Working Together to Protect
Our Common Resources
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Salutations, readers. It’s the summer season, but we haven’t slowed down at The Shareholder Commons (TSC).
In this month’s issue, we focus on two of our initiatives and ask for your help in moving them forward. As always, we can be reached at [email protected] should you want to follow up on anything here.
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TSC PRIORITIES
Highlights
TSC is working on two important projects to optimize diversified shareholders’ portfolio value:
1. A joint tender from asset owners and managers asking advisors to provide a proxy voting advice offering that would help diversified shareholders understand the effects that
votes have on the social and environmental systems that support all the companies in a portfolio.
2. A letter to the U.S. Securities and Exchange Commission (SEC) urging that it allow shareholders to propose that companies address social and environmental costs they externalize, and the effects such costs have on diversified portfolios.
The continued pursuit of profits through business plans that impose social and environmental costs is a root cause of catastrophic threats to people, planet, and portfolios. Broad support for these two initiatives will help keep this critical issue front and center in the minds of investors and regulators. Please consider joining in the joint tender and adding your signature to our letter
to the SEC.
For more context, read on.
COVID-19, Facebook, and your portfolio: a real-time case study for diversified shareholders
On July 19, the U.S.-centered S&P 500 dropped 1.6%, costing shareholders more than a half-trillion dollars. The business press attributed the drop to concerns about the delta variant of the SARS-CoV-2 virus that causes COVID-19. While the day-to-day movement of the stock market should not be overanalyzed, it appears directionally correct and uncontroversial that (1) a resurgent virus
will harm the economy, (2) a damaged economy reduces the anticipated cash flow of companies that make up that economy, and (3) over time, the share price of those companies will collectively reflect those reduced cash flows.
In light of these facts, it is worth remarking that on July 18, the U.S. Surgeon General asserted that Facebook was not doing enough to stop the spread of misinformation and disinformation about COVID-19 vaccines, and this was costing people their lives, health, and livelihoods. This followed the release of an Advisory providing multiple examples of steps that platforms such as Facebook
could take to address the problem.
Whatever one might think about attributing particular market movements to one cause, the long-term connection between health misinformation, market performance, and Facebook is clear—the company makes money by commanding users’ attention; anti-vaccine content drives traffic; that traffic hurts the economy and the stock market. Thus, in some circumstances, what is good for Facebook’s
financial returns and its share price might not be so good for citizens, the economy, or the portfolio of a diversified investor.
Our first proxy season: we told you so
This was precisely why, in the 2021 proxy season, we proposed that Facebook and other companies that routinely externalize costs become public benefit corporations—so that they would feel less obligation to externalize costs to create financial return. At other companies, we asked for a report that would describe the external costs created by the business, and how those costs could affect
the portfolios of the companies’ diversified shareholders. These resolutions gave us a platform to discuss the key ideas of universal ownership, systems-first investing, and beta stewardship with asset owners and managers, proxy advisors, consultants, and companies.
Next steps: how you can help a lot for no cost, except the ink expended for a couple signatures
Our first season was about introducing one idea: a diversified investor should care at least as much about the effect a company’s behavior has on its entire portfolio as the effect the behavior has on just that one company. As we move into the next phase of our work, we are focusing on initiatives that will begin to put this idea into practice across the financial industry. In this issue,
we present two of these initiatives and ask you to participate: first, by joining in a tender for proxy voting advice that accounts for the interests of diversified shareholders; and second, by adding your signature to a letter asking the SEC to consider the interests of diversified shareholders in its process for reviewing no-action requests for shareholder proposals under Rule 14a-8.
We have developed a request for proposals (RFP) that we intend to submit to proxy advisory firms and others to offer services for diversified or “universal” owners. Here are some of the key points:
- In accordance with best investment practices, asset owners diversify their holdings. The returns of these diversified portfolios are primarily determined by overall market returns (“beta”). Beta depends on the long-term health of the economy, which itself depends upon the productivity of social and environmental systems. These systems can be degraded or improved by the activities of
individual companies.
