All credits and copyright Lyn Alden via her Lyn Alden Investment Strategy website https://www.lynalden.com/about-lyn-alden/

A beautifully written blog that demonstrates an alternative way to fight for the environment and social change.

The Ethical Case for Stock Ownership 

Shareholders elect the board of directors that controls a company. Additionally, shareholders are allowed to submit shareholder proposals every year to companies they own for other shareholders to vote on in order to influence the board of directors.

Many people complain about corporate behavior: 

•       How they buy elections and control politics. 

•       How they pollute our air, land, and water. 

•       How they spy on us and use our data in weird ways. 

•       How they market unhealthy foods to kids. 

•       How short-term focused they are on next quarter’s profits. 

However, hardly anyone actually votes in shareholder elections, and that is because most people do not buy and hold individual stocks for the long term. There are many shareholder proposals every year for companies to disclose lobbying efforts, acquire cleaner energy, and so forth, and most of them are ignored. 

Vanguard and BlackRock both have over $4 trillion in assets under management. They are the largest shareholders of most publicly traded companies on earth. The top 400 asset managers in the world collectively own over $50 trillion worth of equities. They are the true owners of the corporate world. 

Most index fund companies and asset managers in general have a policy to abstain or vote no on most shareholder proposals, and they almost always vote for new board members that the existing board has nominated, without giving much thought. 

For example, Vanguard voted no on a shareholder proposal for ExxonMobil to disclose government lobbying payments to shareholders and voted no on a shareholder proposal for PepsiCo to adopt quantitative renewable energy goals. 

Vanguard simply holds so many companies, that they cannot really get involved. 

They abstain or vote “no” for thousands of proposals like these.  

So, are the shareholders really in control? In theory, the shareholders are the owners of the company, and they elect the board of directors to oversee the company’s strategy and to hire executives to run the company’s operations. 

However, in practice, the current board recommends new board members to replace ones that leave, and passive asset managers around the world vote “yes” on almost all of them. Instead of shareholders electing board members, most boards more or less just run themselves and shareholders abstain and do not pay attention. 

If people do not vote for their politicians and then complain about their governance actions, then maybe they should vote next time. Similarly, if they complain about corporate behavior but do not vote any of their company shares, and outsource all their ownership to index companies who just abstain on most things, then maybe they should own a stock or two and actually vote. Each individual vote is tiny, but they add up. It is the same logic as with political votes. Imagine if corporate boards knew they had to be more accountable.  

If we as investors just put the market on autopilot with little governance, we should not be surprised when it does not work out well. Capitalism works best when we pay attention to it and manage it. It is like a garden that needs some pruning from its participants; it does not work well on autopilot.  

“Socially Responsible Investing” is popular these days, and plenty of entrepreneurs are making good money by setting up investment products that filter companies according to some criteria. The standard index funds are the opposite of socially responsible investing because they are designed to be oblivious and passive even as they grow so large that they hold trillions of dollars in equities as the largest shareholders of most companies in the world.  

However, the simple old-school form of socially responsible investing is simply to own shares and vote with them. It takes a few minutes per year per stock to do this, and follows the same logic as voting, where each person makes little difference but if enough people abstain as a matter of course, the election and the results don’t work very well.  

Bill Ackman, a well-known billionaire activist investor, wrote in a 2016 letter to his clients:    

At current rates of asset inflows, it will not be long before index funds eff–––ectively control Corporate America and the corporations of many foreign countries. The Japanese system of cross corporate ownership, the keiretsu, has been blamed for decades of Japanese corporate underperformance and economic malaise. Large passive ownership of Corporate America by index funds risks a similar outcome without the counterbalancing force of large active investors and improvements in the governance oversight implemented by passive index fund managers.

I think the pendulum has swung pretty far towards the convenience of index funds, and it may have to swing back a bit at some point. Large activist investors have a role to play, but millions of ordinary citizens can also have their say.  

I view this topic similarly to how I view the proliferation of processed foods. For several decades, processed foods have grown in popularity due to their cheapness and convenience. However, as a consequence, we became very detached from where our food comes from, obesity and diabetes rates skyrocketed, our soil quality has been damaged, we have badly stressed the financial sustainability of our healthcare system, and we have treated animals like factory products, keeping them sick and confined and laden with antibiotics to keep them alive in hellish conditions for the sake of efficiency. 

Now, whole foods are coming back in vogue, and more people are interested in where their food comes from, how it was produced, and what the ingredients are. 

To me, it seems investing in stocks is kind of like that. Convenience and cheapness in the form of index funds is a good thing, but we have to be careful about how far we go. We should not necessarily outsource everything and become oblivious to its operation.  

It is a useful skill to be able to understand, value, and invest in a business, and it is an ability worth cultivating. If we continue to detach ourselves from having any sort of active role or oversight in the largest businesses around the world, it will not be surprising if we find ourselves with similar problems in finance that we have found ourselves in with our food. 

Not everyone should own individual stocks. However, for people who are interested in investing and have the capability to do so, owning individual stocks is a rewarding practice.  

There is certainly a case for at least some investors to own individual stocks, to assert your right as a shareholder, and play your small role in shaping the world as you would like it to be. By extension, paying attention to a handful of companies helps you become and remain generally knowledgeable about economics and business as an informed citizen of your country and the world as a whole. 

End of article.

This chapter was taken out of one of Lyn Aldens digital software products ‘The StockDelver’ that is designed to educate people in intelligent investment strategies.