Working Together to Protect
Our Common Resources
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Welcome to the third newsletter of The Shareholders Commons, a nonprofit organization promoting an economic model designed to save capitalism from itself. Together with our committed allies, we are working to transform the current system from one that measures success by profits alone to one that accounts for the true environmental and social costs
of business.
We have had lots of exciting developments in the last few weeks. Please help us continue the momentum by forwarding this issue to others who may be interested. If you feel inspired to get involved, please reach out to me at [email protected]
Join The Movement
Are you frustrated with the lack of progress in the fight for real change in the way business is done? I am: I left my job and am working pro bono to make The Shareholder Commons a reality, but I need some help. Here are some ways you can be part of the solution:
- Resources. We need some early supporters who can open doors for financial support from foundations or others.
- Exposure. Inform us of any upcoming events or speaking opportunities that would benefit from The Shareholder Commons perspective.
- Content. Let us know if you have any to contribute.
Welcome to Jenn Warden, who joined us at the end of October as our Interim Director of Strategy and Operations. Jenn has a deep background at the intersection of social movements and responsible business practices, including leadership roles at B Lab and in global philanthropic networks, with several years of
experience managing growth for startups. Jenn can be reached at [email protected]
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This Month’s Ramble:
The Problem with Political Spending
One key area of focus at The Shareholder Commons is equipping shareholders with the tools to limit corporate political spending. This article takes a few steps back in order to explain why limiting such spending is essential to our mission and to creating a just and prosperous economy.
TWO BUBBLES, ONE MODEL
I spend much of my time in a progressive bubble where Elizabeth Warren is celebrated (although perhaps taken more seriously than literally) and where “neoliberal” is an epithet applied to anyone who objects to the government intervention anticipated by her platform. In another bubble, such skepticism is championed as “free market conservatism.” But these bubbles are closer than their inhabitants imagine, as demonstrated by Warren’s
embrace of the label “capitalist” and by the reaction of progressives to the new isolationism.
Serious policy arguments about where we can turn to address fundamental concerns like growing inequality, ecological risk and human rights continue to involve adjusting the dials on the “Washington consensus” that has governed policy circles and international organizations for decades. This consensus takes economic ideas like gains from trade, comparative advantage and the reality of market failure, and turns them into policy prescriptions.
The difference (which I do not mean to understate) involves emphasis—while free marketers may emphasize gains from trade and thus increased property rights, my progressive crowd will focus on market failures and the need for the regulation of externalities. But serious conservatives do not believe that pollution should be unregulated and serious progressives do not believe all industry should be nationalized—there is much common
ground.
Corporate political spending salts this common ground.
MILTON FRIEDMAN IN THE MIDDLE
The truth is that most progressives and conservatives are using the same formula but are assigning different—sometimes vastly different—values to its elements. For example, these two bubbles often engage on the wisdom of Milton Friedman; progressives cast his famous 1970 article -- proclaiming that corporations’ only responsibility is to make money-- as the epitome of greed-centered neoliberalism, while free marketers view it as a touchstone of common sense. Here is what he actually
said:
"In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of their society, both those embodied in law and those embodied in ethical custom."
That is, maximize profit to the extent that shareholders desire, but only within ethical and legal boundaries. I would submit that progressives and free marketers agree on this point but differ in how those ethical and legal boundaries should be designed, and what it is that shareholders should want.
Thus, there is not really a difference of opinion as to the role of corporations in society. The hard question is how far to let private enterprise go in using free markets to allocate resources and make economic decisions—when does social and environmental degradation caused by the pursuit of profit outweigh the productivity created by the invisible hand? When is the collective action made possible by government needed to rein in the collateral damage of unrestrained
competition?
POLITICAL SPENDING DESTROYS FRIEDMAN'S LOGIC
This is where corporate political spending becomes a problem. In a democracy, legal boundaries should be created in a political process that treats all voices equally. But money is giving business interests outsized influence in setting the very legal bounds that Milton Friedman cited as legitimating corporate profit seeking. Corporate money has deregulated the finance industry, distorted government capacity to address climate change and, as detailed in the work of Thomas Phillipon, limited the very competition that makes the free market an essential tool for price discovery and resource allocation.
