The ESG Perversion of Shareholder Resolutions

By Benjamin Zycher Washington Examiner May 24, 2023

Back in the old days — oh, before, say, 2021 — the annual general meetings of company shareholders were boring. Questions asked of management more or less uniformly oriented toward the financial condition of the firm and the variables affecting the values of the shareholders’ stakes. How is the firm dealing with exchange rate risk? Are any major assets of the firm underperforming, and what does management propose to do about it? Why are costs rising faster than revenues? How does management justify its ever-bigger bonuses, other than declining golf handicaps?

After all, companies are supposed to be in business to make money for shareholders, the owners, by producing things that consumers value..............Oh, how matters have changed under Gensler. The right of management to respond to proxy recommendations has been revoked. The application of Rule 14a-8 has been changed to force consideration of resolutions of “wider societal interest,” yielding a predictable surge in the number of proposals having far less to do with shareholder value than with the latest fashions in environmental, social, and governance political imperatives. Now, during companies’ annual shareholder meetings, both activists and the proxy advisory firms pursue the timeless joy of spending other people’s money on such topics as climate change .............The environmental leftist industry comprises thousands of similar entities engaged in legalized protection rackets funded by various left-wing foundations. 

But the real opprobrium in this context should be reserved for Gensler. It is he who has been all too happy to shunt aside the SEC’s advertised role as a protector of investors, promoter of fairness in securities markets, and facilitator of informed decisions and confident investments by investors, in favor of a facilitation of politicized securities markets.............To Read More...

Shareholders Over Stakeholders, Part II

June 26, 2022 by Dan Mitchell @ International Liberty 

 In Part I, I warned that “stakeholder capitalism” is not just empty virtue signaling. Some advocates are using the concept to promote a statist agenda.

For Part II, let’s start with this video.

The main message of the video is that ethical profits are good for shareholders, but also good for everyone else (the supposed stakeholders).

 

By contrast, companies that don’t prioritize profits wind up hurting workers and consumers, not just the company’s owners (i.e., shareholders).

Let’s dig deeper into this topic.

Stakeholder theory reflects the more interventionist approach of continental Europe’s “civil law” while the shareholder approach is more consistent with the “common law” approach of the Anglosphere (the United Kingdom and many of its former colonies, including the United States).

That’s a key observation in Samuel Gregg’s column for Law & Liberty, which reviews a book by Professor Nadia E. Nedzel.

…stakeholder theory reinforces continental European rule through law inclinations and vice-versa, not least because of shared hard-communitarian foundations. …Such goals undermine the ability of corporations to produce prosperity. An emphasis on stability and maintaining levels of employment, for instance, exacts a cost in terms of organizational dynamism, not least by discouraging risk-taking and entrepreneurship. … 

Without such adjustments, however, a business will become complacent and uncompetitive. Eventually it will disappear, along with all the jobs once provided by the business. Likewise, if boards of directors are not focused on delivering shareholder value because profit is considered only one of many company objectives, a decline in earnings is sure to follow. … 

To the extent that stakeholder theory draws upon hard-communitarian principles which it shares with continental European rule through law models, it risks undermining already fragile commitments to rule of law in America and elsewhere. That’s just one more reason to shore up the priority of shareholder interests throughout corporate America. These priorities help explain the weaker economic performance of many corporations in civil law jurisdictions compared to those businesses located primarily in the Anglo-American sphere.

Allison Schrager of he Manhattan Institute wrote for the City Journal that Biden is on the wrong side and that his mistake, along with others, is failing to understand that so-called stakeholders benefit when companies are profitable.

…one thing that stood out was Biden’s vow to “put an end to the era of shareholder capitalism.” …disdain for the notion that a corporation’s primary objective is to maximize value for its shareholders has united the disparate likes of Elizabeth Warren and Bernie Sanders and the Davos/Larry Fink crowd. It’s no surprise that Joe Biden is against it, too. …Maximizing shareholder value…does not create conflicts between different stakeholders, because economic success is not zero-sum. …long-term success requires happy and loyal employees, a healthy relationship with the community, and a thriving environment.

In a column for the Wall Street Journal, Lucian A. Bebchuk and Roberto Tallarita shared their research showing that CEOs who pontificate about stakeholders don’t actually change their behavior.

…we dug deeper, investigating an array of corporate documents for the 136 public U.S. companies whose CEOs signed the statement. …we found evidence that the signatory CEOs didn’t intend to make any significant changes to how they do business. …We’ve identified almost 100 signatory companies that updated their corporate governance guidelines by the end of 2020. 

We found that the companies that made updates generally didn’t add any language that elevates the status of stakeholders, and most of them reaffirmed governance principles supporting shareholder primacy. …We also found that about 85% of the signatory companies didn’t even mention joining the “historic” statement in their proxy statements sent to shareholders the following year. Among the 19 companies that did mention it, none indicated that joining the statement would cause any changes to how they treat stakeholders.

Speaking of insincere hypocrites, that’s a good description of the Davos crowd. Matthew Lesh of the Adam Smith Institute wrote about their trendy support for stakeholders in a column for CapX.

