BREAKINGVIEWS-Imperialist ways flow from Oval Office to C-suites

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, Feb 20 (Reuters Breakingviews) - The influencers of the investing world are losing some clout. New guidance from the U.S. Securities and Exchange Commission makes it trickier for normally passive money managers to voice concerns to companies without potentially facing the more onerous explanations required of funds seeking to apply pressure. Although the regulator’s change reflects President Donald Trump’s war on climate and diversity initiatives, the chilling effect on shareholders will be broader.

Following an approach embraced by the White House, acting SEC Chairman Mark Uyeda abruptly made the changes earlier this month with a stroke of his pen rather than use the consultative rulemaking process. Both the method and the decision itself caught corporate consiglieri off-guard and left them scrambling to advise clients. Fund goliaths BlackRock BLK.N and Vanguard paused meetings with executives from companies they invest in to sort out what they can and cannot say.

Before the SEC’s revision, an investor that owned 5% or more of a company could discuss environmental, social and governance matters with management while still qualifying as “passive.” The agency’s revised directive makes it harder to secure such an exemption if a fund manager urges a company to take certain ESG-related steps, invokes its voting policies or makes support for board members conditional on implementing changes.

In such cases, the stakeholder may now be considered an activist investor, putting it in the same category as funds which typically seek to oust CEOs, break up companies or push for other strategic changes. The classification involves more paperwork, attracts greater attention and can make it harder for institutional investors to rebalance funds on the fly.

It’s easy to spot the primary target. In a 2022 speech, Uyeda called out the burden of complying with climate-related disclosures, citing an SEC estimate that they would quadruple corporate filing costs from about $2 billion to more than $8 billion, assuming legal fees of $600 an hour. He also questioned the value of ESG-focused investing and suggested the agency revisit whether asset managers engaged on such matters should be forced to divulge additional information more quickly to the market.

Despite the recent ESG backlash, BlackRock alone still oversees $1 trillion of sustainability-related investments. Trying to stifle custodians of so much capital is not exactly business friendly, but the shift also affects other factors in a way that further augments executive power. Fund managers that try to sway CEO pay or corporate takeover defenses may now be considered active rather than passive. Big investors will either have to declare themselves activists, diluting the power of the label in the process, or be more judicious with their feedback. Either way, the imperialist proclivities of a U.S. president who considers himself a monarch will be cascading into C-suites.

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CONTEXT NEWS

Mutual fund manager Vanguard paused meetings with portfolio companies while it reviews the impact of new guidance about passive and active investors from the U.S. Securities and Exchange Commission, Reuters reported on February 19, citing unnamed sources. Rival money manager BlackRock also suspended meetings for the same reason.

The SEC issued guidance on February 11 that may require fund managers to file Schedule 13D disclosures if they pressure management on climate-related or corporate governance matters rather than the simpler 13G form that typically applies to passive investors with at least a 5% stake.