Capitalisn’t: Shareholder vote suppression

Nov 21, 2019

Sections Public Policy

Two recently proposed rule changes at the SEC would transfer more power to CEOs. But do we really want to empower managers to operate with fewer checks and balances? On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales sit down with SEC Commissioner Rob Jackson to talk through these issues and debate the proposed rules.

Kate: A common theme of Capitalisn’t over the past few weeks has been whether shareholders have too much power. That is, whether corporations end up maximizing shareholder value at the expense of employees, consumers, creditors, and members of the community. 

Luigi: One way to address the issue is transferring power away from shareholders to managers, and that doesn’t necessarily empower the other groups. It could end up giving CEOs full reign over the corporate landscape without any checks and balances. 

Kate: One of the things I’m always afraid of is that there are rules changing in the background. Rules that might have a serious impact on how markets work, but they don’t get much attention from the public. 

Luigi: We may be living through one of those moments now. While there is attention being paid in the media to voter suppression in presidential and Congressional elections, and rightfully so, there is less attention being paid to voter suppression in corporate elections.

The Securities and Exchange Commission, the agency in charge of regulating American corporations, is in the process of changing some of the key rules in corporate voting. And I claim that some of these changes may have more impact than changing the gubernatorial election. The power of Facebook is probably bigger than the power of the state of Arizona. Sorry for the people from Arizona. 

Kate: On today’s episode, we’re going to explain how shareholder voting works, and discuss whether the new SEC rules could have unintended consequences. 

From Georgetown University, I’m Kate Waldock

Luigi: And from the University of Chicago, I’m Luigi Zingales

Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today. 

Luigi: And, most importantly, what isn’t.

Now, who better to discuss the new SEC rules than an SEC commissioner? 

Kate: Today, we are incredibly lucky to be joined by Commissioner Rob Jackson, who’s also a professor of law at NYU Law. Rob, welcome to the show. 

Rob Jackson: Thanks so much for having me. 

Kate: All right, so let’s get to shareholder voting. The first thing to be clear about is that CEOs in the United States, they have a lot of power. But there are a couple of checks on this power, and one of those checks is through the board of directors. And the other check is through the annual meeting that every public company in the United States has to have, where shareholders can vote on various proposals, some of which are put forward by management and some of which are put forward by the shareholders themselves. 

You don’t have to attend the annual meeting to actually vote, because often it’s in expensive places, and you have to pay for your plane tickets and stuff. So, rather than attending the meeting, you can just mail in your vote and vote by what’s called proxy. This used to be done by snail mail, but now it’s for the most part electronic. 

On today’s episode, we’re going to focus on shareholder voting. To talk about this, we should go back to a time, let’s say the ’70s, when managers definitely had way too much control. But Rob and I probably don’t remember the ’70s very well. I think, Luigi, you are our best bet. So, can you tell us about the corporate landscape in the ’70s?

Luigi: OK, let’s be clear here. I was a little kid in the ’70s, let’s not exaggerate how old I was. But because I was interested in corporate governance from an early age, a very early age, I can tell you from experience. I think that the so-called shareholder revolution started in the early ’80s. In the 1970s boards were still incredibly large, filled mostly by insiders, and the CEO was extremely powerful. The only attempt to break into the corporate arena was done by political activists that were fighting to stop the Vietnam War. And so, you had some proposals to vote at shareholder meetings regarding banning the production of Agent Orange, or stopping supplying ammunition for the Vietnam War, or stuff like that. 

Some of the SEC rules come from a period where shareholders’ proposals were seen as just a way to break the peace and harmony and efficiency of the corporate arena for political purposes that have nothing to do with the company itself. 

Rob Jackson: Well, certainly in the 1970s, that was a very consistent theme of concerns that were raised and the SEC rules that were designed to address these considerations. But then, in the 1980s, we had the emergence of the takeover wave and a number of disciplining forces entering the marketplace to try to check the power of CEOs, which was being used at that time to build large corporate empires or for perquisites or salaries that didn’t make sense from investors’ point of view. But activist investors in the ’90s and the early 2000s and even over the last decade have been arriving on the corporate scene, demanding change from CEOs and corporate boards, and in many cases getting it. 

