November 12, 2018 / In-depth

Morningstar slams hidden backers behind anti-ESG campaign

By Jessica Tasman-Jones, Portfolio Adviser

SEC proxy voting review accused of being influenced by corporate interests

Morningstar slams hidden backers behind anti-ESG campaign

Morningstar has slammed an anti-environmental, social and governance (ESG) group attempting to undermine shareholders’ rights by giving more prominence to board recommendations and management proposals as the US regulator reviews the proxy process.

A preliminary agenda for a Securities and Exchange Commission (SEC) roundtable scheduled for 15 November will focus on the voting process, retail investor participation, and proxy advisory firms.

Morningstar director Jackie Cook says the lobby group Main Street Investors Coalition, which states it represents retail investors but has many corporate backers, appears to have influenced the agenda, particularly on issues such as thresholds for filing and re-submission as well as the role of proxy advisory firms.

The US regulator will examine, for example, whether shareholders must own more than the current $2,000 or 1% of a company’s stock for one year to submit a proposal. It will also reexamine current threshold of votes required before a proposal can be resubmitted at a future meeting. These are currently 3%, 6%, or 10% depending on how many times an issue has been voted on in the last five years.

CORPORATE BACKING BEHIND RETAIL INVESTOR CHAMPION

Main Street Investors Coalition says on its website that it represents the $16.9trn pool of capital held by retail investors, which represents 30% of all US shareholdings. “That means we control the single largest pool of equity capital in the world. It’s time for our voices to be heard, and our agenda to be adopted,” the website says.

It argues institutional investors should not be engaging with companies on issues such as climate change, gender diversity on boards of directors and, in a swipe at Blackrock, gun safety, stating this should be limited to ESG investors. It also rubbishes claims these funds are working in the financial interests of investors.

But in comments made to Portfolio Adviser, Cook said the National Association of Manufacturers is the main backer of the group, which was founded in May 2018.

She is not the only person to raise questions about the Main Street Investors Coalition’s financial backers. Proxy adviser ISS has accused the group of “astroturfing”, a lobbying practice whereby apparent grassroots campaigns are in fact supported by corporate interests.

Many of the groups backing the Main Street Investors Coalition are connected to companies that have faced shareholder revolts over executive pay, said an ISS blog post, which had no named author but said it represented the views of the proxy adviser.

Similarly, Cook says the backers of Main Street Investors Coalition, plus related conservative business lobby groups like the US Chamber of Commerce and the Center for Capital Markets Competitiveness, have been attacking existing shareholder voting rights since institutional investors started significantly increasing support for climate resolutions around 2014.

The National Association of Manufacturers, for example, urged Donald Trump to pull the US from the Paris Agreement. Another named partner on the Main Street Investors coalition website, the American Council for Capital Formation, has said a political agenda drives many shareholder resolutions.

MAIN STREET INVESTORS COALITION RECOMMENDATIONS ON VOTING

Main Street Investors Coalition chairman Bernard Sharfman has stated the coalition is simply trying to represent the primary objectives of retail investors, which is to maximise returns. This is true even of investors with social impact aims, Sharfman said in October via a letter to the SEC ahead of its roundtable.

The Main Street Investors Coalition would like retail investors that do not hold shares directly to be able to opt into voting according to board recommendations rather than having their investment adviser or pension fund vote on their behalf, the letter said.

It also called for the SEC to clarify that institutional investors can meet their fiduciary voting duties by following board of directors’ recommendations and that it should be a breach of fiduciary duty if proxy advisers do not have a predetermined level of information before making recommendations.

In September, the SEC rescinded guidance to institutional investors from 2004 stating conflicts of interest in voting could be resolved by following recommendations from proxy advisers like ISS or its rival Glass Lewis.

The SEC roundtable coincides with a Republican-sponsored bill (HR 4015) currently before the Senate that would require proxy advisers to share draft research with companies they are analysing, to employ an ombudsman to deal with complaints about recommendations and to register with the SEC.

– This article first appeared on ESG Clarity‘s sister site, Portfolio Adviser.