An anti-shareholder movement—often mislabeled as “anti-ESG”—is silencing everyday investors’ voices in the United States, including the 50% of private sector workers who participate in 401(k) retirement plans.
Government Capture
Anti-shareholder activists use government power to bully investors who promote responsible behavior at the companies they own. If successful, they will further enrich wealthy corporate executives and Wall Street financiers, leave retirement savers poorer, and weaken the social structures and environmental systems upon which ordinary Americans rely. A few examples of the movement’s growing power:
- A recent federal case said the American Airlines retirement plan broke the law by using an asset manager that supported measures designed to slow climate change; in particular, the court criticized a shareholder vote to replace several directors on the ExxonMobil
- Eighteen state attorneys general wrote a letter that insinuated major asset managers and banks were violating fiduciary duties and other legal obligations simply by considering climate and diversity issues when voting proxies on behalf of clients.
- A report from the House Judiciary Committee asserted that there was a collusive “climate cartel” of investors, evidenced by (among other things) the Exxon vote cited in the American Airlines case.
- A lawsuit Exxon brought against its own shareholders stopped them from proposing a climate vote at a shareholder meeting.
- New staff interpretations of longstanding SEC regulations made it harder for investors to ask other investors to vote for proposals on biodiversity loss, workplace safety, and other matters.
- A speech from an SEC Commissioner augured new rules that will make it harder for shareholders to bring matters regarding significant policy issues (e.g., shareholder proposals regarding public health or poverty wages) to a vote.
In each case, financial market rules are being rewritten to accomplish political objectives of both the fossil-fuel industry and a well-coordinated campaign against corporate efforts to remove employment and access barriers for marginalized groups. While silencing investors may advance the agendas of fossil-fuel advocates and discrimination apologists, it threatens the role capital markets play in the U.S. economy. The great irony is that this power shift from shareholders to government is being executed by erstwhile champions of private property rights. The former defenders of free markets justify these government attacks on investor rights using two faulty premises:
- They refuse to acknowledge legitimate investor concerns regarding the impact of social and environmental issues on a company’s long-term value. (Incorporating such effects into investment decisions is sometimes called “ESG investing.”)
- They ignore investors’ financial interest in protecting markets from the macroeconomic costs of degrading the environment and threatening human well-being.
Regarding the first premise, the anti-shareholder campaign invites judges, regulators, and legislators to override the judgment of investors who believe it’s bad for their investments when companies ignore the relationship of society and the environment to their businesses. In the American Airlines case, for example, the court clearly believed it knew better than BlackRock (the world’s largest asset manager) whether decisions to reduce greenhouse gas emissions would be good for individual companies; indeed, the Court was so sure of this that it dismissed BlackRock’s value arguments as “pretext.” Secondly, these actions to gag shareholders uniformly ignore the economic reality that most investors lose when companies create outsized social and environmental costs: limiting irresponsible corporate behavior can protect diversified portfolios from externalities that threaten overall market returns. Proxy voting and other investor action that protects the value of systems and portfolios (rather than just individual companies) is sometimes called “system stewardship.” Government actions outlawing system stewardship might well protect some individual companies and their well-paid executives, but are likely to destroy the value investors are building across their portfolios and the U.S. economy. In her speech, the SEC Commissioner appears unaware of this risk, stating without reservation that companies serve their shareholders only if they “maximize the value of the company,” implying they shouldn’t account for their impact on the systems that undergird those shareholders’ portfolios.
Financial Market Disaster
A unified governmental effort to hobble shareholder stewardship will be a disaster for financial markets, and for anyone who cares about the future of the people who live on this planet. Our economy relies on the collective wisdom of capital markets to guide capital to its best use: that’s Economics 101. Policies that muzzle shareholders replace the voice of capital with a regime of corporate executives free to satisfy their own interests at their shareholders’ expense, subject only to politicians and judges who can channel investors’ capital to satisfy whomever the political winds favor. The problem is clear from the actions cited above. The attorneys general letter asserts that a coalition of asset managers working to drive down carbon emissions “demanded that its signatories focus on climate change rather than making money for their clients who hired them to make more money.” This false dichotomy between profit and climate demonstrates that the attorneys general don’t understand how an investor might factor climate into the risks of owning certain companies. Nor does it reflect an understanding of how the climate affects the economy and overall investment returns. Companies can only “make more money” if the systems that support our entire economy are healthy. But fossil fuel emissions put the climate system at risk. The Institute and Faculty of Actuaries recently issued a report calculating that we face a 50% global GDP loss as early as 2070 if we don’t address the growing concentration of GHG in the atmosphere. Ordinary workers relying on 401(k) plans such as that of American Airlines would be devastated by such an economic catastrophe. One recent study suggests the economy’s current emissions trajectory may lead to a downward shift of the entire equities market by 30-40%. Another calculation suggests a 30% loss to the compound return on a typical 60/40 equity/debt portfolio over the next 40 years. For an indexed investor (the type of investor the case dealt with), trying to “make money” by encouraging oil companies to invest more in the energy source that threatens the global economy is like trying to save yourself from drowning by clambering to the highest point on a sinking ship. Investors should at least have the option to focus the companies they own on righting the ship.
