Chapter 5
How Citizen Capitalism Unleashes Corporations’ Positive Power
ALTHOUGH THE UNIVERSAL FUND will be a long-term committed shareholder by design, it is important to ensure that citizen-shareholders decide how the shares in the Fund are voted. Proxy services will provide that function.
Under our plan, citizen-shareholders would be able to select which qualified proxy advisory service best represents their interest as everyday citizens and shareholders, and the Fund would pay for the costs of using the proxy service. This is an important set of conditions, which does two things. First, it eliminates cost as a consideration, which would presumably lead citizen-shareholders to select proxy services that represent their interests, and second, it incentivizes the development of alternative proxy advisory firms with a long-term value focus. As we saw, current proxy advisory services cater to institutional investors. Making proxy advisory services available to each individual citizen-shareholder allows a diverse range of citizens a say in corporate elections.
Through the use of qualified proxy advisors, the Fund would offer a means for citizen-shareholders to vote in a collective and informed manner that would counter many of the distortions in today’s corporate governance system. The Fund would truly be a long-term shareholder, and the long-term investment commitment of the Fund will likely be reflected in the voting preference of citizen-shareholders. In fact, short-term voting strategies would be inconsistent with the long-term commitment of the Fund—remember that Universal Fund administrators do not trade shares in the portfolio, thus voting strategies that would reap benefit from “squeezing” a corporation and walking away would not bear fruit.
The proxy services we envision would feature three important characteristics: (1) they would be paid for by the Universal Fund and not by citizen-shareholders, (2) they would be transparent, and (3) they would be nonprofit.
Citizen-Shareholders’ Proxy Services Will Be Paid by the Universal Fund
One of the most important elements of our proposal for Citizen Capitalism is that it allows those who register to receive a citizen-share to select a proxy service that would be paid for by the Fund. In other words, citizen-shareholders could decide which proxy service’s guidelines determine how their portion of the stocks in the portfolio are voted. But cost is not a consideration in their decisions. This leaves them free to select the proxy service whose guidelines most authentically represent what they really want corporations to do.
This is a critical distinction between the proxy services we envision and today’s service. Today’s services are for-profit entities that compete for market share by seeking out the largest potential clients and by giving them what they want. Unfortunately, as previously discussed, the largest potential clients are mutual and pension fund managers, who are effectively forced by SEC regulations to vote their shares, and whose culture, education, and incentive structure have not traditionally inculcated a focus on longer-term results, much less nonfinancial concerns. Instead, these potential clients may rationally determine that it is more cost-efficient to outsource the noncore and messy job of voting logistics to proxy advisors, plus in return they receive some regulatory “cover”—after all, there is no safer strategy for keeping regulators off your back than to do what everyone else in your industry is already doing as cheaply as possible. Moreover, some have argued that to the extent fund managers care at all about the substance of the voting guidelines the services develop, they want the guidelines to encourage companies to focus on raising share price as quickly as possible.
The result is that today’s proxy services guidelines are often criticized for being fickle, “one size fits all,” and quick to embrace corporate governance fads and fashions like stock options or “de-staggering” corporate boards so activists can more easily remove recalcitrant directors. Not surprisingly, empirical studies back-testing whether companies that had followed the proxy services’ guidelines in the past in fact performed better than companies that did not concluded it made no difference, even though “performance” was defined narrowly in terms of financial returns to shareholders over short periods of time.1
Fund-approved proxy services would also want to seek out the largest possible potential customer base and compete for those customers by giving them what they want. In our case, however, the potential customer base is citizen-shareholders. And, because they do not have to foot the bill, citizen-shareholders would be free to focus entirely on the quality of the proxy services’ guidelines and the extent to which they authentically serve citizen-shareholders’ interests—not on finding someone to do the job at the lowest possible cost. The proxy services, in turn, would compete with each other to develop guidelines that appeal to citizen-shareholders, including competing to persuade citizen-shareholders that their guidelines are the best informed and the most attuned to citizen-shareholders’ interests.
Citizen-Shareholders’ Proxy Services Will Be Transparent
All relevant information about the Universal Fund and its portfolio would be public: the contents of and the returns to the portfolio; the identities, backgrounds, and independence of the administrators; all Fund financial records (which should be audited); and all records of donations and disbursements.
Similar transparency would be demanded of any proxy service that wanted to provide voting guidelines to, and vote the shares of, citizen-shareholders. It would have to disclose how its organization was structured; the identities, backgrounds, and possible conflicts of interest of its managers; all its financial information, including balance sheets, earnings statements, and statements of cash flows; how its guidelines were developed; and even the guidelines themselves.
This would increase the information available to the public compared to today’s scenario. For example, both ISS and Glass Lewis currently are, and for many years have been, private companies, and private companies disclose relatively little information, financial or otherwise, to the public. Moreover, current guidelines are generally only accessible to paying clients.2
Openness and transparency are essential for accountability. Citizen-shareholders would be entitled to shine the brightest of lights on the proxy services that guide their voting.
Citizen-Shareholders’ Proxy Services Will Be Nonprofit
Finally, we believe that the Fund should require that any proxy service that wants to serve citizen-shareholders must be organized as a nonprofit enterprise. Entities run on a for-profit basis are subject to pressures to maximize returns that can be inconsistent with delivering the best possible service to clients, especially when (as in the case with the Fund and its citizen-shareholders) the clients are not paying the bill. Indeed, many governance experts believe this is exactly why many projects are pursued through nonprofit organizations in the first place.3
Another advantage to a nonprofit structure is that it minimizes the chance that, after a particular proxy service has developed a reputation for providing authentic, high-quality voting guidelines, it might be purchased by special interests seeking to use it to gain influence. For-profit organizations have owners that can stand to gain from “selling out.” Nonprofit organizations, in contrast, cannot be bought or sold. They can only be closed down or dissolved, and their assets given to another nonprofit organization.
