Exploring Collective Action in Markets With Michael Levin and Christina Sautter
On the democratization of corporate governance.
One of the animating concepts behind Troop is the idea that investors can accomplish more together than they can on their own. It’s at once intuitive and not: The global financial system is imposing, and the work of navigating it, let alone influencing it in some way, is difficult by design. How many casual traders know they can influence the companies they have a stake in? And how has this dawning realization changed the calculus for asset managers looking to attract the next generation of investors?
During a recent panel hosted by market watchdog Unusual Whales, Troop co-founder Felix Tabary discussed the evolving landscape with two experts: Christina Sautter, the Southern Methodist University law professor behind some of our favorite research on governance and retail investing trends, and Michael R. Levin, the investor and writer of the essential newsletter and resource hub, The Activist Investor. Troop is honored to count Levin as an advisor. The conversation is condensed and edited below; you can listen to the full stream on Spotify here.
Felix Tabary: Activist investing is first and foremost a collective exercise. Corporations, especially in the US, have a pretty outsized impact on our lives — but we don't necessarily elect the executives and the boards of these companies. Most people who are shareholders of companies, whether they realize it or not, typically have the right to cast their vote for the members of the board of directors, and sometimes they can cast their vote on a number of other issues. Activist investing, for us, is the exercise of taking an active seat in your position as a shareholder. What can we do to get people to realize they have this right, and that they can and should exercise it? And how can we make it more exciting? Our response to that is collective effort. We think that the mechanism of activist investing lends itself particularly well to both of those things: educating you about the concept of governance, and inviting you to participate in the governance of companies together.
Christina Sautter: Think about when you first became aware of the vast power of corporations — when was that? And when did you first become aware of your power to vote within corporations, and how that works? I think for most people, the answer to that is they did not become aware of these things. Corporate governance education should be mandatory, at least at the high school level; learning about corporations should not just be a natural thing that occurs in every American's life, as they grow up. Also, the Securities and Exchange Commission can play a significant role here.
Michael R. Levin: “Universal Proxy” was a change in how the SEC regulates these board elections, and this seemingly technical change actually reverberated throughout companies, and led to a lot of companies actually paying more attention to what their shareholders want. Shareholders in the past had very little they could do when they voted for directors, and this little regulatory change really strengthened their ability to elect individual directors that they preferred, and to knock out incumbents who didn't seem to be representing their interests very well. You want your elected representative, just like in civic elections, to represent your needs, whether it's going to be for some form of sustainability, better governance, or pure money making; you want to have a say here. For anything to happen at a company through governance changes, it takes the concerted effort of a large collection of shareholders. We're interested in trying to figure out ways to coordinate the interest of a large group of diverse shareholders in a classic collective action problem: How can the actions of a very small number of shareholders, or even a single shareholder, start to benefit all shareholders of a company.
Sautter: What we see and what we know is that people don't understand [the proxy voting] process. They don't know the terminology or understand the terminology, and there's really no reason for them to, it's not intuitive. They don't know what a record date is. And they don't know what that process is and how that process works.
Tabary: There's information asymmetry, and a bit of a knowledge gap at play here. Some of the more cynical voices in the realm of voting advisory or governance are quick to suggest that there's voter apathy, or retail shareholder apathy; I don't know that I necessarily agree with that. At the same time, though, if you look at voter turnout for federal elections in the U.S., it's among the lowest turnout rates of any developed democracy in the Western world. So there might be a cultural thing at play. Either way, the solution remains roughly the same: It's a grassroots voter registration-style issue that can only be solved through a branding and marketing and education exercise.
Sautter: “Rational apathy” is the thought that one's vote doesn't matter. It's very much individualistic thinking: this idea that it's too costly to participate, too costly to get up to speed, and even if one does incur those costs, that doing so will be useless. Apathy is really a result of a lack of information: It's an inability to communicate, and an inability to coordinate, an inability to learn that one's vote actually does matter, particularly if other people are voting in a similar fashion or hold similar views. Technology and social media really remove these barriers to communication, and remove the barriers to information-gathering. People can communicate much more easily; they can discuss issues that are on shareholder meeting agendas; they can exchange information about how they're going to be voting. So, it's no longer rational to stay apathetic. When social trust exists, that builds greater civic engagement.
Tabary: We're seeing an increase in democratic participation in governance systems at a slightly higher clip in the U.S. today than we have since probably the early ‘60s. On one hand, you've got resource constraints that are getting people to start questioning the basis of the model upon which we're building most companies — and then at the same time, another shift is a movement towards participating more in governance structures. Perhaps we're seeing that apathy being combated. To me, it's not super surprising that this trickles over to the stock market.
Levin: There is a raging debate among aficionados, but also investors and scholars and so forth, about the purpose of a company. Is the purpose of a corporation to make money, or is the purpose of a corporation to participate in a constructive way in our society? That's the backdrop in which all this is happening. And at the same time, a lot of shareholders have grown frustrated and disillusioned with their ability to participate in civic elections. So they're now looking to another place where they can maybe have an influence over what happens in the world, and that would be to try to influence what goes on in the company. People who own stock are starting to see that, “Okay, if I really can't express my views very directly about how I elect people, at least I can do that in trying to figure out and influence what companies should be doing.”
Sautter: As Gen Z becomes more active in civic participation and political participation, they're naturally also going to become more active in corporations, once they realize the power that they're sitting on.
Tabary: When you are a very large, long-term investor, such as pretty much every pension fund in the U.S., or a large institutional asset manager, you are investing with one goal, which is to give the people whose money you're managing more money tomorrow than they gave you today. If you look at Exxon Mobil, the overwhelming majority of their revenue comes from everyday Americans filling their cars at the gas pump — except that at the same time, on a 2035, 2040 horizon, all U.S. automakers are committing to transitioning to electric vehicles. So if you're Exxon Mobil, and you don't have a plan to transition to renewable energies by 2035 or 2040, [the value proposition of an ESG-minded governance proposal] really doesn't have much to do with the environment, it’s just the cold, hard business reality. So, off the back of Exxon’s lack of plan, the small hedge fund [Engine No. 1] built a pretty impressive coalition, composed mostly of the world's biggest investors, all of whom have some sort of a stake in Exxon Mobil, and were able — to ExxonMobil's great surprise — to get three people who they nominated to the board appointed, out of four.
Levin: It also illustrates a couple of points we've all been making. Engine No. 1 was a very new little hedge fund, but through the case that they made, they were able to not only get a significant number of retail investors — Exxon has a very large retail investor base relative to a lot of other companies — but also were able to persuade all three of the biggest shareholders in Exxon Mobil and really get that collective action going. Engine No. 1 figured out a way to bridge financial activism and the sustainability aspect: They were able to show that for Exxon Mobil to adopt a much better approach to sustainability wouldn't only be good for the world, but it was also going to be good for Exxon Mobil financially.
Tabary: Bringing your shares together and creating a front behind an idea often leads you into a place where you probably would have never really been able to achieve some of the outcomes that you would if you'd undergone this action on your own. We're trying to make it as fun and engaging as possible. Not every topic necessarily lends itself to light and breezy discussion, a lot of these topics tend to be rather serious — but the [Troop] platform itself encourages anyone with a brokerage account and a couple ideas to go ahead and submit your thoughts for how you'd like to push a company on its financial record, or its environmental or societal record, or both at the same time. We're here to help you structure your argument.
Sautter: Although [retail investors] may only have one vote per share, that is a voice, and it's an important voice. And if you're not exercising your right to vote, then you're missing out on something.
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