GOP Plan May Signal End Of 'Socially Responsible Investing'

May 3, 2017

One of the many reforms Republicans are pushing to ease regulations on business is a rule that would limit who can make proposals during a company’s annual meeting. CEOs say the change will focus more attention on increasing the long-term value of publicly traded companies, but some worry it could end what’s often called “socially responsible investing.”

Sometimes called socially conscious or ethical investing, there are over a thousand of these funds to choose from. Mary Beth Gallagher runs one called the Tri-State Coalition for Responsible Investment.

Gallagher describes Tri-State as “a coalition of forty Catholic institutional investors who work to use our investment portfolio to advance social and environmental issues.”

Tri-State represents billions in assets so sometimes they can just call a company and ask if their investments are being used for something like slave labor. In 2014, Tri-State put that question to Archer Daniels Midland, a huge commodities company.

"But we weren’t seeing the sort of action we needed, so we decided to file a shareholder proposal,” Gallagher says. “Once it’s filed, it’s voted on by all shareholders.'"

It’s a sort of corporate ballot box. If someone doesn’t agree with something a company is doing, the investor can buy a stock in the company and ask their fellow owners to change.

Gallagher filed a proposal at the annual meeting for Archer Daniels Midland to produce a report about how the company’s products were grown, “that the conditions in which those commodities were grown were safe, respected the dignity of the workers that were growing the products, and were not detrimental to the environment.”

And it worked. Now the company applies environmental and human rights standards to farmers across the world.

Shareholder proposals like this happen about a thousand times every year. About half them are for social or environmental issues. Others range from CEO pay to disclosures on political campaign donations.

Right now, all it takes to file a proposal like this is $2,000 worth of shares held for over a year. But CEOs say this threshold is so low that anyone can file proposals.

Former Michigan Governor John Engler leads the Business Roundtable, a lobby group for CEOs. In an interview on CNBC, he called many of these shareholder proposals a nuisance.

“In other cases they are agenda proposals, be they social, some type of activism, maybe around environment.” He added that the value of many retirement pensions were at stake. “Let’s get focused on the real return for investor and the shareholder.”

John Hayes, also with the Business Roundtable, says that CEOs want to focus their time on investors who have a sizable stake in the company.

“It can take up a meaningful amount of one’s time. Particularly while you engage in and get involved with your shareholders, and talk to them on a regular basis and educate them on why a particular proposal is good or not good.”

In the past, the Business Roundtable has asked the Securities and Exchange Commission to raise the threshold for submitting a proposal from $2,000 to $8,000. But Republicans in Congress want it much higher than that. They say shareholders should own one percent of the company for three years before submitting a proposal.

In the case of Tri-State’s attempt to ask Archer Daniels Midland if its money encouraged slave labor, Mary Beth Gallagher estimates she would have to come up with $237 million.

“I don’t think we would be able to do what we do if this moved forward. So this would silence this group of shareholders and limit it only to the largest ten or twelve investors.”

Republicans are currently moving their bill through the House. But the SEC could change the rule without legislation now that the U.S. Senate has confirmed Trump’s nominee to head the Commission. Jay Clayton, a former corporate lawyer, was confirmed on Tuesday by a partisan vote in the Senate.

A previous version of this story misstated Tri-State's role. It does not control investment portfolios. It represents its shareholder voting rights.