Proxy prejudice is real -- it's time to tackle it on Wall Street in 2021
The corporate proxy season runs each year between April and June
BMO Capital Markets chief strategist Brian Belski shares his outlook for the stock market.
Rarely in American history has the shadow of social justice been cast against the silos of Wall Street. The worlds of private profit and public interest tend to revolve independently, intersecting only occasionally.
But times are changing.
In the wake of the George Floyd murder and Derek Chauvin trial and conviction, America’s social justice movement has gone from Main Street to Wall Street, just in time for proxy season. Activist investors and a handful of large asset managers have introduced environmental, social and governance (ESG) proposals onto the annual meeting agendas, serving notice that change is ahead.
More recently, public companies face growing pressure to vocally oppose voter legislation in Georgia, Texas and other states—a campaign being waged by top CEOs, business leaders and investors.
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The corporate proxy season runs each year between April and June when publicly traded corporations convene their annual general meetings. It is a time when companies typically elect corporate directors, debate shareholder resolutions and preview their plans for the year to come.
Generally speaking, annual meetings are mandatory formalities with few attendees and foregone conclusions. Most proxy seasons come and go without much fanfare, but 2021 is unlike any other due to the corporate response to COVID and expectations raised by the evolving social justice climate.
In the spirit of the times, activist investors have introduced a range of environmental, social and governance (ESG) proposals onto the normally non-controversial annual meeting agenda. Today, there are resolutions calling for more diversity, more transparency, and racial equity audits facing Amazon, Bank of America, Citigroup, Goldman Sachs, Johnson & Johnson, JP Morgan Chase, Morgan Stanley, PayPal, Tegna, Wells Fargo and others.
Proxy Ecosystem
The proxy ecosystem is nothing if not complex. It includes individual stockholders; institutional investors; investment management firms; activist investors; proxy advisory firms; non-governmental organizations; regulatory agencies and the financial press and media.
The process is governed by opaque rules, customs and practices which, according to some observers, perpetuate institutional racial bias. Change comes slowly, if at all, and the resistance to progress is not a well-kept secret.
While most resolutions may seem straightforward, the process is anything but. Corporations hire proxy advisors to research and analyze the many proposals before them, and the proxy advisors make recommendations on how the companies should act. All shareholders are eligible to vote, if not in person, then by proxy. Since most shareholders do not attend the annual general meeting, the majority of resolutions are voted on by proxy.
The proxy advisory universe is small but powerful. Two firms, control 97% of the market -- Institutional Shareholder Services (ISS) and Glass Lewis. These firms are paid handsomely by investment managers and corporations for their proxy analysis, research and intelligence. During this proxy season alone, the ISS and Glass Lewis duopoly is expected to make recommendations to investment managers and large institutional investors on over 60,000 meetings worldwide.
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Investment managers rely on the recommendations of proxy advisers to guide their decisions not only on resolutions but on other corporate issues also. Among them will be controversial resolutions on ESG, racial equity and social justice.
Now is the time to undo the proven prejudice of proxy advisers
ISS and Glass Lewis maintain extraordinary influence over the decisions, actions and direction of institutional investors, hedge funds and asset managers, and their power to determine the fate of shareholder resolutions is virtually unmatched. Their expert views on everything from stewardship, governance, compliance, directors, compensation, ESG and more are of great value to their corporate clients.
Except when it comes to racial equity.
Interestingly, as ISS and Glass Lewis determine the success of resolutions on racial diversity, they lack appreciable diversity themselves. Leadership of both firms reflect few, if any, Blacks and Latinos at the highest levels, leading to serious questions as to their own credibility and commitment on racial equity.
On the investor side, ten asset management firms dominate the landscape-- BlackRock, Vanguard, State Street, UBS, Fidelity, Allianz, JPMorgan Chase, Bank of New York Mellon, Capital Group, and PIMCO-- with over $31 trillion under management.
These firms are responsible for investing the retirement funds of millions of public employees, state and local workers, teachers and unions – groups whose members are significantly Black and Latino. Those hard-earned retirement funds are invested in public companies that may have dismal records on diversity, equity and inclusion. Black Rock alone invests billions of dollars into public corporations, yet its track record on diversity, equity and inclusion is specious.
For these powerful players, racial equity has been more of an excuse than an example, more posture than practice, more rhetoric than reality. But change may be ahead. BlackRock recently decided to examine how its own practices have contributed to racial inequity. Companies including Airbnb and Facebook have made similar decisions following prodding from stakeholders.
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In contrast, Citigroup, Goldman Sachs and Wells Fargo – supported by ISS—have opposed racial equity audits, contending they have done enough. ISS also opposed the audits. Citigroup and JP Morgan Chase petitioned the SEC to deny such resolutions but received a no action decision from the SEC.
To suggest that proxy advisory firms will remain neutral on such consequential proposals belies their historical record. According to precedent, ISS and Glass Lewis can be expected to go along with corporate management the vast majority of the time.
Congress Interested
Rep. Gregory Meeks, D-N.Y. and Senator Bob Menendez, D-N.J. have reintroduced legislation to force companies to disclose the ethnic, gender and veteran diversity of their boards and executive ranks. The legislation has been supported by The American Bankers Association, American Council of Life Insurers, Bank Policy Institute, Financial Services Forum, International Council of Shopping Centers, Real Estate Roundtable, and the U.S. Chamber of Commerce, among others.
Even so, the response by corporations, investors and their advisory firms has been measured, with several of them flat out rejecting the proposals.
Beyond the Board – Doing Business
Focusing on the diverse composition of corporate boards is necessary and important, but it is not sufficient to effect true economic equity. Both proxy advisors and investment management firms also need to examine how public companies engage minority business enterprises as well.
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In 2021, public corporations throughout every sector have no excuse for not engaging in significant contracting and supplier relationships with Black, Latino and minority business enterprises (MBEs). It should be part of the fiduciary duty to review corporate spending with MBEs as diligently as other elements of corporate performance, including ESG commitments.
Recently, the focus on doing business with minority firms received national attention when a collective of Black-owned media companies, led by media mogul Byron Allen, demanded that General Motors increase its national advertising spending with those media from 0.5% to a minimum of 2%. GM spent nearly $3 billion on advertising in 2019.
Is Divestment Next?
In the recent past, public officials responsible for billions in retirement assets have adopted proactive postures on a range of ESG issues. The New York State Comptroller and the New York City Controller, among others, have been at the forefront of change, especially on the environment.
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In like manner, some activists urge a similar divestment course for companies with poor records not only on ESG, but also on DEI.
The proxy ecosystem needs to change. Status quo practices that perpetuate institutional bias and stifle racial equity should not be allowed to continue or prevail. And there is ample proof that change does not have to come at the expense of increasing shareholder value.
As more public companies face shareholder resolutions on racial equity, the influential proxy elite should not resist change. With more shareholder, regulatory and societal mandates, now is the time to undo the proven prejudice of proxy advisers. Shareholders and society deserve as much.
© Adonis E. Hoffman 2021
Adonis Hoffman is CEO of The Advisory Counsel LLC and co-founder of the American Social Impact Foundation. He served in senior legal and policy positions at the FCC and in the U.S. House of Representatives.