Shareholders used to care about the companies they invested in. These days, shareholders waive all voting rights and couldn’t care less.
Why is that?
I think there are a couple of reasons:
#1. The government says everyone should invest in the stock market.
Politicians and the financial news media have been pushing an agenda for decades that the only way to be “prepared for retirement” is to invest aggressively into the stock market.
The average American literally knows nothing about the stock market, how to evaluate a share price, what impacts the markets, etc. Isn’t it strange then that the government pushes us to invest in stocks?
Personally, I am suspicious and no longer invest for retirement.
So the first reason shareholders have given up their rights is because they didn’t know they had them in the first place. These people are not investors and are just doing what the government and media tell them to do.
#2. The Rise of Index Investing
The second reason shareholders have lost relevance is due to the rise of index investing.
Index investing aims to mimic the performance of a certain market. For example, if an investor wants his portfolio to perform like that of the S&P 500, he or she can invest their funds into an S&P 500 Index Fund (or ETF). This results in the investor buying every company listed in the S&P 500. The Balance has a short article that lists the different markets an index investor can copy (large cap, mid cap, international, etc.).
The point is, index investing does not include picking individual stocks and THIS is why Americans don’t care about their rights as a shareholder:
They didn’t choose or even know which companies they own!
What is a Shareholder and What are Their Rights?
So let’s back up.
What exactly is a shareholder and what are their rights and responsibilities?
As a shareholder in a publicly traded company, you’re actually part owner in the business enterprise. That entitles you to a share of the company’s profits, as well as the ability to participate in the rising value of its stock.
But apart from the financial benefits of owning stock, shareholders also have the right to exercise a degree of control over company operations. For example, shareholders have the ability to vote on management selection, the board of directors, corporate policy, among other decisions.
The problem with these rights is that individual shareholders like you and me share them with thousands of other investors. Much like voting in a national election, you can only cast a vote once. So unless you’re voting with the majority, your opinion won’t matter.
That said, you always have the right is to sell your shares in the company if you disagree with how it’s managed.
Who are the Shareholders of a Corporation?
Not all shareholders are just outside investors like you and me.
These days, it’s common for corporate executives to own very large stock positions in their own companies. Since the more stock you own in a company, the more weight your vote has, corporate executives often sway decisions by voting for what benefits them individually. Even if that’s not the best decision for the company.
We see this in action when we consider CEO salaries or friends and family of the executive team serving on the board of directors.
These decisions are a direct result of their overweight shareholder voting power. Want to feel depressed and see an entire list of insanely high CEO salaries? Check it out here and enjoy.
Founders and “No-Vote” Shareholders
The founders of a company are also large shareholders.
It is less disturbing when a founder has controlling power of a company through his shareholder voting rights than when a CEO or executive team does.
By virtue of being the founder, he or she will have the company’s best interest at heart. This is not the case with outside hired CEO’s and executive teams.
That said, founders are stirring up their own trouble when it comes to shareholder voting rights.
In the rise of technology companies, many founders prefer raising money privately instead of taking their company public.
One reason for this comes down to shareholder voting rights. Founders want to maintain control over their company and raising money from the public requires them to disclose every single detail as well as give up voting power to public shareholders like you and me.
This is where “No-Vote” shareholders” comes in. Evan Spiegel, the founder of Snapchat, was the first founder to agree to go public as long as public shareholders gave up their voting rights. It caused quite the stir:
Despite the media coverage, people didn’t care.
And that’s because (most) Americans with money in the stock market don’t realize they have voting rights, don’t exercise them, and don’t even know what they’re invested in.
Other founders were quick to follow suit: Blue Apron, Lyft, Pinterest, WeWork, Stitch Fix… the list goes on.
Maybe this could happen in politics!
If enough Americans stop voting in political elections, we may one day say: Just choose for us! We don’t care enough to pay attention!
The Demise of Shareholder Activism
In my article, How to Be a Conscious Investor, I review the history of social responsible investing (SRI).
