Monday, August 30, 2021
Friend of the blog Bernard Sharfman has posted The Problem of Three In the Voting of Public Company Shares over at RealClearMarkets. A brief excerpt follows.
The problem of the Big 3’s concentration of voting power is illustrated in Engine No. 1’s proxy fight at ExxonMobil …. Engine No. 1’s stated objectives in seeking the election of its own nominees was to: 1) enhance the value of ExxonMobil’s common stock; 2) reduce ExxonMobil’s carbon emissions; and 3) transition ExxonMobil into a global leader in profitable clean-energy production. Yet Engine No. 1 never provided specific recommendations on how it was going to accomplish these objectives. This was odd, as one would expect Engine No. 1 to present such recommendations if it were to convince shareholders that its director nominees were worthy of being elected.
The inability to provide such recommendations must have been a clear indication to the shareholders of ExxonMobil, including the Big 3, that Engine No. 1 was not truly informed about the operations of ExxonMobil or how it was going to achieve its stated objectives. Nevertheless, Engine No. 1 succeeded in getting three of its four nominated directors elected to Exxon’s board. How in the world was it able to do this?
…. I argue in my writing that Engine No. 1 was able to get the Big 3’s support by appealing to their desire to be perceived as investment advisers who are making a difference in mitigating climate change…. Such opportunistic shareholder voting by investment advisers is arguably a breach of an investment adviser’s fiduciary duties under the Investment Advisers Act of 1940. If so, it is up to the SEC to provide the necessary investor protection through enforcement actions. Alternatively, there is a potential market solution for mitigating the “Problem of Three.” This market solution … is for index funds to provide investors with some policy control over their proportional voting interest, as represented by their percentage of ownership in a specific fund.