24 Oct PUBLIC PENSION CORNER, #18
NEWS:
I Shareholders flip the script, target SPLC
The Heritage Foundation and the Bahnsen Group have filed separate shareholder resolutions against several companies, asking them to break of engagement with the Southern Poverty Law Center. The SPLC has long been politically divisive, and that divisiveness has taken on new urgency in the wake of the assassination of Charlie Kirk:
Conservative shareholders at eight major corporations have filed resolutions urging those companies to stop using politicized tools like the Southern Poverty Law Center’s “hate map,” which added Turning Point USA a few months before the assassination of Charlie Kirk.
The Heritage Foundation and portfolio manager David Bahnsen, which have held thousands of dollars in shares at each of the companies, filed the proposals last week.
“The Southern Poverty Law Center has designated October as Hate Crimes Awareness Month—but few organizations have sown more hatred against fellow Americans than the SPLC itself,” Heritage Chief Advancement Officer Andrew Olivastro told The Daily Signal in a statement Friday. “It doesn’t fight hate—it manufactures it, embedding division into every press release they issue and every word they post; their business model is defamation, and America is finally waking up.”
II. Banking Regulators Withdraw Climate Rules
The Federal Reserve and the Federal Deposit Insurance (FDIC) have said they will be withdrawing the Principles for Climate-Related Financial Risk Management for Large Financial Institutions, a Biden-era rule meant to compel big banks to address climate issues:
Established in 2023, the principles were designed to support efforts by the largest financial institutions – those with over $100 billion in total consolidated assets – to focus on key aspects of managing the physical risks and transition risks associated with climate change, and to provide guidance to develop strategies, deploy resources, and build capacity to identify, measure, monitor, and control for climate-related financial risks.
At the time, the agencies explained that the soundness of financial institutions could be adversely affected by weaknesses in their identification, measurement, monitoring, and control of climate-related financial risks, with the interagency framework providing a joint high-level framework to manage risk exposure. The agencies also noted that the principles did not prohibit or discourage banks from providing services to any customers.
In the new communication from the Fed, FDIC and OCC, however, the agencies stated that they “do not believe principles for managing climate-related financial risk are necessary,” as financial institutions are already required to have effective risk management practices in place based on the agencies’ existing safety and soundness standards.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“What Elon Musk Gets Right — and Wrong — about Proxy Advisors”
The other day, Elon Musk – a longtime critic of ESG and everything it entails – posted on Twitter/X about the current frustration he’s experiencing with respect to the proxy advisory services. Annoyed with the recommendations made about votes for some of Tesla’s directors, he wrote:
The fundamental issue is that half of all publicly-traded shares are controlled by passive index funds who, for the most part, outsource their shareholder vote to the advisory firms of ISS and Glass Lewis.
ISS and Glass Lewis have no actual ownership themselves and often vote along random political lines unrelated to shareholder interests! This is a major problem that is not just limited to Tesla.
Before going any further, let me make a couple of brief points.
First, I take a back seat to very few people in my distaste for the “passive” funds Musk criticizes – as evinced here.
Second, I take a back seat to very few people in my distaste for the way the major proxy advisory firms influence votes to suit their ends, rather than those of shareholders – as evinced here.
Third, as I say, Musk is a longtime opponent of ESG, and I hate to criticize an ally in the ongoing push to de-politicize capital markets. Nevertheless…
Musk gets some things wrong here. And they’re not just wrong; they’re wildly wrong. Getting them right is important.
For starters, Musk conflates two problems. Each of these problems matters to opponents of ESG, but each requires a different approach and different solutions. Musk notes that “The fundamental issue is that half of all publicly-traded shares are controlled by passive index funds.” He’s right. This is, indeed, a fundamental issue, one that has created massive market distortions and that enabled the rise of ESG in the first place. The fact that the Big 3 manage in the neighborhood of $25 trillion in assets is inarguably significant. And this concentration of capital is likely to become more significant and more problematic as capital markets evolve. As I put it in The Spectator piece linked above:
The final risk posed by the rise of passive investments is the concentration of assets and power in a very few hands. In 2018, John C. Coates, the John F. Cogan Jr. professor of law and economics at Harvard Law School, wrote an essay called “The Future of Corporate Governance Part I: The Problem of the Twelve.” He argued that passive index investing would lead to major distortions in corporate governance and corporate behavior. “The effect of indexation,” he wrote, “will be to turn the concept of ‘passive’ investing on its head and produce the greatest concentration of economic control in our lifetimes.”