There used to be a time when Americans aligned their values to their portfolios, voted with their dollars, and weren’t total hypocrites.
Those days are over thanks to index investing. Who has time for principles when we are buying the entire stock market? So sure, protest the banks on Wall Street, but don’t forget you’re profiting off them in your investment portfolio.
Shareholder activism is over for the little guy. We have given up our voting rights to Vanguard, Blackrock and State Streets, who have the incentive to please corporate executives. Here’s an excerpt from a recent Reuters article which confirms my point:
Index funds now control half the U.S. stock mutual fund market, giving the biggest funds enormous power to influence decisions at the companies in which they invest trillions of dollars. The leading U.S. index fund firms, BlackRock Inc, Vanguard Group and State Street Corp, rarely use that clout. [F]or instance, they supported doubling the pay of the chief executive at California utility PG&E Corp after its stock plummeted over potential liability from maintenance problems linked to California wildfires. The funds supported big pay packages for executives at beauty products company Coty Inc – including nearly $500,000 for their children’s tuition – as the company struggled to digest its acquisition of Procter & Gamble’s beauty business. And all three cast pivotal votes against the proposed reform of splitting the CEO and chairman roles at General Electric Co after a decade of poor performance.
Americans want to bitch and moan about the evils of capitalism, all the while handing over their voting power to three of the largest wealth management companies in the world!
If you are an index investor, you have absolutely no fucking right to be protesting climate change while 100% profiting off of and supporting ExxonMobil.
Related Reading: Passive Investing Sucks
Fintech and Robo-Advisors Exacerbate the Problem
You know the only thing that could make this situation worse?
Is if instead of actually talking to a human about putting your money into a zombie index fund, you opt to do so using a robot!
Millions of Americans are investing their savings into an asset class they don’t understand that ripple affects the decisions multinational corporations make such as increasing wage disparity, destroying the environment, evading taxes (among other horrors), all because they don’t want to be held accountable for their money.
They are probably busy protesting Trump, am I right?
Most fintech (financial technology) investing products, mainly robo-advisors, make Americans dumber than ever when it comes to investing. The robot asks your age, your income and one or two other questions and POOF! you’re now invested in the same ETF (i.e., index fund) as every other customer.
Ever since the financial crisis, investment flows into ETFs have risen from $531 billion in 2008 to $3.4 trillion in 2018.
Robo-advisors focus on asset allocation and have no minimum deposit requirements. This translates to a typical robo-advisor customer, with just $1,000 portfolio, having shares in hundreds, perhaps thousands of companies. So like 5 cents each LOL.
How does this arrangement encourage the investor to give two shits about the company? It doesn’t.
Robo-advisors and fintech companies encourage customers to see the stock market as an ATM. Put money in and X years later you’ll have Y!
News flash morons: That’s not how it works.
So do shareholders still have rights? The answer is no, because they gave them away.
The pride of owning stock in a company whose mission you support has disappeared. The days of boycotting a company and divesting your shares because they [INSERT EVIL] are over. Now, most folks are only investing in index funds through their retirement accounts, and are only doing that because government and media propaganda told them to.
Why are you not suspicious of our national government telling us to invest in the stock market?
How much more clear can they make it that Wall Street is their first priority?
It’s too bad when we give up our rights as a shareholder. It leads to disaster scenarios like that of WeWork’s CEO, Adam Neumann.
It also reduces the power of hundreds of millions of people down to just a handful of wealth management firms. And you can guarantee their aim is to please corporate executive teams, and absolutely not to please you, the customer.
This style of investing is called detachment. The farther you are away from your investment, the less concern you have for how it works and operates.
An investor today doesn’t need any knowledge of the business or the industry. By relying on the expertise of the fund manager or the robo-advisor, indifference becomes the order of the day. And this may be the way things are in today’s world, but it’s definitely not the better way.
This way of investing is making us complacent and dumb.
Don’t be foolish enough to think this was all an accident.