So, there has been some success in checking CEOs through the activist investing and shareholder proposal process. 

Luigi: But most of this effective intervention takes the form of replacing people on the board or replacing even an entire board by an activist investor. When it comes to proposals to direct corporate policy made by shareholders, most of them don’t receive the endorsement of management, and most of them don’t get approved. In fact, in the last proxy season, 2019, only 14 proposals made by shareholders won support. 

One was actually a proposal by a Catholic-affiliated investment service, asking Walgreen to compile a report on the reputational risk stemming from opioid sales. The other was a proposal by a social investing fund asking Travelers to produce a report on its workforce diversity. But things are on the verge of a change. For example, a proposal to force disclosure of lobbying by Walt Disney, made by some investors, reached 39 percent of Disney shareholders. Which, of course, is not a majority, but it is pretty close to a majority. And so, I think that the world is changing, or at least it’s about to change. 

Rob Jackson: That’s right. One question you might ask if you were an ordinary shareholder is, “Hey, who decides what actually gets voted on in in a shareholder meeting?” And the answer is that the standard corporate governance proposals are often brought by significant funds, public policy groups, religious orders, institutional investors who want to bring forward corporate-governance reforms. 

Now, as I noted in a statement that I issued last week when the SEC changed our rules, it’s also well known that a few individuals actually dominate these annual shareholder meetings. They’re sometimes derisively referred to as shareholder gadflies. In fact, some statistics would say those individuals bring as much as a majority, or even more, of the proposals at any given shareholder meeting. 

Kate: Luigi, is there not a story about a gadfly that you might know off the top of your head? 

Luigi: Oh, there are a lot of stories about gadflies. In fact, I thought this crazy stuff happened only in Italy, where I saw some of these guys in action. No, it also happens in the United States. The most famous one is actually a woman, Evelyn Davis, who started to make proposals in the late ’50s. Basically, she made a good living by selling a publication that was not particularly valuable, but every corporation was subscribing to for the price of $600. Why? Because that was a way to mollify her, to make sure that she wasn’t raising a controversial issue at the shareholders meeting. 

So, with a thousand subscriptions from a thousand corporations, she was making $600,000 a year. That was not a bad salary, especially back then, just to make proposals as a threat point and cash in on the side. 

Kate: Yeah. So, who are the types of people that would use these sorts of information sources? Going back to the individual voting issue, voting can be hard. It can be hard as a shareholder to know what’s even on the ballot or what’s going on behind the scenes of the company, or which way you should vote, if you even do want to vote. And oftentimes, as a shareholder, you just have too many different companies that you’re invested in. For example, I don’t have that much money in the stock market, but I have a little bit through my retirement account, which is managed by, I think, Vanguard. But I don’t even know what stocks I hold, let alone vote those shares myself. 

There were a couple laws that are relevant to this. One in 1988, which was enforced by the Department of Labor. They declared that it was part of the fiduciary duty of managers of plan assets to actually vote the proxies of their investors. And then there was another rule in 2003, an SEC rule, that extended a similar duty to mutual funds as well as other types of retirement plans. And so now, the way that it works is, if you have your money invested in a mutual fund or in some sort of retirement fund, you’re not going to vote those shares yourself, you’re going to have the fund vote them for you.

Now, the fund doesn’t want to get in trouble for voting the wrong way, and they also need to have information about how to vote. And so, they typically refer to pieces of information, newsletters, like the ones that Luigi mentioned earlier, and in general, proxy advisory services to make these decisions for them. 

Rob Jackson: That’s right. And these proxy advisory services have played an increasingly important role in helping shareholders cast their votes. And the marketplace is dominated by two large firms, ISS and Glass Lewis, who are sometimes estimated to have as much as 97 percent of the proxy advice market. 

