ESG Success: Mastering Shareholder Voting

The Power of Proxy Voting: How Corporations Are Influenced

During a recent discussion, BlackRock CEO Larry Fink revealed a key lever of the progressive movement’s control over corporations: proxy voting.

Fink, in a 2017 New York Times conference, explained that as an index fund manager, his firm is the ultimate long-term holder of shares in companies. Unlike active managers who can sell shares they don’t like, Fink emphasized that he can only use one power – the power of the vote.

Proxy voting is the practice of fund managers voting on behalf of the individuals and institutions that invested in their funds. Today, the majority of stocks in the United States are held by a small number of large asset management firms like BlackRock, Vanguard, and State Street.

These firms, with trillions of dollars under management, have significant influence over shareholder votes. They are advised by proxy agent companies like International Shareholder Services (ISS) and Glass Lewis, which guide them on how to vote on various shareholder proposals.

Congressional Hearings on ESG

Recently, Congressional Financial Services Committee hearings focused on the Environmental, Social, and Governance (ESG) movement. Republican representatives criticized the ESG industry for manipulating free markets, while Democrat representatives accused the GOP of racism and climate denial.

Committee Chairman Patrick McHenry (R-N.C.) expressed his support for shareholder democracy but emphasized that external third parties should not impose their social and political beliefs on American public companies.

Democrat lawmakers defended free market capitalism and criticized the hearings as a culture war against responsible investing.

How Proxy Voting Works

The hearings also addressed the role of proxy agents and the Biden administration’s efforts to impose climate reporting rules on listed companies. New regulations would require companies to produce audited reports on their CO2 emissions.

Republican Representative Bill Huizenga (R-Mich.) argued that proxy advisory firms have seized immense power to promote a liberal social and political agenda. He called for transparency and accountability in the proxy process, which currently lacks both.

The proxy process begins with shareholder proposals, which the SEC determines whether they can proceed to a vote. Under President Biden, the SEC has made it easier for ESG proposals to be put to a vote, leading to a significant increase in socially oriented shareholder activism.

Jonathan Berry, a partner at a law firm, testified that environmental and social proposals now represent a majority of all proposals in companies. He also highlighted the SEC’s bias towards approving pro-ESG proposals while rejecting anti-ESG proposals.

Christopher Netram, Vice President of the National Association of Manufacturers, criticized the hijacking of the proxy process by third parties. He argued that proxy firms dictate corporate governance decisions, diverting resources from shareholder value creation and forcing companies into controversial topics.

Examples of companies wading into controversial topics include Disney’s fight against parental rights laws, Coca-Cola’s opposition to voter ID laws, and Anheuser Busc