On November 8, 2018, dRoss Kerber and Pete Schroeder write on Reuters:
The U.S. securities regulator is set to review this month rules on corporate democracy, setting it up for a clash with investors who worry the agency will side with companies to diminish voting rights on charged issues like climate change and gun violence.
On Nov. 15, the Securities and Exchange Commission will hold a roundtable on the ‘proxy process’ by which big pension funds and other shareholders can force companies to vote on a range of environmental, social and governance matters.
For over a decade, corporate America has complained that voting rules have allowed special interests and proxy advisory firms that recommend how investors should vote to hijack corporate boardrooms with costly demands.
The SEC has heard out corporate concerns in the past, but has not pursued changes to rein in shareholder proposals, which have taken on a higher profile since the financial crisis as a mechanism for corporate oversight. Business groups are hoping this time is different with a business-friendly administration in power, while investors gear up for a battle to protect the influence they have gained.
The SEC is already taking written comments and might consider rule changes next year in areas where a compromise is possible, such as raising the bar on submitting proposals.
“It is important to regularly review whether our existing rules are achieving their objectives effectively in light of changes in our marketplace,” an SEC spokeswoman said in a statement.
Responding to social, environmental and governance concerns of investors, top fund firms, such as BlackRock Inc (BLK.N) and Vanguard Group lately have backed high-profile shareholder proposal campaigns at companies like gunmaker Sturm Ruger & Co and energy giant Exxon Mobil.
Both fund firms declined to comment on the roundtable, but have previously said they vote based on clients’ long-term interests. Proposals put forth by smaller firms and pension funds on areas like workforce diversity and boardroom elections have also gained ground in recent years.
Business groups were heartened when President Donald Trump appointed as SEC chair Jay Clayton, a former Wall Street lawyer who pledged to ease burdens on listed companies. The Chamber of Commerce and the National Association of Manufacturers have dramatically stepped up their lobbying on proxy issues.
“The rules governing the U.S. proxy system have failed to keep up with the times and need to be modernized for the benefit of investors, public companies, and the capital markets,” said Tom Quaadman, an executive vice president at the U.S. Chamber.
A spokesman for the manufacturers association pointed Reuters to a letter it sent to the SEC last month calling for the regulator to further tighten rules on proxy advisers.
In September, Clayton rescinded 14-year-old guidance that allowed funds to rely on recommendations from proxy advisors Glass, Lewis & Co and Institutional Shareholder Services (ISS) when voting in company elections. Business lobbyists complained it gave proxy advisors too much power.
Tougher oversight of proxy firms and raising the bar for submitting proposals will be up for debate at the Nov. 15 event.
Some investors push back.
“Some institutional investors say it’s not broke, don’t fix it. Why open the door to potential damage?” said Amy Borrus, deputy director of the Council of Institutional Investors, which represents state pension funds and other asset managers.
SEC officials have emphasized they see the roundtable as the beginning of a discussion and welcome all feedback.
“Just because something is contentious doesn’t mean we have to not deal with it,” Republican Commissioner Hester Peirce told Reuters.
One change pitched by business groups could subject proxy advisors to stricter conflict of interest disclosure rules, according to lobbyists and SEC sources.
Business groups say the two principal firms are potentially conflicted because ISS offers consulting services to the same companies on which it provides voting recommendations, while Glass, Lewis & Co is largely owned by activist Ontario Teachers’ Pension Plan.
KT Rabin, chief executive of Glass Lewis, said the company has worked to address potential conflicts and new regulation was unnecessary, but that she was “going to this meeting with an open mind.”
Gary Reber Comments:
Financial capital, such as stocks and bonds, is an ownership claim on the productive power of real capital assets. In the law, property is the bundle of rights that determines one’s relationship to things. As binary economists Louis Kelso and Patricia Hetter put it, “Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector.”
All stockowners of public for-profit corporations should have an ownership claim entitling them to both full-earnings payouts and full-voting rights, whether as individual stockowners or as an assembly of individual stockowners (e.g., stock funds, 401k funds, and other group funds). Voting rights should be allocated according to the amount of stock held by individuals and funds. The total should add up to the amount of stock issued as single shares. Thus, with each stock representing an ownership claim on the capital asset properties of a for-profit corporation, voting should be democratic based on the distribution of the stocks issued.
Most urgently, what we need to address is how do people become owners of public for-profit corporations, which pay out their full-earnings dividends and provide full-voting rights?
Most people do not have the right to acquire productive capital assets with the self-financing earnings of the capital assets; instead they are left to acquire, as best as they can, with their earnings as labor workers. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital.