One of the things that’s been challenging for me is to watch the debate in Washington unfold about these advisors, because there is really no target of corporate and executive disdain as intense as the proxy advisory firms. It is impossible to escape a cocktail party in Washington or New York without having somebody angrily talk about the role of Glass Lewis and ISS. 

And I guess my reaction is to think that the more information investors have about how to cast their votes, the better, especially, Kate, because we live in the world you described. A world where the ordinary investor is diversified, has few incentives to invest in corporate governance or oversight or to pay attention to corporate management, and therefore, the more advice we can give otherwise rationally apathetic shareholders to participate in corporate governance, the better. 

Luigi: Can you tell us about the new rules that the SEC has proposed? And, by the way, there are 60 days to object to those rules, so people have time to submit some objections. How are those rules going to change the way in which the market for proxy advisory works? 

Rob Jackson: Well, Luigi, you are right. There are 60 days to comment, and I urge all of the listeners and both of you to come forward with new data on this. 

Kate: Wait, sorry. Can I interrupt really quickly? If people comment really negatively, does that mean that the rules won’t pass? 

Rob Jackson: Not necessarily, but we are required by law to read and review and think through every comment. And I can promise you, even when I disagree with my colleagues, we try very hard to engage with the evidence we get from the marketplace. 

Luigi’s question was, how will this affect ISS and Glass Lewis? And the answer is clear. What the SEC rule does is impose a tax on antimanagement advice. If ISS or Glass Lewis wants to recommend in favor of management, nothing changes. Under the new rules, more or less they can proceed in the same fashion. But if they want to recommend against the CEO, if they want to make a recommendation that management does not agree with, then they must do the following. They must check with management before they provide this advice to investors. They then must take feedback from management. And by the way, if management doesn’t like the proposal, trust me, they’ll have feedback. 

Then they have to send the advice to their clients but have to include, in many cases, a link to management’s view in their final advice. And, by the way, they must do all of this with the threat of federal securities liability if the management doesn’t like their methodology, their approach, the data that they used, et cetera. And we all know that the threat of serious federal litigation obviously tilts the scales and the kind of decisions folks make. So, the answer is, what the SEC’s proposal will do if it’s adopted is simply move advice toward management, because it will tax antimanagement advice from proxy advisors. 

Kate: I’m not a lawyer, but this seems to me like if you had a regular court case, and you have a plaintiff and a defendant, and a new rule is passed that the plaintiffs have to submit everything they know and everything they’re going to argue to the court, and the defendants get a chance to see all of that, but that the defendants don’t have to do the same sorts of actions. Do you think that that’s a fair analogy? 

Rob Jackson: Yeah, I think it is. Or another way to think about it is, suppose we were looking at . . . Do you use the website Yelp?

Kate: Yes, of course. 

Rob Jackson: Yeah. So, I like Yelp. It gives you very interesting feedback on the places where you can eat. It’s a little bit like the customer having to check with the restaurant before posting a review to Yelp. Oh, look, we can debate whether or not that would lead to more or less accuracy, but for sure it would lead to reviews that are more favorable to the restaurant’s management. Whether that’d be good or bad for consumers is a separate question. 

Here’s what I would say, Kate. I hope the Department of Health and Human Services does not adopt such a rule, because I don’t think it’s the role of those who would protect ordinary consumers to tip the scales in favor of management.

Kate: There is also this other proposed rule change that has to do with the resubmission of shareholder resolutions. Can you explain that, and can you explain what the rule is really about? 

Rob Jackson: Sure. So, our second package of rules in this area would take the required vote on a shareholder proposal and increase it if you want to resubmit it in the next year. For example, suppose you would submit a resolution this year and it gains only 4 percent support. The question is, could you resubmit it next year? The answer until this rule was adopted was yes, you could. Going forward, the answer would be no, you could not. 

