Category Archives: Corporate Governance

Does the S&P 500 Index Represent the Market?

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Assumed to be a proxy for the large-cap market and tracked by over $13 trillion in investment assets, the S&P 500 Index enjoys a quasi-official status with the Securities and Exchange Commission. The Commission permits public companies and mutual funds to use the Index to benchmark their financial performance in regulatory filings.  Companies that are part of the Index must do so. 

That is what makes a 2017 decision by the administrators of the Index problematical.  In the wake of the controversial IPO of Snap, which included the issuance of 200 million shares with no voting rights, S&P administrators decided to exclude all new dual-class companies from candidacy for inclusion in the S&P 500 Index. Oddly, the decision did not apply to existing S&P 500 member companies with dual-share structures, such as Meta, Alphabet, Visa, Berkshire Hathaway, and twenty-eight others. 

As a result of the S&P’s decision, as of December 2021, fifty-five dual-class stocks have been disqualified from joining the S&P 500 Index.   In a recent paper, Vincent Deluard of the Stone X Group, found that between July 2017 and 2021, a cap-weighted composite of the fifty-five exiled companies outperformed the S&P 500 by 15%.  Including them in the Index would have added 70 basis points to the returns of the 500 Index.  Deluard estimates that the loss to investors since the 2017 “exclusion decision” to the end of last year was approximately $93 billon. 

The recent Nasdaq sell off has for now narrowed this divergence. Nevertheless, the trends are obvious.  Deluard found that in 2021 and 2022, sixty-two percent of US IPOs opted for a multiple share structure. If that continues, it will steadily reduce the relevance of the Index as a measure of the large-cap market, while granting a wholly unmerited opportunity for companies and funds to claim they are “beating the market” in comparison to an increasingly obsolete index. 

Made in the heat of the Snap controversy, the 2017 “exclusion decision” was an unfortunate foray by the S&P 500 Index into corporate governance matters.  If the decision is not reversed, it may be time for investors, governance professionals, and, particularly, the Commission, to reconsider their assumptions about the role that the S&P 500 Index plays in benchmarking corporate and fund performance.

 

 

Advanced Voting Instructions

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ABC recently filed this letter with the Securities and Exchange Commission (SEC) on Advanced Voting Instructions (AVI).  AVI, sometimes known as Client Directed Voting, is a device to facilitate voting by retail shareholders, that is, individuals who own stock through brokerage accounts.  These retail shareholders are often underrepresented in shareholder votes.

As larger and larger social and economic issues find their way on to corporate ballots (in part because of the incapacity of our political institutions), all shareholders should have an equal opportunity to voice their views.  In this limited sense, there are similarities between corporate democracy and political democracy.  AVI, if put into place, could expand significantly the number of shareholders voting in corporate elections, thereby making the results more representative of overall shareholder sentiment.

Shortening the Ten-Day Filing Window

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In 2011, ABC submitted this comment letter to the Securities and Exchange Commission (SEC) in support of a petition for rulemaking by the law firm Wachtel, Lipton, Rosen & Katz.  Wachtel’s petition called for shortening the ten-day filing window under SEC rules between the time a shareholder or group of shareholders amasses a five percent position in a publicly-traded company and when it must report that fact to the Commission.

The ten-day period, as noted in our letter, is an anachronism that has been exploited by hedge funds and other large activist investors to trade on material, inside information.  ABC argued for immediate disclosure of a five percent position.

The SEC never took action on this matter and the Wachtel petition languished.

Now, interestingly enough, a group of liberal Democratic Senators, including Bernie Sanders, has introduced legislation that would, among other things, shorten the ten day period to two.  The bill is called the Brokaw Act (S. 2720).  It is named for a town in Wisconsin that saw its paper mill closed due to hedge fund maneuvering, according to the bill’s chief sponsor, Senator Tammy Baldwin of Wisconsin.  Other sponsors of the Baldwin Act are Jeff Merkley (D, OR) and Elizabeth Warren (D, MA).

Hedge funds are important players in the capital markets and corporate takeovers can lead to great economic efficiencies.  But the ten-day window between the time a five percent position in a publicly traded company is acquired and the disclosure of that fact cannot be justified in a period  of rapid information dispersal.  The window should be narrowed, if not closed, ideally by the Commission or, if not, via the Brokaw Act.

 

The Untapped Power of Individual Investors

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This article, written by American Business Conference president John Endean and published in the Wall Street Journal, demonstrates that there are more individual holders of “street shares” than normally supposed and outlines a proposal at the Securities and Exchange Commission to make it easier for these individual shareholders in corporate elections.  The goal:  an expansion of corporate democracy at a time when corporate elections are tackling difficult social and economic policy issues.

A Note on the Apple Shareholder Meeting

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At the recent Apple shareholders meeting, Tim Cook, the company’s CEO, popped his cork during the question and answer session.  A representative of an organization that owns Apple stock and is apparently skeptical of Apple’s sustainability programs, asked Cook to commit to such programs only if they are good for Apple’s bottom line.

Something about the question or perhaps the questioner got under the CEO’s skin.  Certainly he wouldn’t be the first corporate executive to find questions from shareholders annoying.  Rather than hold his temper and finesse the question, Cook asserted that in some cases he does not “consider the bloody ROI [return on investment].” He then told his interlocutor that “if you want me to do things only for ROI reasons, you should get out of this stock.”

Advising shareholders to sell a stock at a time when the stock is already widely considered undervalued was probably not the best of responses.  Maybe Cook had no choice given that his most famous board member, Al Gore, was sitting on stage behind him.

Still, the notion that a CEO can claim to make decisions arguably not in the financial interest of shareholders and that such decisions should not be subject to questioning by those shareholders seems odd.  It is an illustration of a much larger public perception that corporations are or should be vehicles for social change rather than merely organizations to create wealth.  This idea is appealing only insofar as one agrees with the “non-ROI” decisions of the CEO.  That may not always be the case at all companies.

It would probably be best for CEOs to focus on generating shareholder value in a manner consistent with our laws and ethics.  Doing so may indeed include supporting sustainability programs as part of building that value.

But looking to CEOs to use at their discretion shareholder money to effect social and political changes unrelated to the bottom line is a very bad idea.  That it is a bad idea whose time may have come is, at bottom, a commentary on the dysfunction of our political system where social and political change should, ideally, be debated but so often is not.