I wrote a piece in June that highlighted a study conducted by leading economists that concluded that there is no evidence that environmental, social and governance (ESG) shareholder resolutions enhance shareholder value. The study was sponsored by the Mainstreet Investors Coalition (MSIC), a group funded by the National Association of Manufacturers (NAM) and other business interests, and led by Joseph Kalt, PhD Senior Economist at Compass Lexicon. It found that the high cost in time and resources that companies targeted by such resolutions spent dealing with these initiatives are actually harmful to the companies. This finding should come as no surprise to anyone familiar with the process.
The New York Times, in its “Dealbook” pages, recently published a piece that is critical of the MSIC. The piece, by Andrew Ross Sorkin is titled “What’s Behind a Pitch for the Little-Guy Investor? Big Money Interests.” Sorkin attempts to take down the group by tying it to big money interests, when in reality, the Main Street Investors Coalition has been upfront about who its partners since it launched. In taking this angle, Sorkin makes no case at all for why American businesses and American retail investors cannot advocate for the same things.
The Times surely doesn’t argue that it is impossible for giant environmentalist lobby groups like the Sierra Club to advocate for the views of ordinary citizens who donate to them. Why then should we believe that the businesses in whose stock millions of ordinary citizens invest aren’t equally capable of looking out for their interests?
Corporate management teams in the oil and gas industry – which has been a main target of these groups – and other businesses in fact have a fiduciary responsibility to maximize returns to their shareholders. At most companies, that is pretty much the overarching driving force behind their decision-making – it is in fact what they are in business to do.
Given that, it is not surprising they don’t want to spend large amounts of dollars and resources responding to counterproductive shareholder proposals, which all too often seek to function as just another layer of regulation, often duplicative of government regulations already in existence. Nor do they want to be inordinately affected by the advice a few large proxy advisory firms give to institutional investors regarding shareholder votes.
Meanwhile, individual investors want to see businesses prioritizing returns and they want a say in how their shares are voted. It seems to me that all of these priorities can be achieved simultaneously, so it’s unclear why Sorkin writes as if the Main Street Investors Coalition is misrepresenting itself.
The Times’ column attempts to convince readers that MSIC’s fundamental purpose is to prevent activists from bringing climate change agenda items to the table. In reality, the Coalition expresses no position on ESG investing. Instead, its real target is the handful of proxy advisory firms that crank out cut ‘n paste resolutions which the institutional investor firms then use to target a wide variety of companies.
Interestingly, Sorkin credits Neil Minow for bringing the MSIC’s activities to his attention. Mr. Minow happens to be the Vice-Chairman of ValueEdge Advisors, a firm that “was created in summer 2014 to help institutional investors engage effectively as owners with their portfolio companies.”
Whether one likes the MSIC or not, the group’s basic argument appears to be that it isn’t the job of institutional investors to advocate for politically-motivated causes at the urging of these proxy advisory firms. Their job should be to earn returns for their clients, so said clients can retire comfortably.
To support its point, the MSIC points out that it surveyed 1000 retail investors and found that 78% of people invest in passive funds because they want low-fees and consistent returns – not to advance social and/ or political causes. Bottom line – retail investors aren’t particularly concerned with climate disclosure or governance issues when it comes to their money. While they may vote for these ideals in ballot booth, they aren’t all that interested in seeing these issues played out in their retirement funds.
While Sorkin expends a lot of words attacking NAM and the MSIC, he wisely avoids going after Mr. Kalt – whose reputation is pretty unassailable – and Compass Lexicon’s work. The facts laid out by the study remain unchallenged: these ESG resolutions have no statistically measurable impact on a company’s bottom line. Yet, they can consume an extraordinary amount of time and energy.
In the end, one’s point of view on this issue comes down to which boogeyman you trust the least: the corporate management teams who have the fiduciary responsibility to maximize value to the shareholders and the business groups that represent them, or the proxy advisory firms who crank out the cut ‘n past resolutions for broad distribution by ESG-focused institutional investors. It doesn’t seem like a hard choice to me, and it probably wasn’t for Mr. Sorkin, either.