Sen. Eric Schmitt's (R-MO) Stop Woke Investing Act was released at the end of last year and has recently received support from industry actors and think tanks alike. While the name of the bill may sound like something designed to control business investment, in reality, the bill attempts to dial back interventions into corporate decision-making by the Securities and Exchange Commission (SEC). With restored discretion, companies will be less exposed to shareholder activists who take focus away from the corporation’s responsibility toward company success, which will translate into consumer benefits.
The Act was proposed in response to the SEC’s 2021 Staff Legal Bulletin No. 14L (SLB 14L) and other rules that have limited the ability of companies to disregard minority shareholder proposals that have no bearing on companies’ material success. When the SEC first addressed shareholder resolutions in 1945, they stated that such proposals were not for general political or social matters. Shareholders could not utilize resolutions to promote interests outside the company’s fiduciary duty to its investors.
SLB 14L narrowed the scope of which shareholder proposals could be excluded during a review. While previously any proposal without material benefit could be discarded, now the SEC is protecting environmental, social, and governance (ESG) proposals.
As outlined by the Competitive Enterprise Institute, only some of these ESG proposals actually pass when subject to a shareholder vote. However, because companies are often forced to vote on these proposals, they take up time. Activists have latched on to these new protections and are swamping shareholder meetings with hundreds of ESG proposals; such individuals are called “political gadflies.”
The result has been that social and environmental policy proposals made up 63 percent of all shareholder submissions in 2022, according to an American Consumer Institute study. In total numbers, S&P 1500 companies are receiving more social and environmental policy proposals than ever before. While very few pass, they still exert significant influence on corporate decision-making and waste precious time.
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These proposals take time and resources away from the board's fiduciary duties, not only negatively impacting shareholders but consumers as well. When ESG proposals comprise the majority of shareholder proposals, there is less time that can be spent on proposals that aim to create new opportunities to lower consumer prices, expand into new markets, or create new products and services, etc.
Furthermore, SLB 14L changed the focus of company boards from one oriented toward business operations to one focused on ESG proposals. Even though few of these ESG proposals have passed, the sheer number of them forces companies to pay more attention to ESG policies and make changes to satisfy activists. Shareholder advocacy is the primary way activists promote ESG policies, and companies have adopted many aspects of these policies, despite the low success rate of ESG proposals and evidence of shareholder weariness of them.
It would be one thing if ESG proposals were only a distraction from more consumer-oriented corporate policy proposals, but they are more nefarious than that. ESG investments have been shown to underperform against non-ESG investments. Companies that incorporate more ESG policies into their operations are losing their shareholders money. This is money that could have gone towards pro-consumer investment.
For these reasons, bills that aim to restore control of proposals back to the majority of shareholders will ultimately benefit the American consumer. A minority of shareholder activists should not be legally protected in a strategy of proposal inundation, which ultimately comes at the expense of everyone else.
Isaac Schick is with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal
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