The Rise of Shareholder Politics

Traditional theories portray stockholders as fully focused on profits. But that’s not as true as it once was.

A golden bull on a U.S. dollar
Getty / The Atlantic

About the author: Roberto Tallarita is a senior fellow in law and economics and an associate director of the program on corporate governance at Harvard Law School.

When asked whether public corporations should be legally forced to disclose their political donations, Gary Gensler, President Joe Biden’s pick for chair of the Securities and Exchange Commission, said that the decision should be based on what investors want. To an outsider, this might sound like an evasive answer, in the grand tradition of confirmation hearings. The truth is that for the future chair of the SEC to pledge to pay attention to investors should be no surprise.

But what investors want is sometimes surprising. On May 26, for example, shareholders of Chevron voted 61 percent in favor of a proposal that asked the company to cut so-called Scope 3 emissions in order to reduce its climate impact. A few days earlier, shareholders of Norfolk Southern Corporation had voted 76 percent in favor of a proposal requesting transparency regarding the company’s lobbying against the goals of the Paris climate agreement, and shareholders of American Express had voted 60 percent in favor of a proposal for a quantitative report on workplace diversity.

Shareholder proposals of this sort are not a rarity. As I document in a new paper, from 2010 to 2019 shareholders of S&P 500 companies submitted more than 2,400 proposals on political, social, environmental, and ethical issues, including the transparency of corporate political spending and lobbying, the reduction of greenhouse-gas emissions, the use of renewable energies, employees’ gender and racial diversity, and the morality of experiments on animals. Very few proposals get a majority of votes, as happened this year at Chevron, Norfolk Southern, and American Express, but a growing number are getting more support every year.

Traditional corporate-finance models are based on the premise that what shareholders want is to maximize stock value. Pressing companies to take action on various public-interest issues—a phenomenon that I call “stockholder politics”—is at odds with this premise. Why would supposedly profit-maximizing investors concern themselves with social, environmental, or ethical matters?

One popular answer to this question is that corporate social responsibility is good for business. Over the past two decades, an emerging empirical literature has shown that some corporate decisions benefiting employees, society, or the environment increase stock value, too. But the evidence on this point is mixed. A survey of 128 academic papers found that the causal link between corporate social responsibility and financial performance is not demonstrated, and while “59% of studies report a positive relationship between [corporate social responsibility] and financial performance, 27% report a mixed relationship, and 14% report a negative relationship.”

In reality, many measures proposed by shareholders in favor of employees, consumers, or the environment seem to be primarily or exclusively driven by social and environmental concerns, not by financial concerns.

Take, for example, a shareholder proposal on food waste submitted to Amazon in 2019. The proposal requested that the company issue a report “on the environmental and social impacts of food waste generated from the company’s operations.” The supporting statement briefly mentioned that reducing food waste might be good for “performance” and “brand reputation,” but it did not really explain how, nor did it try to quantify the relevant costs and benefits. Instead, the proposal heavily focused on the social and environmental impact of food waste, and it warned the company that “wasted food production is responsible for consuming 25 percent of U.S. freshwater, 19 percent of fertilizer, and 18 percent of cropland.”

Or consider a shareholder proposal submitted to Pfizer in 2017 requesting a report on the price increases of its 10 best-selling branded prescription drugs. The proposal asked the company to explain the reasons for the price raises, citing surveys that show that “one in four people in the U.S. report difficulty affording their prescription medicine,” and noting that “current price increases severely limit access to live-saving medicines, particularly for economically challenged patients.” The social goal of the proposal was crystal clear, and any discussion of financial goals was absent, except for the vague mention of possible “legislative, regulatory, reputational and financial risks.”

Proposals like these, in which the financial rationale seems weak or is outright missing, are not infrequent. Indeed, when I analyzed the text of a random subsample of all public-interest proposals submitted to S&P 500 companies over the past decade, I found that more than a fourth of these proposals do not mention a financial rationale, and many proposals that mention it do so vaguely.

So why do shareholders file these public-interest proposals? An alternative theory suggests that these proposals are the product of eccentric preferences—of individual investors or special interests—that conflict with the interests of most other shareholders. But the data contradict this theory too. Of the 2,410 proposals I’ve analyzed in my research, only 23 percent were filed by individuals, and I estimate that in more than half of these cases, these individuals were backed by institutional players.

