The Changing Landscape of Disclosure Rules

The Securities and Exchange Commission (SEC) has been examining the need for new disclosure rules in various areas such as climate, human capital, boardroom diversity, and “greenwashing” issues. This move comes in response to investor demands for increased transparency. However, the recent proxy season of 2023 has shed light on what truly matters to investors – returns and tangible outcomes rather than unrelated political matters.

Shifting Focus: Returns vs Politics

The SEC’s revised guidance, which allows for a broader range of proposals addressing societal concerns, has resulted in a significant rise in shareholder proposals centered around political questions. Yet, shareholders are showing a growing tendency to reject these types of proposals. Surprisingly, the SEC’s claim of investor demand for such changes is not reflected in reality. In fact, in 2023, the average support for ESG-related proposals dwindled to a mere 22%, marking an 11 percentage point decline compared to 2021.

The message from investors is clear – a company’s bottom line takes precedence over seemingly arbitrary political matters. As the landscape evolves, it becomes evident that shareholders value returns and tangible business outcomes above all else.

Investor Opposition to Emissions Disclosures

ExxonMobil, Chevron, JP Morgan, and Goldman Sachs have recently defied calls for increased transparency regarding their emissions data, according to a report by Bloomberg Law[^1^]. These rejected proposals mirror the strictest requirements outlined in the SEC’s proposed climate rule. Shareholders, at the companies’ annual general meetings, overwhelmingly agreed with management that the responsibility for reporting and reducing absolute emissions should not lie with individual companies[^1^].

While this evidence demonstrates investors’ preferences, SEC Chair Gary Gensler plans to impose mandatory disclosures by October. Is it truly justifiable for Gensler to justify his new climate rule by citing investor demand, when shareholders of some of the world’s largest publicly traded companies are actively voting against these very same disclosures?[^1^]

Investor Favor Profit Over Politics

Moreover, Amazon, Toyota, and Eli Lilly are other prominent examples of companies whose shareholders have rejected proposals related to climate change, labor rights, and abortion[^1^]. These investors opted not to prioritize political issues over financial gains. As I explore in my recent book, The Profit Motive, the majority of investors prioritize maximizing value over advancing partisan agendas[^1^].

Rise of “Anti-ESG” Proposals

There has been a noticeable increase in proposals that are being described as “anti-ESG” – a term referring to environmental, social, and governance factors in investing. These proposals specifically challenge companies’ diversity, equity, and inclusion programs, environmental goals, and political spending. Surprisingly, the 2023 proxy season witnessed the submission of 88 anti-ESG proposals, which is a significant 69% increase from the previous year and a massive surge of over 400% from 2021.

Little Support for Anti-ESG Proposals

Despite the growing number of proposals, these initiatives have not gained substantial support. In fact, their average support in 2023 plummeted to an alarmingly low 6%, down from an already meager 9% in 2022.

Interventions by the National Association of Manufacturers

Companies are keen to avoid being entangled in political disputes that are completely irrelevant to their core business, just like shareholders.

The Depoliticization of Capitalism: Shifting Focus to Shareholder Returns

As the economy weakens and interest rates rise, investors are turning their attention towards shareholder returns. This shift in mindset is both necessary and crucial for the thriving of capitalism. It is a development that should be welcomed by all stakeholders, regardless of their political affiliations.

While there is a prevailing sentiment that corporations should step up to tackle social problems due to political paralysis and partisan gridlock within the government, it is important to acknowledge that businesses are not equipped with the necessary skill set to address these complex issues. Expecting them to do so will only create internal conflicts and further deepen the existing political divisions within our country.

Complex challenges such as climate change, economic inequality, and historical racism require innovative solutions that extend far beyond the purview of corporations. Corporate executives, likewise, have little incentive to solve these societal ills, particularly when they fall outside the expertise of their respective enterprises. Additionally, there is no direct financial return associated with solving social issues, making it nearly impossible to measure success in this regard. Moreover, diverting significant resources from profitable practices to address social problems might lead to a phenomenon known as “greenwashing,” where businesses prioritize superficial gestures over meaningful impact.

It is imperative to recognize that the responsibility for addressing societal challenges lies not solely on corporations but on a collective effort involving governments, nonprofits, and society at large. By depoliticizing capitalism and diverting attention towards improving shareholder returns, we can create an environment where businesses can thrive within their areas of expertise while other entities tackle the pressing social issues we face today.

Conclusion

The shift towards focusing on shareholder returns amidst a weakening economy and higher interest rates is a necessary move for the depoliticization of capitalism. While corporations play a crucial role in our society, expecting them to single-handedly solve complex social challenges is unrealistic and counterproductive. By acknowledging the limitations of businesses and incentivizing shareholder returns, we can promote a more balanced approach to addressing societal ills, working together with governments and other stakeholders in pursuit of a better future.

# The Importance of Shareholder-Value Maximization: Preserving Social Benefits Through Business Innovation

The movement to push businesses away from shareholder-value maximization poses a significant threat to the social benefits that business naturally bestows upon society. These benefits primarily manifest in the form of innovation, which drives progress and advancement. However, blindly imposing strict ideological, political, and cultural ideals on businesses may impede their ability to push the boundaries of society through invention and creativity. As a result, the damage inflicted upon social welfare would far outweigh any limited gains that companies might achieve by prioritizing nonfinancial concerns.

The Role of Shareholder-Value Maximization

Shareholder-value maximization has long been regarded as a fundamental principle in business. By seeking to maximize the value of shares, companies are incentivized to optimize their operations, improve efficiency, and achieve sustainable growth. This ultimately benefits not only shareholders but also broader society.

Unleashing Innovation for Social Good

Innovation, a natural byproduct of businesses’ pursuit of shareholder value, has consistently reshaped our world for the better. It has led to groundbreaking advancements in technology, medicine, and various industries, enhancing our quality of life and addressing societal challenges.

However, shackling businesses with rigid ideological constraints jeopardizes their ability to innovate freely. Innovation often arises from a drive to challenge existing norms and boundaries. By imposing rigid standards, we risk stifling the creative spirit and hindering progress.

The Negative Consequences

If businesses are constrained by external ideological, political, and cultural forces, the potential for innovative ideas to flourish diminishes significantly. Without the freedom to explore uncharted territories, businesses may struggle to develop groundbreaking solutions and make transformative contributions to society. This limitation on innovation will ultimately hinder the creation of social good.

Balancing Financial and Nonfinancial Concerns

While it is essential for businesses to address nonfinancial concerns such as sustainability and corporate social responsibility, it is crucial to strike a balance with shareholder-value maximization. By prioritizing financial success, companies can generate the resources necessary to invest in long-term growth, research, and development. These endeavors, in turn, foster innovation and pave the way for future social benefits.

Conclusion

The centrality of shareholder-value maximization in business cannot be underestimated. It is this pursuit that enables businesses to unleash the transformative power of innovation, benefiting society as a whole. While nonfinancial concerns must not be disregarded, it is crucial to strike a delicate balance and ensure that businesses can thrive, innovate, and ultimately deliver substantial social good.