Finally, nonprofits by their very nature tend to attract managers and employees who are motivated less by the desire for personal advancement and more by the desire to help the nonprofit organization accomplish its mission—in this case, providing voting guidelines that advance the authentic interests of citizen-shareholders.
Reclaiming Your Other Vote—Citizen Capitalism Will Give Average Americans a Powerful, Authentic Voice in the Corporate Sector
Most individuals understand the power of exercising their right to vote in political elections. When it comes to voting in corporate elections, however, most individuals do not exercise their right to vote. The opposite is true for institutional investors. More than 85 percent of institutional investors vote their shares, while only approximately 27 percent of individual Americans who own shares directly actually vote.4 That means that 73 percent of all potential individual votes in corporate elections each year are simply discarded. As we saw, the result is a power vacuum that has been filled by a collection of narrow special interests that include portfolio managers, activist hedge funds, and proxy advisory services. Only one of these three groups—hedge funds—actually has any direct economic interest in any of the shares they vote, and their interest typically is in only a few companies, for only two years or less. None of the three has reason to care about the impacts corporations have on their employees, customers, suppliers, or longer-term shareholders—much less concern for our nation, the environment, the other people who populate the globe, or future generations.
However, share voting is immensely important—with it comes the power to elect and influence directors and shift corporate decision-making. In turn, the decisions that corporations make affect each and every one of us in both obvious and nonobvious ways in our daily lives—some more personal than others, such as compliance with safety standards for the installation of air bags. Others are more “behind the scenes,” such as supply chain management, which affects whether your favorite T-shirt was made by a child or in compliance with human rights principles. Yet many of us do not exercise our vote.
The Fund makes it easier for individual citizens to earn a right to vote in corporate elections and to exercise this right to vote in an informed and collective fashion. Rational apathy and free-rider tendencies could be reduced by the availability of free (from the citizen-shareholders’ point of view) proxy advisory services. The Universal Fund is designed to incentivize individual shareholders to control their right to vote, and it provides average Americans with a path to exercising voice through share voting.
Providing a path for more democratic participation in corporate elections also has implications for the relationship between business and politics. When our political system listens mostly to business interests and the wealthy, the capture of corporate power translates to the capture of political power as well. Citizen Capitalism offers to democratize both, dramatically increasing the range of voices heard in corporate boardrooms. Guided by transparent, nonprofit proxy services without disabling conflicts of interest, citizen-shareholders can help corporations expand their time horizons and the range of interests they serve.
Of course, this is not to say that all citizen-shareholders will choose to exercise their vote in a manner that supports the type of long-term sustainable value that the Universal Fund is intended to engender. One can imagine a citizen-shareholder who would rather go for a quick short-term return than vote in a manner that supports long-term gains. That said, we are both optimistic and pragmatic in how we envision shares being voted. First, we know that investments in the sustainable, responsible-impact category make up approximately 22 percent of the market.5 Similarly, a study shows that 86 percent of millennials indicate that they care about environmental, social, and governance factors in their investment, and nearly 90 percent of them expressed interest in pursuing sustainable investments as part of their retirement savings strategy.6 Relatedly, another study estimated that by 2020 global millennials may be worth up to $24 trillion.7 While these data points are for the market at large and are not an exact measure for the composition or behavior of future citizen-shareholders, they do indicate that there is good reason to believe that a critical mass of citizen-shareholders will be motivated to cast their votes in a manner supportive of sustainability and long-term value. Second, the creation and availability of qualified proxy advisors will go a long way in helping individual citizen-shareholders to cast their vote in a collective and informed manner. And third, as author Lynn Stout explores in her book Cultivating Conscience: How Good Laws Make Good People, the evidence from behavioral science and other related fields suggests that people are more “unselfish” and “prosocial” than is generally recognized.8 Research suggests that under the right conditions, most individuals are motivated to act ethically and look out for the interests of others. The Universal Fund is intended to do just that—create the right conditions to motivate individuals and corporations to act prosocially.
Finally, it is worth pointing out that the type of proxy advisory services we envision are not as far-fetched as they might sound. Although currently absent in the United States, close approximations of the type of nonprofit and/or transparent, sustainably focused proxy advisory services that we envision exist in Canada and Europe.9
The focus of our discussion to this point has been on exploring the role of corporations in helping address broader social, economic, and political problems, but that given the historical norm of “shareholder value” and the nature in which shares are often voted, the corporate sector’s potential has not been optimized. Thus far it has been a lost opportunity. The Universal Fund provides a vehicle for collective, broad-based, long-term investments. Through the related proxy services that we envision, the Fund offers an effective way for shares to be voted in a manner consistent with the long-term, sustainable focus of the Fund. How shares are voted affects corporate behavior. Share voting is a key leverage point in unlocking our corporate sector’s enormous potential to help us solve our most pressing economic, social, and political problems.
In addition to tackling the fatal flaws in today’s corporate governance system, Citizen Capitalism also has the benefit of helping to address inequality, and it meshes well with certain key American ideals. One of these ideals is capitalism, which we examine in the next chapter.