That same year, Jack Bogle wrote an op-ed for the Wall Street Journal in which he wondered if, perhaps, his creation had become too successful for its own — or anyone else’s — good. The passive investment revolution he inaugurated had, unintentionally but inarguably, given enormous amounts of capital and, by extension, enormous economic and political power to a very small collection of men and women. “Three index fund managers,” he wrote, “dominate the field with a collective 81 percent share of index fund assets,” a condition that he deemed unwise, uncompetitive and ultimately unhealthy for the function of free and fair capital markets. Bogle was unflinching in his assessment, despite the fact that one of those “fund managers” was the company he had founded forty-four years earlier. He knew that those firms — Vanguard, BlackRock and State Street, known collectively as “the Big Three” of passive asset management — had become so big and so powerful that they could intimidate corporate executives into doing exactly what they insisted, whether it was ultimately good for the company and its shareholders or not.
Couple this concentration of resources and power with the increasing temptation to inject political, non-pecuniary considerations into investment decisions and engagement…and it becomes inarguable that the passive investment revolution possesses the potential to be every bit as destructive and anti-capitalist in its ultimate outcomes as the French or Russian Revolutions before it.
As I say, that’s a massive problem. But it’s not the problem about which Musk is currently frustrated. He continues, insisting that these passive funds “for the most part, outsource their shareholder vote to the advisory firms of ISS and Glass Lewis.” This is, flatly, untrue. “For the most part,” the massive passive firms – like BlackRock, Vanguard, State Street, and Fidelity – do their voting in-house, using their own stewardship teams and proxy committees. Most of them consult research from ISS and Glass Lewis, but they don’t delegate voting, and they make all their own decisions.
This is important for a couple of reasons. It is indicative of just how difficult the effort to purge politics from American capital markets was, is, and will be. This is a truism, but: if the massive passives are politicized AND the proxy advisory services that cater primarily to smaller firms and active managers are ALSO politicized, then virtually the entirety of the proxy-voting world is politicized.
ESG supporters chuckle and pat themselves on the back when anti-ESG shareholder proposals get 3 or 4% of the vote. Under the circumstances, though, that’s actually pretty impressive. The fact that the opponents of ESG have had such an impact speaks to the potency and urgency of their (our) message. The deck was radically stacked against them (us)…but they’re winning.
The second reason all of this matters is, as I say, because different problems demand different solutions. Addressing the issues with the consolidation of capital (if that’s even possible) wouldn’t solve the problems with proxy advisory services. Likewise, busting up the proxy advisory duopoly isn’t going to fix the concerns posed by the massive consolidation. JP Morgan Chase CEO Jamie Dimon (whom the Wall Street Journal recently praised for his opposition to ISS and Glass Lewis) doesn’t hate the proxy advisory services because they force his firm to make poor and politicized proxy votes or because they enable the massive asset managers to rig the capital markets. He hates them because they oppose his pay package every year. Fixing the problems with proxy advisory services and their house recommendations might help Dimon get his pay approved more easily, but it won’t do anything to make BlackRock, et al. any less powerful.
I hate to sound like a shill or a broken record, but a number of the problems with proxy advisory services can be addressed by using small, independent research companies – like Bowyer Research (a sponsor of this newsletter) – to audit proxy voting records, assess the uses to which capital is put, and to create custom proxy voting guidelines that suit asset managers’ and investors’ specific needs. As I noted last week, one upshot from the decision by Glass Lewis to abandon its house recommendations is that custom guidelines are likely to become far more pervasive. That’s good. And it’s a major step in the right direction.
As I am fond of noting, ESG (and stakeholderism) is like Carl Sanberg’s onion: “every time you peel off a layer, you discover another layer underneath, and another underneath that, and then another still.” The Massive Passives and the proxy advisory services are enormous problems for opponents of ESG, but they are also different layers of the onion. Peeling one doesn’t necessarily mean peeling the other, yet both require peeling.
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