…the man behind the World Economic Forum has declared that Covid warrants a ‘Great Reset’. With tedious predictability, Klaus Schwab’s bogeymen are the twin menaces of “neoliberal ideology” and “free market fundamentalism”. …he’s also calling for a “stakeholder model of corporate capitalism”… 

But it’s an idea based on a false dichotomy. A business that fails to return a profit to its shareholders cannot do anything for its other stakeholders, such as providing useful products to customers, paying its staff, procuring from suppliers… Delivering for shareholders is ultimately indivisible from benefiting your other ‘stakeholders’ because you can’t do one without the other. … 

Shivaram Rajgopal of Columbia Business School has found that top European companies who brandish their social and environmental credentials do no better in these criteria than American companies. But the European firms are much worse at ensuring good corporate governance. For example, worker representation on Germany’s supervisory boards has often meant worker representatives teaming up with managers to push against new technology and methods. In the longer run, this undermines returns to shareholders, but also means poorer products for customers, lower salaries for employees.

The bottom line is that there are lots of misguided attacks against capitalism, but none of the criticisms change the fact that free enterprise is the only system to ever deliver mass prosperity to ordinary people.

 

And that’s true even if big companies don’t support the system that enabled their very existence (perhaps because they fear they will got knocked from their perch by the the forces of “creative destruction“).

P.S. Just like yesterday, I can’t resist adding this postscript about the left-leaning executive who thought he was rejecting Milton Friedman, but actually did exactly as Friedman recommended.

 

Shareholders Over Stakeholders, Part I

June 25, 2022 by Dan Mitchell @ International Liberty

My warm and fuzzy feelings for “capitalism” turn sour when someone promotes a modified version such as “common-good capitalism.”

Why? Because I worry such terms imply a Trojan Horse for statism. And that’s definitely the case with so-called “stakeholder capitalism.” 

As you can see, my core argument is that stakeholder capitalism is just another way of saying cronyism. And if I was being lazy, I would simply point out that Elizabeth Warren is a big proponent of the idea. That, by itself, should convince every thinking person that it’s a bad idea.

But I’m not going to be lazy. I’m going to cite some experts to show why stakeholder capitalism is bad news.

But first, I mentioned Milton Friedman’s famous quote in the above video clip.

Here’s the full quote, and notice that he explicitly says companies should follow rules – both legal and ethical – as they pursue profits.

Friedman was advocating what is sometimes referred to as “shareholder capitalism,” which is the notion that a company should strive to earn honest profits for its owners.

So what, then is stakeholder capitalism? In a column for the Wall Street Journal, Professor Alexander William Salter warns us that it is an invitation for intervention.

…beneath the lofty rhetoric, stakeholder capitalism is mostly a front for irresponsible corporatism. …Stakeholder capitalism is used as a way to obfuscate what counts as success in business. By focusing less on profits and more on vague social values, “enlightened” executives will find it easier to avoid accountability even as they squander business resources. 

While trying to make business about “social justice” is always concerning, the contemporary conjunction of stakeholder theory and woke capitalism makes for an especially dangerous and accountability-thwarting combination. …profits are an elegant and parsimonious way of promoting efficiency within a business as well as society at large. Stakeholder capitalism ruptures this process. When other goals compete with the mandate to maximize returns, the feedback loop created by profits gets weaker.

Writing for the Washington Post, George Will has a similarly scathing assessment.

…everyone who values economic dynamism, and the freedom that enables this, should recoil from the toxic noun “stakeholder.” …Stakeholder capitalism violates fiduciary laws that require those entrusted with investors’ money to employ it “solely in the interest of” and “for the exclusive purpose of providing benefits to” the investors. … 

In a dynamic society, resources are efficiently disposed by corporate managements whose primary duty, which other corporate activities do not compromise, is to maximize shareholder value… Self-proclaimed stakeholders, parasitic off others’ labor and accumulation, assert that everything is their business.

In a column for the Wall Street Journal, Phil Gramm and Mike Solon point out that today’s stakeholder capitalism is very similar to feudalism, which was a pre-industrial form of socialism.

…because of the misery Marxism has imposed, the world has a living memory and therefore some natural immunity to a system in which government takes the commanding heights of the economy. No such immunity exists to the older and therefore more dangerous socialism of the pre-Enlightenment world. 

In the communal world of the Dark Ages, the worker owed fealty to crown, church, guild and village. Those “stakeholders” extracted a share of the product of the sweat of the worker’s brow and the fruits of his thrift. …The 18th-century Enlightenment liberated…people to…own the fruits of their own labor and thrift. … 

These Enlightenment ideas spawned the Industrial Revolution and gave birth to the modern world… Remarkably, amid the recorded successes of capitalism and failures of socialism rooted in Marxism, pre-enlightenment socialism is re-emerging in the name of stakeholder capitalism. …the biggest losers in stakeholder capitalism are workers, whose wages will be cannibalized.

Amen. The only economic system to ever produce mass prosperity for workers is capitalism (or, if you prefer, free enterprise or classical liberalism).

And the pursuit of profit is what generates efficiency, which is economic jargon for higher living standards. And that’s good for rich people and poor people.

The bottom line is that I’m not surprised when politicians support so-called stakeholder capitalism. After all, the crowd in Washington likes to have more power.

Based on what I said at the end of the above video, I’m disappointed – but not surprised – when big businesses (such as the Business Roundtable or Larry Fink of Blackrock) embrace the idea. After all, “creative destruction” is not so appealing when you’re already as the top.

P.S. I was very amused by the left-leaning CEO who criticized Friedman, but then did exactly as Friedman recommended.