Shareholders are Not An Antitrust Problem

Nell Minow is Vice Chair of ValueEdge Advisors.

Not to suggest that they are making up their mind before hearing the evidence, but the House Subcommittee on the Administrative State, Regulatory Reform, and Antitrust may be suggesting their conclusion by titling the June 12 hearing “Climate Control: Decarbonization Collusion in Environmental, Social, and Governance (ESG) Investing.” Having failed to persuade anyone last year that there was some improper behavior that might be violating securities laws[1], the same forces have persuaded a subcommittee of the Judiciary Committee to try to find a violation of the antitrust laws. At this point, they are just throwing darts at a list of federal legislation to see if they can find a way to explain that it is illegal for shareholders to raise concerns about corporate strategy and conflicts of interest. When the attempt to find a fit with antitrust law fails, they may come back next year with a claim that the FDA should look into shareholder requests for information because they cause queasiness and weak knees in corporate executives.

Essential legislative protections underlying the integrity and vitality of our capital markets, making the US the most successful in the world for almost a century, come from Congress, and, for the specifics of corporate governance, state legislatures, with Delaware the most prominent. These laws are all designed to promote transparency, the essential requirement for market efficiency, and to the extent feasible, to level the playing field, again to prevent self-dealing. The antitrust laws do that to prevent predatory pricing, bid-rigging, anti-competitive mergers, and collusion. As the founder of modern capitalism, Adam Smith, wrote: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

There is nothing anti-competitive about investors sharing information.  There is no evidence of agreement to act together, and if there was, there are very extensive rules already in place to govern what shareholders working together must disclose and what they cannot do. Most important, there is no evidence that any decision made by the institutional investors called to testify or their independent information providers is based on anything other than the strictest, most quantifiable analysis of risk and return, as required by their obligation under the strictest standard of our legal system, the rigors of free market competition, and, in the case of the public funds, the obligations, accountability, and electoral mandates of government.

Like the antitrust laws, the SEC regulations and state laws also are intended to level the playing field to make sure that neither corporate insiders nor what we used to call corporate raiders are able to benefit themselves at the expense of investors. Therefore, if a group of shareholders amounting to as little as five percent of the stock agree to join forces, they are required to make a public filing and there are limits on what they can say and do to give management time to respond effectively. If a shareholder wants to submit a shareholder proposal to be included on the company’s proxy card, they are limited to a very narrow category of subject matter. It has to be significant enough to the company to be relevant but not “ordinary business,” which is exclusively reserved to the insiders. The SEC has a very active office that reviews these proposals when they are challenged by management as outside of the permissible guidelines.

Most often, these proposals request reports of some kind. While the household name, consumer-related companies get a few proposals every year, nearly 90 percent of listed companies do not get any. And if a shareholder wants to communicate with other shareholders to urge support for an – again, advisory-only – shareholder proposal, they are required to make a public filing. The data show that this system is robust and that the SEC has no hesitation to rule against shareholder proponents for going outside of the very narrow limits on the subject matter of proposals.

For example, Sanford Lewis of the Shareholder Rights Group reviewed this year’s challenges.[2] He wrote about several climate-related shareholder proposals asking for reports were allowed to be excluded by the SEC.

The proponents asserted that the disclosures sought by these climate related proposals would shed light on material shortcomings of the companies’ climate transition plans, of concern and interest to a significant portion of mainstream investors. Yet in each instance the SEC found that the proposal was too granular in its request, attempting to micromanage company activities.

The SEC allowed a large number of proposals to be excluded by the corporations.

All told, this year the SEC Staff has nearly doubled the number of exclusions supported compared with 2023. The Staff marginally increased the proportion of the requests, but the large increase in exclusions is largely a result of an increase in the number of no action requests filed by companies. 259 no action decisions (granted, denied or withdrawn) were issued as of May 1, 2024. This compared with only 167 decisions at this point last year.

Withdrawals have continued at a similar rate of 22% of requests. So far this year, 56 challenged proposals have been withdrawn – compared with 32 withdrawn last year at this time. Of the remaining shareholder proposals after withdrawals, the staff has granted no action requests for 139 proposals, compared with 76 proposals at this time last year. As a percentage of non-withdrawn proposals, 68% of exclusion requests were granted contrasted with  56% of exclusion requests last year.

We note that this year’s exclusion rates are on par with the average exclusion rate in the prior administration, from 2017-2020 which was 69%. [Emphasis added]

In 1932, Adolf A. Berle and Gardiner C. Means wrote in The Modern Corporation and Private Property about “the separation of ownership and control,” undermining the balance of powers necessary for the exercise of private power, because companies were too big and shareholders too dispersed to provide effective oversight, even to get the necessary information. The problem of collective choice (“the prisoner’s dilemma”) means that it cannot be in the interest of any individual shareholder to take the necessary action as the pro rata share of increased returns will not exceed the cost of engagement.

