What motivates you to keep such a close eye on the companies you invest in, and indeed, to influence them?
Part of it is that I’d like to make money, and by influencing companies you can help them make more money. Of course, I also want to make society a better place, but it’s like how initially you had the Frederick Taylor school of management that said workers were replaceable parts – gradually companies realized that they were better off if employees brought their brains to work. Hopefully, companies will realize they will perform better if investors bring their brains to work as owners.
You started off studying what forms of organization helped employees be more productive. How does what you do help companies carry out their business better?
Yes, I ran California’s Co-operative Development Program, did some direct work with employer-owners, and could see the difference. Later, when I headed legislation and regulations for an environmental protection agency, I would sit down with companies to write laws and realized we weren’t really regulating them – the companies were essentially regulating us! It got me thinking about how investor could be a more powerful and positive influence on companies.
It’s easier to see the differences you make at small companies. I’ve been working with one for several years. At first there was considerable resistance, but over the last year and a half they’ve been more receptive. I’ve tried to convince the founder to take on some more critical board members and now not everything is no longer only on the CEO’s shoulders. It’s harder to see the direct impact at larger companies, but there’s evidence to show that good corporate governance leads to higher stock prices.
Has corporate democracy improved in the time you’ve been an active participant?
Yes, substantially. When I first got involved, CEOs appointed boards. Now, boards are supposedly independent from management. That’s better than it was but I’m trying to push boards to become dependent — on shareholders.
With larger companies, most of which have adopted it, majority-voting means we can at least get rid of directors. That’s another step in the right direction.
In our political democracy, founding documents declared that all men are created equal. Even though they certainly didn’t have the same legal rights, at least there was something they could point to in arguing for more democracy. Corporation governance is somewhat similar. The mechanisms look democratic. Hopefully, someday we’ll have greater accountability in both realms.
The system of proxy voting as a fiduciary obligation, created in large part by Bob Monks, was another huge improvement, but is one that mainstream funds haven’t taken seriously enough. Their proxy votes are too frequently at odds with their public pronouncements on issues like climate change and executive pay.
Several of us are likely to buy into these funds and put forward proposals looking at the dichotomy between what they’re saying and doing. I had to withdraw one such proposal at BlackRock this season, but will be back next year.
Are small shareholders still treated very differently than large institutions when making proposals?
Definitely. They haven’t taken public pension funds to court for filing proxy proposals! Larger funds have the resources to respond quickly, so probably get fewer no-action letter requests.
There is more co-operation [between individuals and the big institutions] now, especially with New York City, CalSTRS and CalPERS on proxy access. If someone else is going to make a proposal, I’m happy to withdraw mine. None of our proposals pass without the support of public and mainstream funds. We’ve had many successes.
What’s the issue just around the corner that is going to take off like proxy access has?
I’m hoping that issue is the implementation of proxy access. Companies have adopted a version that limits groups to 20 shareholders, which is only going to happen if the likes of BlackRock, Vanguard and State Street join together to make nominations. That seems unlikely. We’re trying to fix that with amendments. Once that is accomplished, I hope the next trend will be shareowners nominating candidates through the proxy access process. We might even see services facilitating the coordination of such nominations.
You would like to see more funds announce their votes in advance. Why?
Most retail shareholders don’t vote and don’t have a clue as to most of the issues. Investor sites are full of trading tips but the discussions are all about betting where the price will be tomorrow or next week. I want to see more of an owner mentality. That can happen if funds announce their votes in advance. If shareholders see those votes in advance of the meeting, they will start paying attention and will start to see which funds put a lot of thought into acting as owners and which don’t.
If you live in an area where people don’t vote, you won’t have as nice a community as somewhere people do. If you announce your votes in advance, those votes get looked at a lot more than those announced months after the meeting. The more you announce in advance, the more you have to think about those votes, rather than defaulting ISS or other views. If your fund does devote serious time and energy into proxy voting, why not announce your votes in advance and influence other voters?
Do you see a universal ballot happening in the near future?
The universal ballot will probably have to wait until the SEC has a full commission and maybe a new administration. But I do think it will happen. With the growth in hedge fund activism, it’s an obvious problem that you can’t split your vote except at the meeting itself.
Given that this is an election year, has political transparency been an important issue and do you see any shifts on the horizon?
Disclosure of donations to federal candidates is going way up at large companies. The more recent push is for disclosure of dues to trade associations, like the Chamber of Commerce, and the push to disclosure donations to local candidates and for lobbying activities. Bernie Sanders highlighting the influence Wall Street will hopefully lead Hillary Clinton to fulfilling some of her promises in that area if she gets elected office.
In addition, there’s been more than a million comments in favour of an SEC rulemaking to require disclosure of political contributions. Hopefully, Republicans will stop blocking consideration of that measure once the elections are over.
Greater transparency and an end to corporate governance as a democracy-free zone; that’s what I hope is on the horizon. There is still a great deal of work to be done. Tools like Proxy Insight certainly help.