Working Together to Protect
Our Common Resources
|
Welcome to our June newsletter. So much to report this month!
If you’re feeling TLDR, listen to this class in which Professor Amelia Miazad of Berkeley Law School interviews Rick about the what TSC is doing.
Better yet, listen and read below.
We are also hosting an introductory webinar July 15th at 2pm ET, where we will give an overview of our theory of change and review our strategic initiatives. If you're interested in learning more about TSC's work, you can register here.
Did someone forward this email to you? Sign up here!
We are pleased to announce that we have received a generous grant from The Ford Foundation to support our work for the next fiscal year, beginning July 1. This catalytic core funding will leverage our preparation over the last six months into the next phase of execution for both our litigation and guardrail initiatives, as discussed below.
Our small but growing list of donors is at the end of this newsletter. We have a number of positions and items we need to fund in our new fiscal year. If you would like to help, please reach out (or send a check to The Shareholder Commons, PO Box 7545, Wilmington DE, 19803.)
JUNE RAMBLE:
NOW MORE THAN EVER
Business Is Failing
The separation of human needs from corporate behavior has led to growing inequality and exclusion, declining dignity for the working and middle classes, and an existential ecological crisis. If more evidence were needed, the twin crises of COVID and civil unrest in response to racial injustice prove that current business models provide neither the resilience nor the fair opportunities we need
for a prosperous and just society.
None of this has gone unnoticed by the leaders of business and finance. The chairman of the world’s largest asset manager has called for better corporate stewardship of the environment. The Business Roundtable, composed of the CEOs of the country’s largest corporations, has issued a new statement declaring that the purpose of business includes protection of all stakeholders, including
workers. And scores of large corporations are proclaiming their assistance to Americans in distress from the pandemic and concerns with racial justice following the murder of George Floyd and other Black citizens.
But outspoken money managers, heroic CEOs and corporate contributions to the Urban League cannot save us from a system that rewards exploitation. It is not simply individuals, but the system itself that must change, so that profits earned by depleting common resources are no longer treated as success.
Systemic Change Requires Collective Action
Now more than ever it is clear that the systemic change we need requires collective action. Prioritization of individual gain does not optimize our economy. Instead, it creates an economy that celebrates profits, even when those profits derive from behaviors that create inequality, environmental damage and social fragmentation.
All businesses, global citizens and our only planet are all deeply interdependent, and profits that come from extractive practices serve no one other than a small group of financial professionals and high ranking corporate executives. Through communication, legislation, litigation and advocacy, TSC promotes collective action by shareholders to create business guardrails that lead to
regenerative practices which promote dignity, equality and ecological balance.
BENEFIT GOVERNANCE:
REAL CHANGE IN REAL TIME
Business Roundtable Fails to Walk the Talk
Regular readers of the newsletter will recall that a few months ago we noted that even though 182 big companies from The Business Roundtable had
signed onto a statement proclaiming that the purpose of the corporation had changed from profit machine to stakeholder value generator, none of those companies had actually changed their legal form. As a result, those companies continue to have obligations only to shareholders, despite the high-minded rhetoric.
As conventional corporations, each of these enterprises must organize its operations in a manner that revolves around optimizing its financial return to shareholders. That is, they can take care of customers, employees and communities, but only to the extent that such behavior relates to shareholder value. These companies do not have legal structures that countenance any
sacrifice of shareholder wealth for stakeholder welfare. We see evidence of this failure of governance every day, from the hyper-leveraged supply chains that are unable to cope with a pandemic to the continual stripping of fair pay and dignity from the workforce, feeding injustice and unrest.
Benefit Corporations Are the Real Deal
We also described an alternative to shareholder primacy: conversion to a benefit corporation, a new type of entity that requires corporate executives to consider the interests of all stakeholders, without prioritizing shareholders above all others. In Delaware, the form is known as a “public benefit corporation” or “PBC.” Since we last reported on the subject, there have been some
very promising developments that we hope will lead to more corporations adopting better governance that protects all of us, not just shareholders.
First, in a Harvard Business Review article, the Former Chief Justice of the Delaware Supreme Court, a highly credentialed finance professor (Harvard and Oxford) and a leading asset manager issued a call for
business leaders and shareholders alike to support the PBC:
If the Business Roundtable supports conversion of their public companies to this model, their mere “trust us, we care” words will become those of accountable leaders who embrace an enforceable obligation to others. But corporate leaders cannot succeed unless institutional investors, such as BlackRock, Fidelity, State Street, and Vanguard, and organizations
like the Council of Institutional Investors, also walk their talk on corporate purpose and on the value of stakeholders. These and other large investors have demonstrated that their voting clout can move the market. If they support public companies in converting to benefit corporation status, our corporate governance system can change for the better — fast.
The Market Is Moving
While no Fortune 500 public companies have met the challenge, the shareholders of publicly traded Amalgamated Bank recently approved benefit governance at their annual meeting. Lemonade, an innovative insurance broker backed by SoftBank, Sequoia and other venture capital funds, announced it would go public as a PBC. These two leaders will join the two corporations with benefit governance already trading on the NYSE or NASDAQ, Laureate Education and Natura (the owner of Avon Products and The
Body Shop). In addition, the shareholders of Danone, the French multinational consumer packaged goods producer, just last week approved its becoming the French equivalent of a benefit corporation, with 99% of the shareholders voting in
favor. Its ADRs trade over the counter in the U.S.
The movement is growing internationally as well: on June 30, the first Canadian benefit corporation law became effective in British Columbia, adding to prior adoption in the United
States, Italy, Colombia and Ecuador.
