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Salvo 06.07.2021 10 minutes

Shareholder Activism Floors the Gas

Participants seen holding a banner at the protest. Local

American investors must win the race to align equity with their values.

At ExxonMobil’s recent Annual Shareholder Meeting, an activist investment firm calling itself Engine No. 1 LLC nominated four individuals to the Board of Directors. Their primary goal is to have ExxonMobil increase its investment in clean energy. Preliminary results show that as many as three of their nominees, which would represent one-fourth of the board, have been elected.

This is a major achievement for a firm that was only founded this past November, and according to recent regulatory filings, manages a paltry $240 million in assets, about $50 million of which is invested in ExxonMobil. For perspective, ExxonMobil’s current market capitalization is around $250 billion. How did an obscure investment firm with total assets under management of less than 0.1 percent the size of ExxonMobil get two nominees elected to one of the most powerful companies in the world?

Publicly listed companies can have tens of thousands of shareholders, and if you include those who invest indirectly through financial products, such as mutual funds and ETFs (Exchange Traded Funds), the number can be in the millions. It would be impractical for millions of owners to coordinate the day-to-day oversight of company or agree on routine business decisions, so shareholders elect a board of directors to oversee senior management and make on-going business decisions on their behalf. The election of these directors occurs at a company’s annual shareholder meeting, with each shareholder typically having one vote for each share they own.

Most individual investors invest through mutual funds & ETFs. These funds are effectively pooled investment vehicles in which you are buying a share of a legal entity that in turn owns shares of stock in numerous companies. This form of investing allows the investor to get investment exposure to many stocks with minimal transactions. The voting rights of the underlying shares are forfeited to the investment firm managing the fund. With the growth in popularity of investing via funds over the past several decades, the investment managers of these funds have seen their assets under management grow into the trillions and with it the consolidation of voting power over the boards of America’s biggest corporations.

Large state pension funds control hundreds of billions in assets. Similar to mutual funds & ETFs, the pensioner is entitled to the economic rights of their account, but they don’t control the investment management, or the voting rights of shares held in the pension. These state pension funds are mostly appointed by politicians. The board of CalPERS (California Public Employees’ Retirement System), the largest pension fund in the United States, has 13 members, the majority of whom are either high-level state officers or appointed by elected officials. Though their responsibility is supposed to be strictly fiduciary, political considerations frequently impinge on their decision making.

CalSTRS (California State Teachers’ Retirement System), CalPERS, the Church of England, and the New York Common Retirement Fund were all early supporters of Engine No. 1’s proxy contest. With just these four funds controlling close to $1 trillion in investments, we see how a small firm would only need to influence like-minded decision makers at a few of the largest state pensions to go along with their nominations. These state pension boards are themselves among the largest clients of the very same investment firms that manage your mutual funds and ETFs, and can use their considerable leverage to encourage these companies to vote their shares along the same lines. All of this is done using investments ultimately belonging to everyday Americans.

What can the average investor do? If you invest in a mutual fund or ETF, find the investment firm that manages the fund. Whether it’s Vanguard, BlackRock (they own the iShares family of funds) or one of countless others, they should have disclosures on their website or available upon request to inform you how they voted at corporate annual meeting. If in do so you find that your investments are being leveraged by activist investors that do not share your values nor have your best interest in mind, there are other options. One option would be to work with your financial advisor to circumvent mutual funds and ETFs altogether. With the decline in trading costs, it is more efficient than ever to construct a diversified portfolio tailored specifically to you that includes holding shares of companies directly in your account. Doing so allows you to maintain control of the voting rights of your shares.

If you already hold stocks directly in your account, you should be receiving proxy statements and voting instructions from your broker, by mail or electronically, for each company’s annual shareholder meeting that you are invested in. The Proxy Statement will provide information on what will be voted on at the Annual Meeting, including biographies of individuals running for Board seats and shareholder proposals. If you are like most people and do not have the time to spend all day reading proxy statements, consider working with a financial firm that aligns with your values and offers proxy voting services along with traditional investment management. At the end of the day, it is important to remember that you’re not just an investor, you’re a business owner.

If you control corporations, you control their lobbying budgets. If you control corporations, you control their charitable giving programs. If you control corporations, you control the means of production in this country and the means of the dissemination of information. It is time for the individual investors who own this country to flex their considerable muscle to align their equity with their values.

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