Even in democratic governments constrained by constitutional limits, the interests of the governed and the governors don’t align well. Government is inefficient by its very nature, spending other people’s money and subject to the leeching effects of special interests. Corporate governance, in contrast, historically has been conducted by people spending their own money, subject to the will of shareholders with a common ownership interest in the company. Calvin Coolidge famously noted that “the business of America is business,” because Americans are “profoundly concerned with producing, buying, selling, investing and prospering in the world.”
But today government is working to remake the dynamic business sector in its own feeble image. Reforms to enhance shareholder rights made it easier for small shareholders to initiate votes, but the new rules mostly have helped interest groups with nominal stock ownership promote their political objectives at the expense of shareholders.
The rise of index funds, which own an ever-greater portion of U.S. stocks, raises the specter of a vast number of shares being voted by fund managers and their proxy advisers who don’t own the shares and may have a conflict of interest with the people who do. The Sarbanes-Oxley Act increased the proportion of independent directors on the boards of public companies, diluting the share of the board with a vested stake in good performance.
Today investors with a political agenda force major energy companies and banks to evaluate the impact of fossil-fuel bans, though no government has ever instituted such a ban. A Manhattan Institute study estimates that 56% of proxy resolutions in Fortune 250 companies last year dealt with social and environmental issues. Even when such proposals are repeatedly crushed by shareholder votes, the business operations of targeted companies suffer. And corporations sometimes bow to political pressure by granting concessions in return for dropping the resolutions.
The claim that investors can do good and well at the same time by investing in socially desirable objectives is reminiscent of Bill Clinton’s 1992 campaign proposal to invest private pension funds in chosen public projects. When even union pension funds refused to put members’ retirement at risk by making “publicly beneficial investments,” President Clinton opted in 1995 to…