Ignoring Systemic Risk
But like the attorneys general, the court in the American Airlines case ignores systemic risk. Without support, the decision flatly states that it’s irrational for an investment manager to do anything other than insist that each company in a portfolio make as much profit as possible:
[I]t does not make any rational economic sense for a shareholder (or an investment manager on behalf of shareholders) to encourage an energy company like Exxon to act in a manner that directly undermines the company’s profits. Just as it would not make rational economic sense to act in a way that pressured Microsoft to sell less of what makes it so profitable: software and services. Or JP Morgan Chase reducing the quantity of profitable financial services. Or American providing fewer flights that it could profitably sell.
This is a basic category error. Fiduciaries are not charged with optimizing the return of individual companies—their job is to optimize returns at the portfolio level. If JPMorgan or Microsoft or Exxon is engaging in a business practice that puts investors’ entire portfolios at risk, the fiduciaries who hold their shares should address that risk because their role is to protect investors, not the companies those investors own. As a Columbia Law School Professor explained in a recent article:
The governance of public companies today is shaped by portfolio investors who are trying to maximize the value of the portfolio even if particular firms within the portfolio are thereby made less valuable…
What matters to investors is overall portfolio value, not individual company value. This concept, as it relates to proxy voting and other stewardship, was defined in a recent publication whose authors included the CFA Institute (an organization of more than 200,000 investment professionals) and the PRI (a coalition of investors with more than $120 trillion dollars in investments):
… [I]nvestors have legal rights and other means of influencing the behavior of investees and other parties, such as policymakers. Stewardship involves ensuring this capacity for influence is used to protect and enhance overall value for clients and beneficiaries… The concept of overall value for clients and beneficiaries is multifaceted. It includes the market value of the entire portfolio (as opposed to individual holdings or individual mandates); the long term value-creation capabilities of firms and economies; and the common environmental, natural, intellectual, social, and institutional assets that underpin all economies. Examples of environmental assets include
a stable climate…
In other words, fiduciaries who oversee long-term, diversified portfolios must protect investors from the threat posed by companies that exacerbate the risks of a warming climate—or that threaten the economy by contributing to racial disparities projected to cost the U.S. economy $5 trillion over five years.
Hobbling Shareholder Discretion
The reaction to the Exxon proxy contest illustrates the danger of replacing investor discretion with political control. At Exxon, shareholders voted in 2022 to replace the directors whose job was to represent the interests of the investors whose capital was at risk. That’s how the system is supposed to work—if investors are unhappy with the direction in which a company is headed, they should be able to insist on change by selecting new board members. It’s called capitalism. But instead of respecting the shareholders’ choice, Exxon brought a lawsuit to gag them. Meanwhile, Congress, the federal courts, and attorneys general in some states point to the Exxon shareholders’ stewardship as a reason to have judges and politicians decide what’s best for investors. Make no mistake: taking power away from shareholders will have lasting consequences in the real economy, as the moderating influence of long-term, diversified investors is overcome by the financial interests of those who profit by extracting value from people and the planet.
Where do we go from here?
The investing community has an opportunity to address the dangers of the moment by clearly supporting initiatives to limit value extraction by the companies they own. Pension funds and other asset owners can insist that the service providers who manage their assets work to end such practices. These service providers must explain how they account for social and environmental costs that portfolio companies externalize. And we must keep politicians in check when they act to deny shareholders the right to control their own property. Markets are not an end, but a tool for organizing our productive resources, and they will fail if they don’t account for macroeconomic impact. Market tools must empower investors to reject business practices that threaten the society in which they’re embedded, whether or not those practices are profitable. Policies can be designed to protect social and environmental systems, but financial power will forever undermine policy if the markets don’t account for the full costs of business practices. Let’s make sure they do. Let’s stand together as investors to use every tool we have to stop the anti-shareholder bullies. Our capital markets and the economy they underwrite are at stake.
