoly.” Apple, by the way, does the same thing.

— Walmart Inc. and McDonald’s Corp.: Both were steadfast opponents of increases in minimum wages for years. Although both now offer higher minimum pay, it was only after a tightening labor market forced them to increase wages. But this wasn’t a case of corporate altruism — their stores were messy and employees were sullen, and pay increases were part of plans to keep ill-treated customers from defecting. (McDonald’s is not a signatory to the Roundtable memo).

For the Roundtable commitment to be meaningful, the signatories are going to have to alter their behavior in ways large and small, and maybe even in ways that aren’t always optimal for maximizing short-term profits. Still, we should be encouraged. But the proof will be in the follow through and the actual actions of the Roundtable members.

1. In “The Shareholder Value Myth,” Lynn Stout explained how the entire theory is based on a misreading of a 1919 court case — Dodge vs. Ford – at the time, both privately held, non-public companies.

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There’s scant evidence that American CEOs are too short-term focused. Well, until now that is. A veritable hotel conference room full of suits — including the bosses at Apple, JPMorgan, and United Airlines — signed a joint letter Monday attempting to clarify their raison d’être. Yes, they care about shareholders — but also much love to other “essential” stakeholders: customers, suppliers, employees, and communities.

But while this clever bit of PR may generate a day or two of positive buzz, it risks muddying the longer-term public perception of what American capitalism is actually all about.

The New York Times said the letter showed business leaders were “breaking with decades of long-held corporate orthodoxy” in the face of “mounting global discontent over income inequality, harmful products, and poor working conditions.” And there’s some truth in that description. Certainly CEOs don’t want to appear oblivious to public concerns that what’s good for their corporations — especially multinational ones — is good only for their corporations.

What’s more, this post-financial crisis unease has been exploited by populist politicians on the left and right. Democrats complain about fat-cat execs who fail to share their bounty with workers. And Republicans attack companies for undercutting their employees and communities by supporting mass immigration and free trade. This is why the Business Roundtable’s “Statement on the Purpose of a Corporation” has abandoned the idea that corporations exist principally to serve their shareholders, the document’s core principle for more than two decades. Now the main goal is “to deliver value” to all stakeholders.

All of which has progressives and maybe even some Trumpublicans pretty excited. They see the letter as an important admission by the capitalists themselves that profit-driven capitalism is badly broken. No longer is American business effectively operating under the ideological sway of libertarian economist Milton Friedman, who famously argued that increasing profits is “the one and only one social responsibility of business.” Or as corporate raider Gordon Gekko spun it in the 1987 film Wall Street, “Greed is good.”

But rather than mere clarification, American CEOs should supply education about how capitalism really works, at least when done properly. For starters, the rest of the Friedman Doctrine — is often forgotten. Yes, it says that the social responsibility of business is to increase profits as much as possible — but only while “conforming” to the “basic rules of the society, both those embodied in law and those embodied in ethical custom.” So it isn’t a case of anything for a buck — generally, running a business like that doesn’t work over the long run. Cheating suppliers, disappointing customers, and underpaying workers is the path to a weak stock price at best and bankruptcy at worst.

Indeed, good corporate behavior is generally rewarded by the market. Yes, companies sometimes have to lay-off workers or close plants — and nothing in that letter will alter that economic reality. Yet it really does seem to be the case that treating customers well and compensating employees fairly is a great way to maximize returns for shareholders. For instance: Fortune magazine annually compiles a list of the “best companies to work for” that takes into account worker and customer satisfaction. And that group of companies has handily beaten the broader stock market for nearly two decades. Companies, more often than not, already do best for shareholders by doing good by stakeholders.

Which shouldn’t be surprising. Successful capitalists are those who pay extraordinarily close attention to the needs and desires of their customers. And they do indeed think about the future and not just the present quarter. Turns out the populist critique of shareholder capitalism as hopelessly afflicted by short-termism is pretty sketchy. If shareholder pressure forced public companies — like the ones that signed that letter — to forgo profitable, long-term investment opportunities, then they should invest less than similar private firms. But a 2018 Federal Reserve study found that public stock markets actually “facilitate greater investment” overall. Likewise, a 2017 paper by University of Chicago economist Steven Kaplan found “little long-term evidence that is consistent with the predictions of the short-term critics” of public companies.

Despite the distrust that many feel towards shareholders, we have good reason to believe that their influence serves the economy well. And American capitalists still have a great story to tell if they want to tell it.

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