Retail Investors Need Companies to Put Performance Over Politics

Publicly traded companies play an important role in building savings and wealth of millions of Wisconsinites. Even individuals who do not actively invest in the stock market have skin in the game through retirement accounts. Unfortunately, many publicly traded companies are, willingly or unwillingly, embracing Environmental, Social, and Governance (ESG) investment theories that have a negative effect on investment returns.

That is why I introduced the Performance over Politics Act to protect retail investors from repeat ESG proposals from activist shareholders of publicly traded companies. This bill would permit issuers to set aside for three years resubmission of shareholder proposals that are substantially similar to proposals that received less than 10% of the vote once in the previous five years, received less than 20% twice in the previous five years, or received less than 40% three times in the previous five years. A 2009 study noted that costs directly incurred by companies due to such proposals were estimated at $87,000 per proposal, totaling $90 million annually.

Many studies show a correlation between increased political activism and lower stock returns for companies with such agendas—one in particular by the Journal of Financial Economics found a 14 percent decrease.1 This is in part due to companies going beyond traditional business judgements towards moral judgements, which have traditionally been left to elected officials. Rather than focusing on the financial interests of shareholders, companies are being pushed towards the utopian idea of stakeholder capitalism that evades actual accountability. Shareholder rights are well defined, but if a company has an obligation to a nebulous group of stakeholders, it is ultimately not accountable to anyone. This hurts shareholders, who are often comprised of retail investors and those saving for retirement.

Last year, ESG shareholder proposals accounted for 61 percent of all proposals on proxy ballots, nearly double the previous year’s count. Shareholder proposals of this nature that have recently been proposed at companies like Costco and Comcast are overtly political in nature and seek to transform boardrooms into platforms for political debates, rather than focusing on essential business matters. Moreover, given the significant influence of proxy advisors, companies are unable to exclude repeat ESG-related proposals, regardless of whether shareholders have previously rejected them. A favorable recommendation from a proxy advisor firm can easily garner 25 percent investor support. As a result, shareholder proposals backed by proxy advisors can be resubmitted indefinitely, even if they don't necessarily serve the long-term interests of company and retail investors.

Let me be clear: my legislation would not prevent individuals from choosing what to invest in or go against free market principles. Shareholders and company officials like CEOs have the same free speech rights as any private citizen, but that is different than using a company’s market power to impose their views on society while avoiding public debate. When companies use their market power to make moral rules, whether by their own choice or at the demands of liberal activists, they not only harm investor returns, but disenfranchise citizens from having their say through their elected officials.