In an ominous turn, corporations are now using the same tools to suppress accountability to shareholders, even though Friedman’s theory relies on corporate responsiveness to shareholders for its legitimacy. As discussed later in this newsletter, proxy rules are being reinterpreted and rewritten to make it harder for shareholders to insist that corporations behave responsibly. The Business Roundtable it seems, would like to leave the drawing of boundaries to corporate managers, defying both the political and corporate democracy that Friedman’s theory relies upon.
This combination of factors puts our economy at risk, and one need look no further than the market crash of 2008 and subsequent recession or the wildfires ravaging California to see this.
WHAT THE SHAREHOLDER COMMONS IS DOING
We are working with Business for American Promise to bring institutional shareholders into the movement for a constitutional amendment overturning Citizens United, the Supreme Court decision that freed corporations from important spending restrictions.
We are planning to serve as the voice of the universal shareholder in rulemaking proceedings and litigation around proxy rules so that shareholders can continue to advocate for reduced corporate spending at the companies they own. Finally, we are hoping to create substantive political spending guardrails that shareholders can implement at companies within their portfolios.
This effort is critical. Let us know if you want to be a part of this important initiative.
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Book of the Month
The Rise of the Working Class Shareholder
By David Webber
David Webber’s book, The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon, might just as well have been titled, “How Shareholders Can Save the Planet.” Webber, a professor at the Boston
University School of Law, has written a book that tells a number of stories about public and private employee pension funds using their economic muscle to change corporate behavior for the better. I will not recount all of these stories in this space; here is an excellent review that provides a good summary.
But there is one story that illustrates the potential for universal owners to make real and permanent change: Webber calls this story “The Fight for Meaningful Corporate Elections.”
Twenty-five years ago, “corporate democracy” in the United States was at a nadir: a large majority of publicly traded companies had staggered boards, so that it took shareholders at least two elections cycles to “fire” the board. These companies also had “plurality voting,” so that when directors ran unopposed, they would win as long as they got a single vote. Finally, it
was prohibitively expensive for shareholders to challenge management-sponsored director nominees, because companies were not required to include the shareholder nominees in their proxy statements or on their proxy cards. Thus, even though shareholders nominally had the voting power necessary to control the companies they owned through board elections, it was exceedingly difficult for shareholders to exercise that control.
Webber tells the story of how labor funds led a two-decade battle to reverse this situation so that today most public companies have (1) boards that are entirely up for election every year, (2) a requirement that unopposed directors receive at least half the vote in order to stay in office and (3) bylaws allowing shareholder nominees access to the company proxy
statement.
This is a story of patience, resilience and real change. The good news is that the same tools that labor funds and other universal shareholders utilized to change corporate governance (and the changes themselves, which give shareholders even greater power) can now be used by shareholders to insist that the companies they own stop earning profits through externalizing social and
environmental costs. Our mission at TSC is to help universal shareholders use that power in order to manage the social and environmental impact of the companies they own.
The Empire Strikes Back
As described in Webber’s book, shareholders have figured out how to use their proxy power to force change at the companies they own. At The Shareholder Commons, we believe that the diversified institutional owners that dominate the capital markets should be using the corporate franchise as a force for good. We see that happening every day, with shareholders advocating for
more responsible action on climate, human rights, political spending and other matters.
Corporate managers are fighting back however, through action at the SEC, a federal agency that regulates proxy voting. In August, the SEC announced a new policy that will make it harder for shareholders to obtain advice on
proxy voting. On November 5, the SEC announced a number of proposed regulations that will make it more difficult for shareholders to make proposals to companies. All of this follows SEC action making it easier for companies to ignore shareholder initiatives around climate change. These policies could make the activism described by Webber more difficult.
The Sierra Club has initiated litigation around the last issue, while ISS, the leading proxy advisory business, has sued the SEC for its action making such advising more difficult. The new regulations are open for public comment through this
portal.
The Business Roundtable is supporting these initiatives to make it harder for shareholders to promote the type of responsible business practices that would actually protect corporate stakeholders. As discussed in a previous issue, this makes us wonder whether the recent Roundtable pronouncement about stakeholder values was more about reducing accountability to shareholders than actually increasing accountability for stakeholders.
Look for a future special issue of this newsletter devoted to the implications of current SEC initiatives on the interests of universal owners.
That’s it for this month. Onward, friends. And don’t forget to breathe.
Founder, The Shareholder Commons
Fellow, B Lab
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