Now, a question you might have about this is, look, Rob, if the proposal only gains 4 percent support, maybe it’s a good idea to get it off the ballot, because it’s obviously not one that investors like. But this makes an assumption. It’s a little bit like a workshop paper that has a weakness. It makes an assumption that we should spell out. The assumption is that the short-run voting results reflect the value of the shareholder proposal, and I don’t know if you noticed, but when Luigi spoke earlier, he pointed out that even proposals that don’t get majority support still can draw very substantial amounts of shareholder support and still be ones that are value-enhancing. Rather than just look at the vote total, I think we should look at the long-run value implications of proposals, and the answer is that the amount of vote results in the first or second vote is not necessarily indicative of whether they’re good proposals. And that’s why I dissented from those rules. 

Luigi: But let me play devil’s advocate here for a second, because of course there is a risk of blocking some reproposals. There’s also a cost of having a lot of gadfly proposals repeated year after year without much of a following and without much of an effect. And my fear is that too many of those gadfly proposals actually make it difficult to create the space for serious discussion on the other ones. And my understanding of the new rule is not that it prohibits the representation, it just delays it by a few years. And so, if this is a long-term benefit, the long-term benefit might manifest in the long term. 

So, even if I cannot propose it in the next year, in two or three years, I can repropose it. It’s a bit like with a referendum for Scotland’s independence. You propose it, but you don’t want a referendum every year. If the referendum does not win, you want to at least not repropose it for the next X number of years. 

Rob Jackson: Luigi, I guess my question to you is, how long should investors have to wait to increase value? Because for me, to the degree we think it’s a value-enhancing proposal, we don’t want to knock it off the ballot. And, by the way, these new rules knock it off the ballot for three years. That’s a substantial amount of time to ask investors to wait. And by the way, Luigi, let me just be clear, my colleagues’ proposal, in my statement, I said this is like swatting a gadfly with a sledgehammer. This would not just exclude the gadfly proposals you’re worried about. No. 

Also, we showed, we presented new data in our statement that 40 percent of proxy access proposals that allow investors to put their own candidate on the corporate ballot, those would be thrown off by this new rule. Fifty percent of shareholder proposals that would require CEOs to keep skin in the game, those would be bounced off the ballot. 

So, I agree with you, Luigi, that we have to manage and balance the costs and benefits here. But I would propose a rule that would address just the Zingales gadfly problem rather than take valuable corporate governance innovations off the corporate ballot. 

Luigi: So, what would be your rule if you were the chairman of the SEC? 

Rob Jackson: I would develop a rule specifically targeted at this problem. For example, Luigi, there have been many proposals in this area that would say that a particular kind of shareholder should be limited in the amount of times they can access the ballot in a particular year. 

Or, if you prefer, I actually like a private ordering solution. You could give to issuers, to companies, a basis to exclude a proposal on a gadfly exclusion and say, look, we believe that this proposal is not of the serious type that Luigi has described in the podcast. Instead, it is a gadfly proposal, therefore we wish to exclude it from our ballot. And the SEC staff could weigh in on the appropriateness of that, like we do for every other kind of exclusion for shareholder proposals. 

So, I think there are lots of very tailored ways to deal with this problem. Unfortunately, my colleagues went so much further as to get very basic corporate governance innovations like proxy access off the ballot at many companies. 

Luigi: One thing I don’t understand is why there wasn’t more of a decision to use the size of the support for the proposal as a criterion. Currently, if I understand, you have to have $2,000 worth of stock and to have held it just for a year. So, it’s very low as a threshold. The threshold is going up. Either you have $2,000 for three years, or you have $25,000 for a year or something like that. If I require a larger threshold, as long as I can allow people to coordinate and sign onto this, and I keep actively the holding period shorter, because the holding period is a way to make it more difficult for institutional investors to get involved, why isn’t this a way to penalize the gadflies, but let proposals that have a significant amount of following to be on the ballot? 

Rob Jackson: Oh, I think it would, Luigi, these are good ideas. One thing to be clear about from the proposal that was made last week is that it prohibits aggregation of individual stakes so as to cross the particular thresholds. So, it rules out the— 

Luigi: It prohibits . . . no, let me stop here. It prohibits the aggregation of different stakes? 

