Looking at the Securities and Exchange Commission’s Investment Advisory Committee as a proxy for the relative influence of the shareholder empowerment movement gives one the distinct impression that the SEC is, at the least, unduly influenced, if not fully captured.

Shareholder empowerment advocates—primarily, but not exclusively, those who represent the interests of public pension funds and union-related funds—call for shifting corporate decision-making authority toward shareholders and away from boards of directors and executive management. The effect on corporate governance is to allow uninformed shareholders an ever-increasing power to interfere with the decision-making of the most informed loci of corporate authority. The end results of this approach are suboptimal board and executive decision-making, fewer successful companies willing to become or remain publicly traded and constraints on society’s ability to create economic wealth.

Congress created the IAC under Section 911 of the Dodd-Frank Act, with the drafted purpose to:

advise  and  consult  with  the  Commission [SEC]  on … regulatory priorities of the Commission; … issues  relating  to  the  regulation  of  securities products, trading  strategies, and  fee  structures, and the effectiveness of disclosure; …  initiatives  to  protect  investor  interest;  and  … initiatives to promote investor confidence and the integrity of the securities marketplace; and … submit  to  the  Commission  such  findings  and  recommendations  as  the  Committee determines  are  appropriate, including  recommendations  for  proposed  legislative changes.

This sounds innocuous enough. Moreover, it appears Section 911’s authors expected membership to be broadly based and to represent a variety of interests:

The members of the Committee shall be … the Investor Advocate [heads the Office of the Investor Advocate, a new office established by Section 915 of the Dodd-Frank Act]; … a representative of State securities commissions; … a representative of the interests of senior citizens; and … not fewer than 10, and not more than 20, members appointed by the Commission, from among individuals who … represent the interests of individual equity and debt investors, including investors in mutual funds; … represent the interests of institutional investors, including the interests of pension funds and registered investment companies; … are knowledgeable about investment issues and decisions; and … have reputations of integrity.

Nevertheless, like a lot of legislation, Section 911 has had unintended consequences. The IAC’s membership has been dominated by shareholder empowerment advocates. I estimate at least seven of the 18 members can be considered movement supporters, including Chairman Kurt Schacht of the CFA Institute and Vice Chairman Anne Sheehan, Vice Chairman of the California State Teachers’ Retirement System, who presumably set the committee’s agenda.

Given this bias, it should not come as a surprise that one item on the IAC’s meeting agenda earlier this month was a discussion of Snap Inc.’s recent initial public offering with a dual-class share structure that did not offer voting rights to purchasers. The shareholder empowerment movement’s abhorrence of dual-class share structures—based solely on the fact that they reduce or eliminate the voting power of the typical stockholder—is nonsensical. This structure has been used by some of the most successful companies in the world—including Alphabet (Google), Berkshire Hathaway, Alibaba Group, Facebook, Under Armour and LinkedIn—to create enormous wealth for their stockholders.

Moreover, the Snap IPO was hugely successful. Snap priced its offering at $17 per share, giving it a market valuation of roughly $24 billion. The book was more than 10 times oversubscribed and Snap could have priced the IPO at up to $19 per share. So whose interest are shareholder empowerment advocates trying to protect when they attack dual-class share structures?  It appears the interest of most concern to the movement is its own, as the more dual-class share structures there are, the less power the movement has.

Shareholder empowerment advocates do not need any extra help from the Dodd-Frank Act to have a major impact on corporate governance. As Congress and the White House continue to review sections of the Dodd-Frank Act to be amended or repealed altogether, Section 911 should be included on that list.


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