James McRitchie: 2019 Proxy Season Wins Threatened by SEC Proposals

2019 proxy season results show widespread support for retail initiatives. In 2017, SEC Chairman Clayton indicated the SEC would review shareholder proposal rules, noting it is “very important to ask ourselves how much of a cost there is…. how much costs should the quiet shareholder, the ordinary shareholder, bear for idiosyncratic interests of other [investors].”

My proposals averaged 52.3% support this proxy season. I am exactly the type of shareholder targeted by the rulemaking under consideration – a small retail investor. If my submissions were really “idiosyncratic,” why do they win the votes of so many shares? They win because they drive best practices and increase value for the entire market. 

 The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent by Emiliano Catan and Marcel Kahan found:

Out of the 114 firms in our sample that granted that power over 2005-2017, 80% had received a precatory proposal. Relatedly, 84% of the unique firms that received at least one shareholder proposal asking for the right to call special meetings had granted their shareholders that right by the end of 2017…

The proposals were almost exclusively filed by individuals (as opposed to pension funds or other institutional investors). Remarkably, close to 90% of the proposals were filed by members of four families (the Chevedden family, the Steiner family, the Young-McRitchie family, and the Rossi family).

Most Americans don’t hold stock directly. They do so through huge passively managed funds in their 401(k) programs. Increasingly, they want funds focused on environmental, social and governance (ESG) issues. Many funds have begun offering ESG funds. Participants may be surprised to learn that such funds often vote against ESG proposals, since fund families like BlackRock, Vanguard, Fidelity and State Street vote their shares as a block. Their ESG funds vote no differently than their other funds. 

I have petitioned the SEC to make fund proxy votes available in real-time, in machine readable format. That would spark competition among funds around their proxy voting records, much like the current market competition around low fees and performance history. When average Americans see how their funds are voted on ethical issues, they will demand change. 

My petition can be found under Petitions for Rulemaking Submitted to the SEC as File 4-748, Jul. 9, 2019. 

As long as 84% of corporate stock is owned and controlled by 10% of Americans, corporations will not be trusted. For capitalism to be compatible with democracy, we need most American families to participate in share ownership. That should be part of the mission of every corporate director, as well as the SEC in order to maintain its legitimacy.

After World War II, the New York Stock Exchange developed a marketing campaign, Own Your Share of American Business (OYS), to rebuff communism, restore profitability to retail brokerage firms, and persuade Americans to lower capital gains taxes. OYS was never aimed at shifting power from the few to the many. Participation in corporate governance was not an objective. Giving small retail shareholders a “sense” of participating in capitalism was enough.

Imagine, instead, if most Americans had a substantive stake, as well as a meaningful voice in how corporate governance. Imagine if investing in shares was promoted as a way to participate in financial returns and in voting on what future we want to live in based on each company’s “social purpose,” as Larry Fink of BlackRock has called it.

Creating a nation of small shareholders involved in corporate governance would be transformative. We will never get there by stripping small shareholders of their rights. 

James McRitchie is a retail share owner, and the host of the website, CorpGov.net

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