Rob Jackson: Absolutely. 

Luigi: Why? 

Rob Jackson: If I had the answer to that question, my friend, I’d be in the majority, not the dissent. Look, for me, this is what I mean by a swatting a gadfly with a sledgehammer. These are not tailored solutions to the particular economic problems that we are facing, a balancing of costs and benefits. This is just, full stop, making it harder for shareholders to bring proposals and making it easier for CEOs to navigate the annual meeting. 

By the way, here’s what’s so frustrating to me. Luigi, I know you know. There’s lots of very good scholarship making promanagement arguments for why we should make it harder for investors to intervene. 

I’d love to have that debate with my colleagues. We can have that debate on the podcast right now, but we should come forward and say what we are doing. What we’re saying is we prefer to trust corporate managers and grapple with the agency costs than to allow investors to have a say. If that’s the choice we want to make as a society, we can make it, but we should call it what it is. 

Luigi: Yeah, but this looks like the old restriction against gatherings that the monarchs in Europe used to have in order to prevent democracy from spreading. 

Rob Jackson: Well, without commenting too much on that, here’s what I’ll say. I think it’s very frustrating for shareholders who have been participating in this process for a long time, because it doesn’t feel like a solution for a particular problem. It just feels like tipping the scales toward management. Look, these are areas with very strong intuitions. People have very strong views, and what I try to do is say, look, the fact is we’ll be taking 40 percent of proxy access off the ballot. We’ll be taking 50 percent of share retention proposals off the ballot.

And whatever you think . . . Maybe you think that’s a good thing. We can have that debate, of course, but let’s just agree that that is what we are doing. We are not solving the gadfly problem. We are going much further than that. 

Kate: Let’s talk a little bit about market power. Going back to some stats thrown around earlier, it seems like ISS and Glass Lewis, basically the only two proxy advisory firms that operate in this market, they are an oligopoly. Maybe ISS is even a monopoly or bordering on that. Is this something that we should be worried about? Do we think that this actually affects the prices that they’re charging for the information that they provide? And is there anything that can be done to promote competition in this market? 

Rob Jackson: So, yes, we should be concerned about it. And I gave a speech about a year ago where I urged my colleagues at the SEC to take a look back at our statute that empowers us to make rules. That statute requires that we consider the effects on competition of any regulatory step we take. When we make rules in the proxy advisory space, we risk turning a two-firm market into a one-firm market. And part of my argument to my colleagues on the commission and in the corporate community has been, if you don’t like a world where you’re held accountable by two proxy firms, imagine a world where you’re held accountable by a monopolist proxy firm that has the sole power to tell American investors how to vote their shares. 

And the truth is, I know you both know the history here very well. It’s been decades and there hasn’t been a tremendous amount of competition in the space. And the reason is very straightforward. It’s just not that profitable of a business. We have seen people attempt to enter over the years, companies have opened and closed shop because they couldn’t make the economics of the business work. It is a very low-margin, not highly profitable business. And that’s why there aren’t more entrants. 

And that’s what worries me about adopting new regulations, because if we impose those costs, the incumbents will be able to pay them because they’ve achieved the scale necessary to do it. But it’ll make it very, very, difficult to enter and compete. And that’s why I think the rules that we proposed have made it much less likely that we’re going to have a competitive market in the future and much more likely we’re going to have a monopoly, because it’ll be very, very difficult for both firms to survive with all these regulatory changes. 

Luigi: But whether they have absolute power or have some power, I think is a source of concern. Number one is the fact that it is a duopoly, and it’s actually funny, I read the US Chamber of Commerce position paper on the topic, and they are extremely concerned about concentration, and they make arguments that are in favor of regulating monopolies or oligopolies, which they’re not very willing to apply in other areas, but in this area, they seem to be very in favor.