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital assets is made available by financial institutions ONLY to people who already own capital assets and other forms of equity, such as the equity in their home that can be pledged as loan security––those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets pledged to them in the eventuality that the loan is not paid off. Thus, the rich, who by definition do own assets, are made ever richer, while the poor (people without a viable capital asset estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and productive capital asset ownership is clinically denied to those who need it.
Buying stock thus requires “past savings” (obtained by withholding from consumption). Further, 99 percent of stocks are pre-owned and, as such, the stock market is a speculative “gambling casino” with high risk, and not based on REAL productivity gains. Wall Street has convinced many people, who stand to lose a substantial mount or all of their past savings “invested,” that it is necessary to forgo safe, guaranteed returns, and risk principal in favor of “possible” 8, 10 or even 12 percent returns on their “investments.” Unfortunately, any gains that have occurred in people’s retirement––even after years of growth––can be wiped out with a market downturn.
The vast majority of Americans cannot afford to risk losing monies to speculate in the risk game. The system needs to be reformed to incentivize public for-profit corporations to issue and sell stock to finance their growth with EVERY American having equal opportunity to buy these new full-dividend-paying, full-voting-privledged issues, using insured, interest-free capital credit, strictly repayable out of the full dividends (from earnings) generated by the true investment in new productive capital asset formation representing the responsible building of a future economy that can support general affluence for EVERY citizen. The new capital credit extended would be fully asset-based and represent the new money created.
Stock purchased directly from a public for-profit corporation and in which the corporation receives the money from the purchase (whether from past savings or insured, interest-free capital credit) in order to produce things is a TRUE INVESTMENT.
But stocks offered on the stock exchanges––virtually all presently owned by someone or someones––are bought and sold for capital gain speculation using what are called long or short sale transactions. (Note: few corporations pay earnings dividends to stockholders, and if they do the dividends are miniscule.) The stock certificates represent physical productive capital assets. The stock exchanges are playing with the “value” tied to these physical assets. Except for Initial Public Offerings (IPOs) and subsequent new stock issues, which represent actual new productive capital asset formation (and then not always), existing stock trading creates no new productive wealth but inflates or deflates the “market value” of existing stocks. In any event, past savings are required to gamble, and the vast majority of Americans have no savings or significant savings. But there is another way to become an owner of productive wealth-creating, income-producing capital assets, without the requirement of past savings and without gambling in the stock market.
Despite what “the experts” would have you believe, the stock market is not the sector where primary activity takes place. That’s why it’s called “the secondary market.” In a rational world, the primary market affects the stock market, not the other way around.
The stock market deals in secondhand securities, which, as previously stated, essentially translates to a gaming casino. Wall Street and the media have convinced us to see ourselves as “investors” instead of “gamblers” or “speculators” and “perceived values” instead of “bets.” At this secondary level, stock is purchased from other stockholders with the “bet” that its value will increase or decrease in future. If selling, one receives the cash from the transaction (after holding it for sale). Stock held for sale to “cash in” with a capital gain at a future time is speculation. The stock becomes speculative as soon as the buyer decides to hold it for appreciation. It is important to understand that the money paid by the stock buyer is not received by the producer corporation to be used to build new asset activity or replace old assets. It is used to pay to the stock seller.
The stock market speculates on expectations about where corporate profits and the economy are headed––the wild ride of casino play. To play you must have past savings to gamble that you will reap gains. But there is also the downside that there will be no gain, and even loss. In any case, this is a trading exercise with present owners selling to new owners just getting into the game or present owners wanting to place more bets. In any event, no new real physical capital asset wealth is created with the monies exchanged. Fundamentally the game is betting on the ups or downs of stock values. And in order to reap any gain, one must sell their stock holdings and cash out. Otherwise, it is hard money put up to speculate and paper (computer) accounting until you cash out.
In the case of speculative stock buying and selling, this activity does not provide gain to the producer corporation (even if the price of the stock offered initially and later sold goes up), but instead enriches the holder of the asset (stock). Speculators do not add to economic activity, at least primarily. Perhaps members of society will feel more optimistic with the stock shares (market) going up, and perhaps they will be looser with their savings to purchase goods, products and services. Unless, however, the producer corporation has new cash to build products and extend services in demand, then speculation will not help. Eventually, the speculators might sell their stock or other asset and use some of that to purchase consumer items, but that is a tenuous trail to economic progress and again it does not assure the producer corporation having the cash to actually build more things.
The pre-tax yield of corporate assets of prosperous corporations varies from 25 to 60 percent. The yield on secondhand securities is around five or six percent. Those “investing” (gambling) in the stock market are hoping for capital gains to increase the amount of money put out to purchase stock.