These developments make it increasingly difficult for the Business Roundtable signers to argue that the public markets aren’t ready for PBCs. The fact is investors are hungry for opportunities to invest in responsible corporations. This study found hundreds of rounds of private investment in PBCs:
[W]e find that there are 295 PBCs which have received investment from VC funds amounting to over $2.5 billion in the aggregate. This investment is significant because it shows that the PBC form is not a failure and that it is capable of attracting for-profit investment, a marker of success. This investment is coming not just from pro-social VCs but from
top-tier firms.
While these are all signs of growing interest from companies, investors and thought leaders, perhaps the most important news came last week, when the Delaware General Assembly passed legislation that eliminated the artificial barriers of a supermajority vote and a shareholder right to cash out when conventional corporations convert to PBCs. The statute was also amended to otherwise
make the form more user-friendly. See this excellent memo from the Freshfields law firm.
No More Excuses
With these developments, there is simply no excuse for companies or investors to talk about the importance of stakeholders as equal partners while maintaining a legal form that treats shareholders as the only group that matters. If you are an asset owner or manager, now is the time to advocate for better governance at your portfolio
companies.
BUT IF THAT DOESN’T WORK...
Our overarching goal at TSC is to give shareholders the ability to establish universal guardrails on corporate conduct. These guardrails would ensure that companies compete only for profits that come from real value creation, and not from burdening the rest of us with the costs of pollution, inequality and job destruction.
The reason we are so excited about the advance of the benefit corporation form is that it is a great step towards enabling shareholders to implement such guardrails. Without a change in governance, companies will be more likely to evade such guardrails, as they may be able to maximize their own profits by continuing to externalize costs onto society and the environment. In contrast, benefit corporations will have a legal obligation to consider guardrails so as to ensure that all of our
common resources are preserved and regenerated, and that all communities are treated fairly.
...WE MIGHT HAVE TO SUE SOMEBODY
However, we recognize that progress toward benefit corporation adoption may be slow. In light of that, we are also working on a litigation strategy to redefine shareholder primacy in a manner much more friendly to our planet and it inhabitants. Interestingly, the law of shareholder primacy was not devised by legislators or regulators—it has been created by judges in response to individual
lawsuits that came before the courts. This is what lawyers call “common law,” and it can evolve as new questions are presented in new cases.
We want to encourage shareholders to push the courts to recognize that shareholders care about much more than the profits that come from a single company, because shareholders have jobs and families and other investments. We believe that if executives were required to consider all of these interests when they were making decisions on behalf of shareholders, they would necessarily be much more protective of all stakeholders, because once you move beyond finances, shareholders and stakeholders
have many common interests.
In pursuit of this idea, we held our first litigation workshop on June 24 with the goal of considering how the following question might be answered in litigation:
If a company’s shareholders are largely diversified, may directors ignore the effect that its behavior has on the overall return of equity markets or other shareholder interests, even if that overall market return and such other matters are far more important to those shareholders than the individual financial return of the company itself?
Participants included Delaware Chancery Court litigators focused on shareholder representation, law professors and representatives from the mutual fund industry, foundations and endowments. Views as to the efficacy of a Chancery Court strategy were varied, and TSC was able to further develop its strategies for this initiative thanks to the insightful feedback and conversation.
Contact Rick Alexander if you would like to get involved in this project as an asset owner or manager or as a lawyer.
...AND, IN ANY EVENT, WE HAVE TO
GET TO THE GUARDRAILS
As we mentioned above, our goal is to catalyze a coalition of investors who will impose guardrails on corporate conduct- here is a deeper explanation of our theory and approach. We have been working
over the last year to bring this coalition together and are now excited to be launching the effort.
We are arranging a series of virtual meetings with small groups during July and August. In these meetings, we will seek input on (1) proposals for initial guardrails and (2) tactics for implementation. Following that initial phase, we hope to bring all of the participants together in an early fall virtual convening to be co-hosted with the Ford Foundation. At that juncture, we will refine our initial
guardrails, tactics and leadership for a “beta test” of guardrails in the 2021 proxy season.
It is our hope that we can begin to bring shareholders together to draw clear lines, precluding corporate conduct that depletes our vital social and environmental resources. Only a coalition focused on the conduct of all corporations can move beyond changing individual company impacts and operate on a systemic level. Such a coalition can go beyond seeking more disclosure and instead insist on better
conduct. Most importantly, such a coalition can cohere around a single, unifying principle— that profits based on costly exploitation of the global commons and vulnerable communities are untenable.
We are looking for asset owners, asset managers and subject matter experts to help build this movement. Please contact us if you are interested in participating, or sign up for our introductory webinar to learn more.
As we close out our first fiscal year, we want to thank all of our incredible donors who make this important work possible:
Founders Circle ($100,000+)
Ford Foundation
Anonymous
Leadership Circle ($1,000+)
Areve Alexander
Ryan Greecher
Pamela and Ajay Raju Foundation
Shareholders Circle ($250+)
Matthew Elkin
Anonymous
BERKELEY LAW
PROFESSIONAL CERTIFICATE IN
SUSTAINABLE CAPITALISM & ESG
We had the opportunity to participate in a new executive education online certificate course -- Sustainable Capitalism and ESG -- developed by Professor Amelia Miazad, founder of the Business in Society Institute at
Berkeley Law School. It is designed as an eight-week, self-paced online certificate program (with an additional three months provided to complete the course). It begins in August and registration is now open. Learn more and register here.
|
Thanks for reading all the way to the end! Please pass the newsletter on to those who might be interested and let us hear from you.
Meanwhile, try to stay safe, sane and healthy. And don’t forget to breathe.
|
Please send this email along to anyone
who may be interested in getting involved,
or could assist us with moving our work forward.
|
|