The second is, what is the potential effect of conflict of interest? We know that ISS—actually, at the cocktail parties they call it ISIS—that ISS, what they do, they also serve their services. 

So, at the same time they judge and decide how to vote, on the other hand, they advise you how to behave. And, surprise, surprise, if you behave well and you pay well, they also tell you to vote in favor. And while Glass Lewis is more rigorous about that—they don’t have a business on the side—they are owned by the Ontario Teachers’ Pension Plan. So, at least in principle, it could be that they represent some specific interests. Maybe this ownership has an impact on the way they operate. 

Now, in a world of competition where we had many of these players, this would not be such a major issue, but when we come down to two, that is a concern. 

Rob Jackson: I think that’s absolutely right. It’s a conflicted business, and it should be subject to rigorous disclosure. The ISS already does some disclosure, but look, you guys know that I’m a scholar who’s concerned about CEO compensation and conflicts of interest. I can’t be of the position that CEO conflicts should be disclosed, but ISS conflicts should not. No, no. The consulting model there is highly conflicted, which leads to all kinds of questions about what ISS is being paid for and why. And I think rigorous disclosure of that is absolutely necessary.

And to the degree the rules advance that objective, I’d be happy to support them. Again, what’s frustrating is they go so much further than this, requiring not only disclosure of the conflicts but also asking ISS to run their opinions by management before they can tell their clients what they should do. 

Luigi: No, no. That part I agree, 100 percent, that seems to be crazy, but why not propose a structural remedy, which is to break up and give away the consulting business? After all, this was also imposed by Sarbanes-Oxley for the auditors. They were in a similar situation, and they were playing on both sides, and Sarbanes-Oxley put some limit on that. 

Rob Jackson: To the degree that we end up with a legal mandate from Congress like Sarbanes-Oxley that allows us to attack this problem—and by the way, Luigi, you could not just break them up, you could have an office that oversees this area—I would be in favor of all of these kinds of things. 

Kate: What about a sort of nudge on the part of institutional investors? So, rather than setting up a new office, maybe set up an opt-in system, where if you have your money in a mutual fund or if you have your money in a retirement fund, you have to select a proxy advisory service. This not only makes people aware of the proxy advisory services that exist, but it puts the power in the hands of the actual shareholders. As it is now, like Vanguard, Fidelity, I don’t know, I’m assuming that they use ISS, but I don’t actually know the answer to that question. 

I think if people felt more empowered, then this might actually promote healthier competition in this market. And it might also promote competition along the lines of specialized advisory services. You might have some that just focus on issues of the environment or some that just focus on issues of social and civil rights. And also, this seems to me like more of a market solution. 

Rob Jackson: There’s a lot that’s appealing about that solution, but a lot that’s complicated about it. Let me say a little bit about that. First, Vanguard, Fidelity, BlackRock, those large firms, they do use proxy advisory services, but they’ve also built their own in-house governance teams that oversee and actually cast the votes. And in the case of Vanguard, there have been recent developments in sending that authority more toward the portfolio managers and giving them more oversight over the way votes are cast.

But the truth is, Kate, they use those services, and if you’re at Vanguard, you pay for some of those services. I don’t disagree that you should know more about the way that they’re used. What would worry me about an opt-in or opt-out system is that as it is, it’s hard to get individual investors to engage in the process of corporate governance. Kate, as we said earlier, you’re not even sure which firms you own, which companies you’re in. 

Asking you to weigh in about the optimal source of advice when it comes to voting your shares, that’s a lot to ask of an ordinary investor, but that doesn’t mean I’d be against asking it. I’d want to structure the rule to make sure we draw the right inference from investor decisions. 

Kate: I think that that’s fair, but I will just say that I think it requires a lot less information to select a certain category of advisor than it does to actually know what stocks are in your portfolio. 

Rob Jackson: Well, that’s very fair. And, Kate, let me point to something else. I gave testimony to the Federal Trade Commission last year where I pointed this out. I don’t think ordinary investors know in general how the institutions they invest with tend to vote their shares. Kate, let me ask you, Vanguard, that’s where you keep your retirement savings, right?

