There’s another one out there. I mean, there’s another group that says they are advocates for retail investors – The Main Street Investors Coalition. Having directed a retail investor outreach program many years ago, news about retail investor trends usually attract my interest.
So, I read the Coalition’s manifesto and reviewed their website and began to wonder what Main Street they were talking about. The Coalition does not appear to be associated with any organization that actually interacts with retail investors and may understand the retail investor perspective. There’s no connection to Broadridge or other transfer agents/proxy tabulators, nor is there an affiliation with groups like the American Association of Individual Investors, Better Investing or the Money Show or even retail oriented brokerage firms. But then, what’s in a name?
Instead, the Coalition’s real concern is the concentration of proxy voting power in the hands of passive institutional investors (i.e., the managers of index funds, quant funds, exchange traded funds, etc.). The group is worried that retail investors as clients (account holders) in these funds don’t know and can’t direct how their economic interest is being voted. As a result, the Coalition fears the major passive institutions are or will use the proxy process to pursue a social/political agenda that’s not aligned with their clients’ wealth maximizing interests.
I’m a little hard pressed to think this is something retail investors worry about. Retail investors turn to mutual funds to benefit from a diversified, professionally managed portfolio that gives them exposure to the overall market or a sector (depending on the fund). Performance, not proxy voting, is on their minds when choosing the fund to invest in. In addition, given that less than a third of retail investors vote their directly-owned shares anyway, it’s clear it’s not top priority for them. Why would it be any different when it came to their mutual fund holdings?
Based on my experience from doing governance outreach, I believe the major passive institutions take their proxy voting responsibility seriously. These major institutions consider themselves permanent investors and as such carefully weigh the issues and vote with a long-term value-creation perspective in mind. In addition, many passive institutions develop and post online their own proxy voting guidelines and do not blindly follow the major proxy advisory firms. So, to characterize, as the Coalition does, that the major passive institution’s vote as empty is unfair in my view.
The next big question is, are the major passive institutions using their voting power to pursue a social/political agenda? The evidence suggests not. In 2017, there were 215 shareholder proposals on social/political issues of which 6 passed according to Kingsdale Advisors 2017 Proxy Season Review. Had the major passive institutions supported such proposals, a lot more than 6 would have passed.
Further, a Sullivan & Cromwell 2017 proxy season recap noted that a supportive recommendation from ISS, a major proxy advisory service, doesn’t mean a social or environmental proposal will pass – proof that these institutions don’t move in lock-step. I wonder if the Coalition did much research to see who submits social and environmental proposals – its primarily individual investors (gadflies), socially responsible investment funds and pension plans – and how the major passive institutions actually vote.
Corporate governance is another story. Corporate governance speaks to how a company conducts itself and the strategies it pursues. This does have an impact on long-term value creation and the passive institutions spend considerable time weighing the issues and will often support activists or take a position on governance matters based on the facts of the situation.
In this regard, one governance issue the Coalition calls out is the dual class structure. The Coalition appears to support such structures, but major passive institutions do not. Dual class structures concentrate voting proxy power in the hands of a subset of investors. Paradoxically, this is exactly what the Coalition is against when it comes to the major passive institutions. Personally, I believe dual class stock can make sense in certain situations, but it doesn’t make sense forever and should contain some sort of sunset provisions.
Finally, it appears that Blackrock CEO Larry Fink’s exhortation that companies have a social purpose has alarmed the Coalition (and others) as they seem to think that having a social purpose is somehow incompatible with the wealth creation objective. But isn’t a consumer product company that offers new products to make consumers’ lives easier or more enjoyable … or a pharmaceutical company that develops and produces medicines to treat patients … or an industrial manufacturer making equipment that enables factories to operate more effectively … each serving a social purpose? Don’t we expect companies to consider the upstream and downstream implications of their activities and be good corporate citizens? These are things passive institutions – and other investors and stakeholders – are concerned about. As discussed in a previous post, I believe companies that know their purpose and how that purpose creates value become more resilient, aware and aligned organizations who are better prepared for the future.
In the end, despite a wholesome name, The Main Street Investors Coalition, really has little to nothing to do with main street investors, helping them achieve their goals or protecting their interests. Rather, they are railing against an imagined foe without seeming to understand what they do and how they do it.
Lead-IR Advisors, Inc.
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