Working Together to Protect
Our Common Resources
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Welcome to our first newsletter of 2021. It has been a busy year already for The Shareholder Commons, as we hosted a virtual Symposium on Beta Activism and Universal Ownership theory last month, with over 80 participants from across the asset ownership, management, and academic spectrum. For a full recap of the event including recordings and resources, please click here.
Since our last issue, the situation in the United States changed in a profound way. The riot on Capitol Hill confirmed what so many of us had feared—that the frayed ties that bind us together are at the breaking point. This newsletter arrives in your mailbox with no clear resolution of the crisis on the horizon. At the same time, the pandemic still rages, and the U.S. daily
death toll rose above 4,000 on some days and many countries that thought the worst was past are now seeing new variants of the virus and waves of infection and death.
The chaos and uncertainty only underline the importance of our mission at The Shareholder Commons. Much of what happened in Washington, DC last month can be traced to corporate pursuit of financial return, regardless of social cost. Throughout the four years of the Trump administration, members of the U.S.-based Business Roundtable continued to contribute to politicians who put democracy at risk and social media companies monetized their global dissemination of the president’s hateful messaging.
The recent corporate response to the violence is too little and too late. Twitter has banned Trump, but not other venom-spewing politicians. JPMorgan Chase paused its contributions to congress members that voted against certifying the election, but will they stop all political spending (including through trade associations and other intermediaries) and give
the people of the United States their democracy back? Will they stop funding fossil fuel projects that are literally destroying the opportunity for our children and their children to have decent lives?
Shareholders cannot stand on the sidelines. They are investors with broad financial interests, as well as human beings with jobs and lives and moral compasses. If climate change and COVID-19 were not enough to shake them, surely corporate complicity in murder and mayhem in the center of the U.S. democracy must.
In the rest of this issue, we discuss our ongoing projects, which have not changed. But the urgency of now has never been fiercer. We invite you to join us in redoubling our efforts to end a business culture that measures success by financial return at individual companies, without accounting for the social and environmental costs that they impose on others. There is no longer any doubt that if business culture continues to sow seeds of destruction, we will reap a
whirlwind.
As always, please reach out if you would like to further discuss any of the below or to get more involved with our work.
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BETA ACTIVISM UPDATE
TSC has continued to assist various shareholder proponents in challenging companies to consider the threats to diversified portfolios created by profits that come at the expense of environmental systems and social institutions. We have supported proponents in filing 19 proposals so far, with a few more still to come.
Some of the companies have asked the U.S. Securities and Exchange Commission (SEC) to allow them to exclude the proposals from their proxy statements, attempting to make arguments that the proposals violate SEC's Rule 14a-8 requirements. More companies are likely to do so in the next month or two. In every case so far, the proponents disagree with the companies’ assessments, and we are currently helping them to compose and file responses. Here’s the running tally:
Proposals at Goldman Sachs and JPMorgan Chase request that the companies disclose how their facilitation of
multi-class voting, which gives individuals perpetual power over critically important companies like Facebook and Alphabet, will affect the economy and markets over the long term. Both companies seeking to exclude the resolutions, essentially arguing that the proposals:
- Deal with ordinary business (Rule 14a-8(i)(7))—the company’s “decisions and considerations regarding whether or not to offer its underwriting services to customers, and, if so, to which customers, on what terms, and in what context,” according to Goldman Sachs, and
- Are vague and indefinite so as to be inherently misleading (Rule 14a-8(i)(3))—neither the company nor its shareholders can understand what the requested report would address; or, as per JPMorgan Chase, the proposal
“prob[es] too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
We have submitted responses to Goldman Sachs’ and JPM’s exclusion requests, arguing that the
concentration of power in few minority shareholders is a recipe for disaster and represents a critical policy issue. Ironically, both companies recognize the concern, as each of their asset management businesses have comprehensive voting guidelines opposing the very structures that their underwriting business facilitates. Our responses also contest the companies’ assertions of vagueness.
A proposal at PepsiCo requests a report on the public health costs of its food and beverage business and how those costs affect market performance, in light of the fact that the World Health Organization has assessed the unpriced social burdens of obesity at nearly three percent of annual GDP. The company
is seeking to exclude the resolution on the same ordinary business and vagueness grounds as the preceding two companies, arguing that decisions about the products it carries are so complex that they cannot be subject to direct shareholder oversight, and that terms such as “external public health costs” are not
adequately defined and thus potentially misleading. We have submitted a response to PepsiCo’s exclusion request, arguing that publicity around PepsiCo’s targeting of Black children in its advertising campaigns and participation in trade groups that block public health legislation demonstrates the
importance of the policy issue behind the proposal.
