How small shareholders can cause good trouble

The global pandemic's wrenching disruptions have had an array of unforeseen economic and social consequences, from gluts of office space to developmental challenges for children. Not many forecasters are likely to have had "revived shareholder democracy" on their bingo cards. Bravo to anyone who did.

The part that lockdown boredom played in inspiring the meme-stock craze is acknowledged. Less appreciated may be its role in a shift to greater exercise of investor voting rights. UK startups Tulipshare Ltd. and Tumelo are at the forefront of a movement to bridge the gap between ultimate shareholders and the companies they collectively own. This may not generate quite the same viral buzz as the GameStop Corp. frenzy, but it's a trend with potentially longer-lasting and more profound effects on the investing landscape.

Think of it as the serious elder sibling of the meme-stock mania. If the typical GameStop or AMC Entertainment Holdings Inc. buyer was a millennial lying on the sofa laughing about the fun of messing with hedge fund short sellers, then the typical Tulipshare customer might be pictured as a millennial lying on the sofa worrying about how the world will survive.

The Tulipshare platform lets individual investors pool their stakes so they can meet the threshold for submitting shareholder proposals and put pressure on companies to adopt more socially responsiblebehavior. In effect, it allows any shareholder, however small, to become an activist. The company, founded in July 2021, posted a 166% increase in users to 27,000 for the third quarter. Founder Antoine Argouges said in an interview he aims to have close to 1 million "from Berlin to Los Angeles" in 2025.

The rise of such platforms hasn't exactly flown under the radar, with Tulipshare taking on some of the biggest companies in the world in its short existence. Its campaigns have included pressing Coca-Cola Co. to use fewer plastic bottles and urging Johnson & Johnson to end talc sales (a step the health-care company took in August). Most notably, it drew support from 44% of Amazon.com Inc. shareholders for an unsuccessful resolution in May calling for an investigation of working conditions at its warehouses. "This is the stuff of a financial revolution," Argouges said.

Four-year-old Tumelo, meanwhile, is more focused on institutions such as pension providers and asset managers, providing tools that enable more than two dozen including Legal & General Investment Management Ltd. and Fidelity International Ltd. to identify and channel the voting wishes of beneficial owners. "The momentum is really increasing," CEO and co-founder Georgia Stewart told me, saying she expects the company is on the cusp of "exponential growth."

The question now is whether these changes are permanent or fads that will disappear as Covid recedes. Meme stocks have fizzled (while showing periodic signs of life) and pandemic-fueled enthusiasm for crypto has taken a beating from the collapse of FTX, but the trend toward shareholder enfranchisement looks less likely to reverse.

Even before Covid left millions with excess time to spend on their brokerage apps, a confluence of factors was pointing toward greater shareholder engagement, among them: the increasing attention given to environmental, social and governance issues; the expanding capabilities of fintech, and political polarization in the US — but probably nothing as influential as the rising power of passive investing.

Low-cost index funds have increasingly come to dominate the asset management industry: BlackRock Inc., the world's biggest money manager, had almost $8 trillion of assets under management as of the end of September. But this has left a democratic deficit — though BlackRock's Chief Executive Officer Larry Fink sees a new era of "shareholder democracy" coming and pledged to extend voting power to more of the firm's clients. How should the providers of index funds, with their market heft, vote their holdings? The active manager, who has chosen to buy stock X or Y, can be expected to have a view on corporate policies and vote accordingly in the interests of the ultimate owners. The passive manager, by definition, has no such opinion — he or she just buys every stock in proportion to its weighting in the index.

This conundrum arrives just as investors become more interested in knowing that the companies in which their money is invested are doing the right thing. That's easier said than done. Millions of us contribute to pensions while having little idea of where precisely the funds go or how the investment manager would vote on issues we might care about — like net-zero targets or labor conditions. Imagine if you could log on to your pension provider, see upcoming shareholder decisions and click to indicate how you would like your vote to be used? That's what Tumelo and its competitors provide.

Skeptics question how great the impact of returning votes to owners will be, and argue it may be the opposite of what advocates expect. For one thing, most US shareholder proposals are non-binding: Company boards can ignore them if they choose. What's more, it will have the effect of dispersing votes. At present, a fund manager can vote an entire block of shares, and can potentially use that leverage to influence management. Once the company knows that the fund no longer controls those votes, it has less incentive to listen.

That's no reason for not doing it. As a matter of principle, the votes belong to the owners. The separation of ownership and control, a function of the complexity of modern capitalism, has long been recognized as a corporate governance challenge. Restoring that link may have results that are as yet impossible to predict, but they are likely to be mostly positive: driving new levels of engagement, encouraging people to care about a process from which they have become alienated, and potentially even reviving faith in the economic system. This trend is to be welcomed.