Kate: Mm-hmm.

Rob Jackson: Are they promanagement, antimanagement or down the middle? What’s your sense? 

Kate: My sense is that they’re probably promanagement. 

Rob Jackson: Right. One thing I would like is for the SEC to play a better role in getting you a quick answer to that question. You could also do polling of ordinary retail investors just to try and get a sense for what their actual preferences are for voting on these things. 

One of the things that’s so hard for me about the debate we’re having right now is we’re not talking at the SEC about making sure that the way votes are cast actually reflects the preferences of the underlying ultimate investors. 

And the reason I’m for that is because I’m a big believer in and concerned about agency problems. I think we’d be better off asking the people whose money is at stake what they want out of corporate elections. For that reason, I think you’re right that Kate has a good idea. Anything that gets at what ordinary investors really want in the voting process is something I’m for. 

Luigi: What is the principle that they try to follow at the SEC? If this is not to try to capture what shareholders want, what is the overarching principle? 

Rob Jackson: I have to tell you, one of the criticisms I shared in my statement last week is I don’t know what principle is guiding the proposal that we made. Would it be they generally feel that the last 20 or 30 years have involved a shift from management to shareholders in terms of power, and that somehow the role of the SEC is to reverse that trend? I don’t know why we would be in the business of dictating that outcome. 

Even if I granted the premise and, Luigi, I don’t, because the three of us know very well that actually the last 30 years have been pretty good years in terms of managerial power in the United States. The approval of the poison pill, the widespread use of staggered boards, there are many impediments to the exercise of shareholder authority, to say nothing of the standard collective-action problems that investors have suffered for decades. So, I don’t know why we’d be in the business of resetting that balance. 

Luigi: Sorry, with what underlying idea do they claim they want to do that? Because I thought that many members of this administration were kind of free market, they didn’t want to interfere with the natural outcome of the market. And here you’re saying they want to interfere, but they want to interfere on the side of management against shareholders. 

Rob Jackson: I think that’s a reasonable read of what happened last week. And here’s what I’d say. Free market philosophy . . . I don’t think last week’s proposal represents free-market thinking. 

Kate: Right. I don’t understand why this is so confusing. The Trump administration seems to be probusiness and antiregulation, and it seems to be doing just that through this SEC vote. So, sorry, maybe being a little unfair to your colleagues. 

Luigi: Are you saying that Trump is probusiness but not promarket?

Rob Jackson: Well, right. I think, Kate, it’s very . . . I understand your reaction, and I’ll leave it to you to make that point. But here’s what I’d say. It’s interesting. It’s not probusiness, it’s promanagement.

Kate: Right.

Rob Jackson: And I think it’s so important to draw that distinction because, look, I have an MBA in finance from Wharton. I learned probusiness. I know what pro-investor actually means. The idea that we would favor corporate management is not probusiness. In fact, it risks extraction of very substantial agency costs. No, no, I would think this is a promanagement move and maybe justifiable as a policy choice. But again, that’s not the debate that we had last week. 

Kate: Let’s address, I guess, the elephant in the room, which is, OK, so what if they had called it that? What if they had said, look, we want to support management at the expense of disenfranchising shareholders. We just think that that’s the right decision to make at this point in time. Are there any potential benefits from doing that? Maybe shareholders do have too much power, and I have to say that on recent episodes, that’s been exactly the point that we’ve been discussing. And so, it is in some sense a little hypocritical of Luigi and I to be saying, no, shareholders do need to be the ones with the most power. 

Rob Jackson: Well, I’m a big fan of the podcast, and so for sure I understand the reasons to be skeptical of too much shareholder power, but I never took your or Luigi’s argument to be that the answer to this is to hand more power back to CEOs. No. Instead, the consideration is giving more influence to other stakeholders, et cetera. But I think all of us who spend time in the corporate governance scholarship know that for 30 or 40 years, corporate management has been telling us, “Trust us, we’ll deal with long-term problems like environmentalism, environmental issues, social issues, et cetera.”