Many of the public-interest proposals—almost half—do come from unions, religious groups, policy-advocacy groups, or public pension funds—so-called “special interests.” But to write these groups off as merely representing their own self-serving imperatives misses the broader support they have recently built among investors: In 2010, public-interest proposals obtained 18 percent of shareholder votes on average; in 2019, that number had grown to 28 percent. Furthermore, although very few proposals obtained a majority of votes (1 percent in my sample), a good number of proposals (16 percent) were withdrawn by the proponent after the company agreed to address the relevant issue.

To make sense of this phenomenon, we must apply the conventional tools of corporate finance unconventionally, to the topic of shareholders’ political and social beliefs.

Although it’s useful, in many contexts, to think of shareholders as exclusively interested in profits, such a simplified assumption doesn’t help us understand shareholder politics. Shareholders are driven by a bundle of diverse motives, just like everyone else. They are interested in profits (financial motive), as standard economic theory claims, but they are also willing, to varying degrees, to accept a lower financial payoff in order to produce a benefit for other groups (pro-social motive) or to express their political or moral values (expressive motive). The diversity of human motives was obvious to early philosopher-economists, such as Adam Smith (who built his moral psychology around the concept of “sympathy,” which he defined as the “interest … in the fortunes of others”) and Jeremy Bentham (who listed 13 sources of utility other than material pleasures, including amity, “good name,” and benevolence). The world around us confirms this idea: Many people donate to charities, religious groups, or political candidates; others pay a higher price for products that promise to be less harmful to animals or the environment; still others pay hefty fees to join clubs and associations that reflect their own beliefs and values.

What does this mean for a public corporation?

Corporate-finance experts have identified three general principles to help understand the relationship between shareholders and management. First, most shareholders are passive. They have little incentive to monitor how managers run the company. (As corporate-governance scholars like to say, shareholders are “rationally apathetic”; the individual return on paying attention is minuscule.)

Second, the interests of principals and agents are never perfectly aligned. Yes, managers run corporations as agents of shareholders. But because shareholders pay little attention, managers have the opportunity to make choices that are in their own personal interest rather than in the interest of shareholders.

Third, activists may help mitigate these agency problems. Unlike regular shareholders, activists have the expertise and incentives to monitor corporate decisions and hold managers accountable.

These notions are traditionally applied to financial decisions, such as CEO pay, takeovers, and corporate acquisitions. But what I found is that they are also helpful for understanding corporate decisions with a significant public dimension. Most regular shareholders do not have enough information or attention to monitor corporate policies on employee rights, greenhouse-gas emissions, public health, or political donations. Therefore, managers can follow, to some extent, their own social and political preferences, rather than those of shareholders.

This is where stockholder-politics specialists make their entrance. Just as takeover specialists and hedge funds are driven by their high-powered financial incentives to challenge management and drive up stock value, stockholder-politics specialists have the expertise and motivations to monitor and challenge the company’s impact on society. Regular shareholders are too passive to actively make proposals, but many of them are sufficiently motivated to vote on these proposals when an expert activist makes the relevant issues salient.

Stockholder politics is also a good antidote to corporate leaders’ overreach into the public sphere. In 1970, in an article in The New York Times Magazine, Milton Friedman famously invited managers to focus exclusively on profit making and to ignore social responsibilities. Individual shareholders, Friedman argued, can then use their share of profits to address the social problems they care about. Whatever one may think of Friedman’s recommendation, it doesn’t reflect reality. Large corporations wield significant influence on policy and politics, and many decisions by their leaders have social and environmental consequences that cannot be easily fixed after the fact.

In a world in which corporate directors and top executives have so much power, maintaining a vibrant space for internal corporate speech is vital. The most precious lesson of pluralism is that the best protection against excessive power is having a great variety of competing powers, interests, and voices. Stockholder politics plays exactly this role. It bridles the discretionary power of CEOs, increases transparency, gives voice to alternative points of view, and puts a spotlight on the public dimension of corporate decisions.

Will shareholders fix our most pressing social problems? Most likely not. Investors’ financial motives can’t be naively written off: They remain a most powerful force, one that propels the economy but limits the possibility of corporate altruism. And many large-scale corporate externalities are best dealt with at the political level. These days, however, when more and more experts trust corporate directors and CEOs to take care of the public welfare, stockholder politics is a healthy reminder that the power of these corporate leaders can and should be subject to close scrutiny. And that this scrutiny starts from inside the corporation.