Why Does the SEC Want to Stifle Investors’ Incentives to Hold Management’s Feet to the Fire?

Shareholder activism – the practice of buying small stakes in public companies and pushing for change – is one of the best tools we have for holding companies accountable. The efforts of shareholder activists can benefit not just long-term investors (including the beneficiaries of pension funds, i.e., people like you and me), but also anyone who thinks that investors should be doing more to discover value relevant information about a firm and, if you are a socially conscious investor, to recognize the risk of climate change.

Around 20 percent of an S&P 500 firm is owned by the three passive indexers (BlackRock, Vanguard, and State Street) whose business model is the provision of low-cost index funds. Their business model is not designed to generate fundamental information that would suggest whether the company is under- or over- valued. As an example, consider the case of IBM. IBM has under-performed the S&P 500 index by around 250 percent in the decade spanning 2010-2021. Will an asset management firm stay solvent if it underperformed the market by 250 percent? Yet, the big three passive indexers continue investing in IBM because the company is in the index. Who, if anyone, has the power to get IBM’s management to confront its problems? Undervalued firms usually attract the attention of activists such as Elliott Advisors or Third Point. Overvalued firms usually attract short sellers.