We Must Protect the Rights of Shareholders to Advocate for Their Best Interest
The assault on socially and environmentally responsible investing has ramped up since January this year. With it has come a growing threat to shareholders’ rights to vote for what they believe is in their best interest, as well as the best interest of the companies they own.
As an investor in a company, you have the right to raise issues at the annual shareholder meeting that you believe could impact the success, profitability, and longevity of the business. Shareholders raise these issues through ‘resolutions’, which are then voted on.
If your investment is through a mutual or exchange traded fund, then the managers of that fund generally take on the right, as fiduciaries obligated to act in the best interests of the clients they represent, to vote a proxy ballot on your behalf.
Corporate democracy in this country is not as expansive as political democracy. Shareholder resolutions are non-binding on management, after all. Even when approved by the majority of shareholders in a company, shareholder proposals are only ever advisory in nature.
But resolutions can nevertheless be very effective in raising critical concerns about financial, legal, operational, and reputational issues that boards sometimes ignore. And they can affect investor sentiment and impact a company’s stock market value. Shareholder proposals have also led to increased corporate transparency, which is critical to providing investors with the information necessary to understand a company's risks and opportunities.
However, recent attacks on socially and environmentally responsible investing are putting shareholders rights to advocate for themselves at risk.
Last year, a group of 11 state attorneys sued three of the largest asset management companies in the world, accusing them of breaking anti-trust laws by engaging in a “conspiracy” to constrain coal output via their investment sustainability policies and shareholder activism.[1]
By avoiding investments in coal–a fossil fuel that is a major contributor to climate change– these fund companies supposedly endanger the survival of the industry.
In February, conservative officials in 18 states sent a letter to the Securities and Exchange Commission and Department of Labor urging the agencies to adopt policies that would prevent fund managers and retirement plan sponsors from including environmental or social criteria in their investment or proxy voting decisions by defining such considerations as “inconsistent with fiduciary duties.”[2]
Then, last month, the Trump administration’s Department of Justice and the Federal Trade Commission filed a statement of interest supporting the claim that asset management companies broke anti-trust laws with their social and environmental practices.[3]
These developments display a worrisome trend to limit the rights of shareholders.
There is strong evidence that social and environmental issues do, in fact, impact company performance.[4] Numerous recent studies, for example, have found that companies with strong environmental performance can lower costs and boost profits. It makes sense for fiduciaries to take into account how exposure to environmental risks can harm a company’s bottom line both in the near and long term. Climate change is not in anyone’s economic best interest, and is already causing massive financial losses (think of California wildfires or North Carolina flooding.)
Shareholder proposals are an important mechanism of accountability and of democratic engagement in corporate governance. They represent moreover a fundamental exercise in freedom of expression.
Reducing the rights of investors is just one more example of a dangerous erosion of the avenues the public has to hold powerful interests accountable.
This material is intended for education purposes only. LongView Asset Management, LLC (referred to as "LongView") does not warrant that the provided information will be free from error. None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon for transacting securities or other investments. Under no circumstances shall LongView be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials provided. In no event shall LongView Asset Management, LLC have any liability to you for damages, losses, and causes of action for accessing this commentary. Past performance is not indicative of future results. This content not reviewed by FINRA. Photo by Michael Hart on Unsplash.
[1] https://www.crowell.com/a/web/ncEXk58x4dg7qdpiHoArWV/states-v-blackrock-complaint-20241127.pdf
[2] https://www.esgdive.com/news/republican-finance-officials-urge-sec-dol-adopt-anti-esg-dei-rules/739060/
[3] https://www.crowell.com/en/insights/client-alerts/doj-and-ftc-file-statement-of-interest-supporting-antitrust-lawsuit-against-asset-managers-climate-goals
[4] https://www.sciencedaily.com/releases/2024/12/241210163404.htmhttps://www.sciencedirect.com/science/article/pii/S221484502200103X#:~:text=They%20indicate%20that%20firms%20with%20high%20performance,to%20create%20more%20value%20in%20the%20market.&text=(2021)%20explore%20the%20effect%20of%20ESG%20on,but%20individual%20ESG%20performances%20have%20mixed%20results.