- The contemporary market for proxy advisory services ignores the broad systemic effects of company behavior; advice is focused solely on optimizing the return of each individual company for which voting advice is rendered.
- Proxy voting intended to reduce cost externalization by portfolio companies would improve the systems upon which all companies in a benchmark rely, increasing returns for all diversified investors.
- Diversified investors need advice that recognizes the importance of beta. If the actions of an individual portfolio company may cause financial harm to the other companies in an investor’s portfolio, the negative financial impact of those actions to the investor may outweigh the benefit created at the individual company level.
- The RFP seeks advisory-only services for voting advice on matters where the effect of a vote on the activities of a portfolio company is likely to have significant effects on the financial returns of other companies in a portfolio. Advice on such issues would not be used to replace the standard advice the advisors issue on a company-by-company basis, but rather to enhance the analyses
performed to ensure that fiduciaries are fully informed as to the manner in which voting decisions can enhance the long-term financial performance of their portfolios.
The full copy of the draft tender is here. Please consider signing—it is important to diversified owners that such advice be made available, but that will not happen until advisory services understand that there is a market for this important advice. Once that market develops, we are confident that service providers will respond, and diversified investors will have a ready resource to
vote the true financial interests of their beneficiaries. Please click here to sign on to this joint tender. If you have questions or want to discuss, drop Rick a line at [email protected].
(ANOTHER) LETTER TO THE SEC
Readers of this newsletter have heard us describe numerous missives we have sent to the SEC. The current letter we are working on represents a new type of opportunity. The SEC response to several of our letters in the last proxy season prompted us to address the process by which the SEC decides whether companies must include shareholder proposals in their proxy statements. That process
has grown increasingly arcane over the last few years. Of particular concern to TSC, the process is quite confusing when it addresses proposals that concern cost externalization by individual companies.
Our letter asks that the SEC recognize that cost externalization that harms the diversified shareholders of a company is a critical issue for those shareholders, and the shareholder proposal process should reflect that. Our letter supports a recent submission by the Shareholder Rights Group recommending changes to streamline the shareholder proposal process and increase its transparency and objectivity. Here are some key points from that letter:
- We urge the Staff to reexamine its analysis of proposals that address cost and risk externalization. The question of whether businesses should profit at the expense of social and environmental systems is under scrutiny in public debate, the business community, state legislatures, and Congress.
- The purpose of Rule 14a-8 is not served if shareholders cannot bring a proposal regarding company conduct that significantly threatens the interests of diversified shareholders in preserving social and environmental systems.
- To protect the interests of the vast majority of American investors with diversified portfolios, the SEC must account for investors’ financial interests in protecting systems and common resources, not just the interests of a hypothetical shareholder whose sole interest is in the financial performance of a single company.
- We ask the Staff to adopt the following polices with respect to requests for no-action relief under Rule 14a-8(i)(7):
- Otherwise proper requests for proposals addressing costs and risks that a company externalizes to stakeholders and diversified should not be excluded as ordinary business; and
- Such proposals should be considered to have a proper nexus to the company if the company makes a significant contribution to the costs or risks in question.
The full copy of the draft letter is here. Please consider signing this, as well as the tender. The SEC is denying shareholders the opportunity to be heard on issues that are critical to the vast majority of investors who diversify their portfolios. With a new Chair and many new leaders on the Staff, this is an opportune time to raise the visibility of this issue. Please click here to sign on to this letter. If you have questions or would like to discuss, please reach out to Rick at [email protected].
IN THE NEWS
Lastly, we were also thrilled to see Roger Urwin’s recent comments on the importance of guardrails around corporate behavior.
THAT'S ALL FOR NOW
Thank you all for your responses and feedback to these newsletters over recent months. We are thrilled to be working alongside you and love hearing your thoughts on this work.
Fondly,
Team TSC
Rick, Jenn, Sara, and Sophie
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