The other reality is the majority of Americans do not have the option of purchasing stock on the exchanges because they do not have sufficient income or savings to risk––the better bets on stock cost in the hundreds of dollars for a single share. And don’t expect dividend income because corporations overwhelming finance FUTURE growth through retained earnings or corporate debt financing, neither of which creates any new owners. Capital credit is restricted to the purchase of assets that are expected to pay for themselves out of the revenue generated from the capital investment, which it financed, and therefore these assets are expected to earn a continuing flow of profit for whoever owns the assets. Thus, because no new owners are created, as a result of issuing and selling new stock, the present ownership class continues to enrich themselves by monopolizing capital ownership of America’s productive capital assets.
As the system is now structured, there is a complete disconnect between the productive sector and the secondary market for debt and equity (the stock market). Stock market prices are not a leading or lagging economic indicator. What remains puzzling is the fact that so few of the “experts” realize that there is an alternative to the wild swings that characterize the modern business cycle.
The real problem remains, however: how do we restructure the system to give as many people as possible the opportunity and means to become productive capital asset owners?
Oddly enough, despite the fact that the first principle of economics is “consumption is the sole end and purpose of all production,” no one seems to grasp the obvious conclusion that producing to generate savings (defined as the excess of income over consumption) in order to have financing for investment is holding back economic growth because of the slavery of past savings. Kelso and philosopher Mortimer Adler had the right idea: instead of saving to invest . . . invest to save; that is, shift from past savings that result from consuming below production, and go with future savings that result from producing more in response to increased production.
To finance new production and simultaneously create new productive capital asset owners, what is needed is to implement the Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act).
This is also the way, to create jobs. Companies only hire new workers for the same reason they invest in new non-human productive means: there is existing demand to be filled. If labor is required for a task, a job is created. So to create jobs is to encourage production. To encourage production is to make it possible for people to produce. Since physical capital is rapidly replacing labor in production, wouldn’t making more people into productive capital asset owners create jobs automatically? Why tax people or inflate the currency by issuing more government debt to create jobs when both are disincentives to production?
We need to mandate that ALL new money is backed by the present value of existing and future marketable goods, products and services. Bills of exchange represent the present value of future marketable goods, products and services, while mortgages represent the present value of existing marketable goods, products and services. New productive capital asset formation can be financed by discounting and rediscounting bills of exchange through commercial banks, thereby turning the future increases in production into current money to finance the productive capital assets that will produce the goods, products, and services.
We also need to create ALL new money in ways that create new productive capital asset owners so that every single child, woman, and man can produce all that he or she consumes, either directly or by exchanging with others through money, by means of both productive capital and labor.
Presently, the Federal Reserve creates money by loaning it to banks, who re-loan it with interest. With Capital Homesteading, money would be created by loaning it directly to citizens via banks at zero interest (plus administrative costs) to invest in FUTURE wealth-creating, income-generating (full dividend payout/full voting) productive capital assets formed by producer corporations growing the economy. To build real wealth, the new full-reserve money would go into a long-term retirement account (an IRA-type Capital Homestead Account), held by individual citizens, to be invested in dividend-paying/full voting, asset-backed shares of viable corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.
The Federal Reserve could and should play a more positive role by removing artificial barriers to equal citizen access to acquiring and owning productive capital wealth. By creating asset-backed money for production, supported by growth-oriented tax policies, the Federal Reserve could truly help promote shared prosperity in a market system.
To achieve this, Americans need to support the elimination of the corporate income tax with the provision that for any corporation to benefit from this measure they must pay out fully their earnings to the individuals who own the corporation (who would be subject to individual tax rates), eliminate retained earnings and closed-benefit debt (neither of which creates any new capital owners), and issue and sell new stock when the corporation desires to grow and expand. Otherwise, any corporation who does not adhere to this corporate tax-free incentive would continue to be subject to the corporate income tax and whatever rate that would be. In any event, what may be necessary to strengthen the incentive is the corporate income tax raised, perhaps to 90 percent.
We need to do everything in our political power to implement policies that will create productive capital asset owners and universally broaden personal ownership of wealth-creating, income-producing capital assets to grow our economy responsibly and abate economic inequality. Otherwise, the vast majority of Americans will be subjects of the wealthy capital asset ownership class as wage slaves, consumer debt slaves, welfare slaves and charity slaves.
The JUST Third WAY (not the neoliberal Third Way) is a radical overhaul of the economic system (i.e., the Federal tax system, Federal Reserve policy, inheritance law, welfare and entitlement system, etc.) that will achieve genuine economic democracy,
Support the Agenda of The JUST Third WAY Movement at http://foreconomicjustice.org/?p=5797
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice
Support the Capital Homestead Act at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/. And The Capital Homestead Act brochure, pdf print version at http://www.cesj.org/wp-content/uploads/2014/11/C-CHAflyer_1018101.pdf and Capital Homestead Accounts (CHAs) at http://www.cesj.org/learn/capital-homesteading/ch-vehicles/capital-homestead-accounts-chas/