And I don’t think anybody across the marketplace right now is in a place where we think the solution to our problems either as a society or as a market is to hand more power to management. 

Luigi: Yeah. And our discussion of the Business Roundtable statement was exactly in that direction, that we don’t think that we want to hand more power to the CEOs. And the Business Roundtable statement was a huge power grab in that direction. 

Kate: I have a devil’s advocate argument to make here, and this is also going against what I said on that earlier episode about stakeholders versus shareholders, but my impression of the way that managers acted in the ’50s, the ’60s, and the ’70s is, yes, maybe they extracted perks, right? Maybe they bought themselves planes and ate fancy dinners on the shareholder’s dime. But another source of alignment that they had was with their employees. I think that especially back in the day when they lived closer to their employees and were members of the communities in which their businesses operated, that there was some sort of social pressure to pay employees maybe higher wages than the market would dictate, or to invest in local charities. 

And so, to the extent that you think that maybe labor is disenfranchised today because of the secular demise of labor unions, and if we don’t think that those rights are coming back, then maybe giving managers more power at the expense of shareholders is a backdoor way of giving employees more rights. 

Rob Jackson: See, Kate, I feel like you tried so hard to make that argument well.

Kate: I did. 

Rob Jackson: I mean, bravo, but I got the sense that by the end you’d run out of gas. And here’s why. The fundamental proposition is if you want to secure the future of the American worker, trust CEOs, and it’s such a ludicrous idea that saying it out loud, it makes it hard to keep a straight face. 

I have no doubt that American CEOs understand the crisis we have in the American middle class and want to address it. And I believe that they’re thoughtful, brilliant leaders who want to solve the problem. But the idea that we would solve the balance of power between the American middle class and others in the society by trusting CEOs to make those decisions just doesn’t make much sense. They’re simply not well positioned to understand what the problems are and what mechanisms we might have to solve it.

That’s why I, like you, was skeptical about the Business Roundtable statement and why I’m skeptical that the solution to America’s problems lies in the minds of American CEOs. I can tell you right now, I would be happy . . . you can put me down in favor of, I will happily give American CEOs power to exclude more shareholder proposals from the ballot if they promise me in exchange that they’ll live in the same neighborhood and attend the same church as their workers. 

Kate: This is kind of why I was saying I was being the devil’s advocate, because I believe that back then that was an important force in the minds of CEOs, that they had to see their workers every day. They had to be members of their communities. And so, it made sense that they extracted perks or extracted rents away from shareholders and in favor of labor. But I don’t think that that’s the corporate environment in which we live today. And in order for them to be living in the same communities and going to the same churches, oftentimes that means they’d have to move to Myanmar or something.

And so, I don’t see that . . . I agree, Rob, I don’t see it being a very viable way of giving more power to labor. 

Luigi: So, Rob, we like to conclude the episode by saying whether the particular topic is an example of good capitalism or capitalisn’t.

Rob Jackson: Oh, I see. OK. Well, I think you’d have to look at our proposal from last week and say capitalisn’t. It’s not a market-driven proposal. It’s a proposal driven by the particular interest of CEOs in having an easier job. For that reason, I have to say the proposal comes down as capitalisn’t. But the great thing about this podcast is I hope many of your listeners will come forward and talk to the SEC about the rules we proposed. It’s just a proposal, and try to persuade me and my colleagues to move in a direction that would be more capital-is.

Kate: Rob Jackson, thanks so much for joining us today. 

Luigi: Thank you very much. This was a great ending. 

Rob Jackson: Oh, Luigi, this was so much fun. It’s like a workshop. I should come here more often.

Kate: Yeah, you should.

Rob Jackson: In my job now I never get to do this. 

Kate: Really? 

Rob Jackson: Yeah, no.

Kate: I would think that that’s all you did at your job. 

Rob Jackson: We need to talk.