This has shifted in the last 30 years due to the rise of institutional investors, including pension funds, index funds, endowments, and mutual funds. While this has some advantages, there are also risks. The cover story in the current issue of Harper’s Magazine asks how we can keep our economy vibrant when index funds create an automatic bubble. Harvard Law professor John Coates has a very important book called The Problem of Twelve: When a Few Financial Institutions Control Everything. I encourage this Committee to look into the impact on sustainable growth when the largest shareholders are passive investors who are many levels removed from the beneficial holders. My partner, Bob Monks has published a study[3] showing that the companies with the highest level of indexed ownership underperform. This underscores the importance of engaged shareholders who can provide essential market feedback.

The engagement we are discussing today has no relation to the activities covered by antitrust law. There is no collusion. There is no agreement. There is sharing of concerns and information. If what these investors are doing is a violation of antitrust law, then trade associations like the Chamber of Commerce, the Business Roundtable, and the Investment Company Institute should also fall into that category.

The claim that there is something anti-competitive about shareholders raising questions about the sustainability of their investment in fossil fuel companies is contrary to the most fundamental principles of the free market. A key purpose of shareholder oversight is to make sure that corporations do not make the fatal mistake of assuming that what worked in the past will work in the future.

Who is in the best position to decide that it is time for a change? It is not the insiders, who have a vested interest in the status quo, the same corporate managers who, contrary to SEC disclosure requirements, lied to investors and everyone else about the risk of climate change.[4] A much more objective response about the long-term prospects of current strategy comes from pension funds, index funds, and other permanent shareholders whose holdings represent the entire economy. What is it about asking these questions via an advisory-only, non-binding proposal, that so terrifies the insiders? Why are they trying to kill the messenger, when a bracing market response is the essence of capitalism?

What is the risk of allowing shareholders to communicate with each other on issues of mutual concern when the worst-case scenario is a majority vote for a proposal asking for information that the executives and the board can ignore? There is a far more serious risk of further limiting this right of shareholders, allowing corporate insiders to operate without any kind of market feedback.  If executives do not want to hear from shareholders, they are welcome to take the company private and see how far they get with private equity.

The vital role of transparency and accountability is the foundation of capitalism. This is why the US has the most meaningful disclosure requirements in the world, the most robust capital markets, and the greatest example in world history of creating jobs and wealth over a sustained period. But disclosure is not worth much if shareholders cannot respond to it.

There is no evidence that the kinds of investment decisions we are discussing today, including engagement with corporate insiders and filing and support for shareholder proposals are based on non-financial criteria. On the contrary, the questions shareholders are raising reflect the inadequacy of traditional indicators in assessing investment risk and return.  It is not investors, either individual or institutional, who are proposing the weakening of financial measures of performance. The Business Roundtable announced in 2019 that their member corporations had agreed to work for vague “stakeholder”-oriented goals instead of shareholder value.[5] When I first began working on these issues in the 1980s, the most common complaint about institutional investors was that they did not look beyond the next quarter and would jump at any premium offered, even if it was below their own estimates of the present value. Now, CEOs complain that the investors are too long-term in their assessment of investment risk. But what could be more stabilizing for our economy and encouraging for executives to create sustainable value than investors with a 30-year-time horizon?

When I first joined Bob Monks as the fourth person hired at Institutional Shareholder Services in 1986, he asked me if I could set up a meeting with my former colleagues at the Antitrust Division to ask them if an independent service subscribed to voluntarily by shareholders could be a violation of antitrust laws. We did have that meeting, and as I predicted, the Antitrust Division staff was surprised at our question, as they saw no possible way anyone could think what we were doing was covered by antitrust law. Bob said, “Someday, institutional investors are going to be big enough that even for active funds, the transaction costs of selling out of every company that acts contrary to shareholder interests is prohibitive and they will engage with corporate management and boards on corporate governance issues. And they will be accused of violating antitrust law, and I want us to have a letter on the record that there is no violation in shareholders sharing their concerns and telling other shareholders what they are doing.” Monks was right, and so was the Justice Department in saying that there is no antitrust issue when investors communicate with each other to better understand and respond to their portfolio companies.


1Last year, the claim was that allowing the most sophisticated financial organizations in the world to voluntarily pay for analysis and recommendations on the issues put to a vote at corporate annual meetings was somehow a threat to corporate operations. In particular, it bothered them that a small number of the more than 6000 publicly traded companies received proposals from shareholders – advisory-only proposals, so that even a 100 percent vote in favor did not force a company to do anything. And despite claims that the two largest proxy advisory firms[i] are too powerful, it is important to note that no one is required to subscribe or to follow their recommendations, and data show that clients often do not follow the recommendations on non-routine matters. They do follow the recommendations on routine matters, like election of un-opposed directors and approval of auditors, which align with management’s recommendations.(go back)

2 back)

3Robert A.G. Monks, Citizens DisUnited: Passive Investors, Drone CEOs, and the Corporate Capture of the American Dream (2013)(go back)

4“Previous investigations of public and private records have found that major oil companies spent decades conducting their own research into the consequences of burning their product, often to an uncannily accurate degree – a study last year found that Exxon scientists made “breathtakingly” accurate predictions of global heating in the 1970s and 1980s.”,breathtakingly”%20accurate%20predictions%20of%20global(go back)

5I disagreed. back)

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