Shocking New Evidence Shows Activist Resolutions Add No Shareholder Value

Nan Bauroth | Member, Main Street Investor Coalition Advisory Council

Over the past decade, the number of politically charged shareholder proposals has dramatically escalated from an average of 30 per year to over 400 environmental and social-focused resolutions that were placed on company ballots during the 2017 proxy season.

This surge in activism is indicative of a trendy investment philosophy arguing that politically-oriented proposals enhance company performance over the long term and thus add shareholder value.

As Blackrock CEO Larry Fink stated in his most recent annual letter to CEOs, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society. ”

What Fink’s argument fails to acknowledge is that comparatively little research exploring the impact that environmental, social and political proposals have on share price has been conducted — a vital concern to the 54 million American investors like me, who count on our holdings for retirement income.

Now, a groundbreaking study authored by a pair of leading economists helps rectify that critical gap in knowledge. Harvard Professor Joseph Kalt and Dr. Adel Turk have conducted the first research to examine the specific impact of climate change resolutions on shareholder value and found no support for the argument that additional disclosure required by these proposals provides meaningful information for the marketplace. Instead, the evidence demonstrates that adoption of such shareholder resolutions has no statistically significant impact on company returns one way or the other.

The authors assert that climate change proposals forcing corporate managers to institute measures based on potential scenarios assume that executives possess a better crystal ball to predict complex national or global policy changes than government bureaucrats, think-tanks or academics. In light of this unrealistic expectation, the paper concludes that such resolutions add nothing to the abundance of information already available to sophisticated investors through other entities in the political sphere and that any “what-if” analyses could hardly be expected to enhance shareholder value.

On the contrary, Kalt and Turki warn that activist resolutions can carry an inherent harm to good corporate governance. In addition to costing millions of dollars, these proposals may also divert resources from efforts directed at maximizing shareholder value, as well as creating a temptation for boards and executives to focus on maximizing personal wealth or popularity.

The study findings were recently given weight by the Department of Labor, which regulates how managers of retirement savings accounts can utilize the money they control on behalf of ordinary citizens. Last month, the DOL released regulatory guidance holding that “fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance policy goals when making investment decisions.”

Specifically, the notice stressed that investment managers may not incur expenses against the accounts of investors “to pay for the costs of shareholder resolutions or special shareholder meetings, or to initiate or actively sponsor proxy fights on environmental or social issues” unless a resolution materially improves the value of the company where it’s being considered.

While the Department’s primary goal appears to be ensuring that managers prioritize fiduciary responsibility ahead of a particular political agenda, the ancillary message for shareholders is that these kinds of resolutions do not constitute intrinsic value to the bottom line. In effect, there’s no solid data to suggest that environmental, social or governance objectives automatically improve company performance or enhance shareholder returns as Fink and others argue.

In fact, a significant body of research has shown that investment managers at large institutions such as Vanguard, BlackRock and State Street spend millions of dollars to campaign for these initiatives, while an SEC survey found that companies report having to spend up to approximately $2,000,000 in inflation — adjusted costs responding to each proposal.

This is not meant to say that such political concerns are not real or worthy of consideration. Rather the paper, coupled with the Department of Labor’s guidance on fiduciary responsibility, makes it clear that the proxy proposal process is not the proper vehicle to address these issues.

Resolutions are an ineffectual substitute for sound political policymaking that could achieve the societal change sought by advocates of these proposals. Until and unless it can be empirically demonstrated that such measures materially add shareholder value over the long term, they will never be successful in meeting the fiduciary responsibility of corporate management to individual investors such as myself.

Nan Bauroth is a member of the new Main Street Investor Coalition Advisory Council. Find out more about the Coalition.


The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.

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