A proposal at McDonald’s and YUM! Brands requests a report on the external public health costs associated with
antimicrobial resistance (AMR) that arises from excessive use of antibiotics in their meat supply chains. The proposal cites studies that calculate economic losses from AMR at $54 trillion by 2050. Neither company has asked the SEC to exclude our proposal, and we are in a constructive dialogue with YUM! Brands.
A proposal at Marriott International requests a report on the external social costs created by the company’s compensation policy and its contribution to growing inequality. Marriott’s CEO receives compensation equal to 346 times that of the company’s median compensated employee, while its lowest-paid
workers don’t earn a living wage. The proposal cites research that estimates a 2-4% reduction in GDP from inequality-driven demand reduction. Marriott is seeking to exclude the resolution on similar ordinary business and vagueness grounds as described above. We are preparing a response to the company’s
exclusion request.
Proposals at BlackRock, Caterpillar, Salesforce, Facebook, Alphabet, UPS, Tractor Supply, S&P Global and 3M request that the companies amend their certificates of incorporation to become public benefit
corporations, in light of their adoption of the Business Roundtable’s Statement on the Purpose of a Corporation (BRT Statement). A similar proposal at Yelp hinges on that company’s recent proclamations of its intention to oppose racism and foster “an inclusive culture.” The proposals note that the law of
the companies’ states of incorporation precludes authentic commitment to the stakeholder model acclaimed in the BRT Statement, unless the corporations adopt benefit corporation law. The proposals also highlight that the companies’ top beneficial owners are broadly diversified and thus have a direct interest in the overall health of the social, environmental, and economic systems on which long-term prosperity depends.
So far, Alphabet is seeking to exclude the proposal, claiming, among other things, that it is not within the company’s power to implement and that it would cause the company to violate the law. In contrast, Tractor Supply is seeking to exclude the proposal on the grounds that it has already been substantially implemented, among other things. We have filed a response to Tractor Supply’s request, pointing out that without converting to a benefit corporation, the company must prioritize shareholders over stakeholders whenever their interests clash, which precludes any authentic commitment to stakeholder values, which in turn means that the proposal cannot yet have been implemented.
Finally, a proposal at State Street requests a report on how the company’s voting and engagement policies, which only consider individual corporation materiality and exclude capital markets materiality, affect its clients and shareholders, the majority of whom are diversified investors. This proposal
essentially asks a universal owner to account for the costs of not acting like one. State Street is seeking to exclude the resolution on the grounds that:
- Implementing the proposal would cause the company to violate the law;
- The proposal is false and misleading;
- The proposal relates to the company’s ordinary business; and
- The company has already substantially implemented the proposal.
One might wonder how State Street squares points 1 and 4—its no-action request makes for some interesting reading. We’re preparing a response to State Street’s exclusion request.
For more information on these initiatives, be sure to check out our Beta Activism platform and also sign
up to receive shareholder-specific periodic updates throughout the proxy season.
PRIVATE EQUITY CAMPAIGNS
In a previous newsletter, we addressed the systemic risks associated with efforts by private equity sponsors to purchase Dunkin’ Brands Group. While our efforts so far have focused more heavily in the public equity
space, we are keenly aware that our theory of change only works if applied to all asset classes. We are still working to flesh out our private equity strategy, and wanted to bring your attention to an important initiative in which we plan to get more involved.
State treasurers are calling on private equity firms to explain how they will manage the risks associated with their prospective acquisition of G4S, a
security firm with 530,000 employees globally. Private equity firms Warburg Pincus and BC Partners are vying to buy G4S, and Illinois State Treasurer Michael Frerichs and Oregon State Treasurer Tobias Read want to know how the firms will manage risks related to workers and incarcerated migrants if the companies are successful.
TSC participated in a January investor forum convened by the Private Equity Stakeholder Project and For the Long Term, where
the Treasurers spoke to a group of institutional investors to discuss the implications of the proposed merger that would render either BC Partners or Warburg Pincus one of the largest private sector employers in the world. The merged company could have as many as 780,000 employees globally, including hundreds of thousands of employees in the United States. Treasurer Deborah Goldberg of Massachusetts also joined the panel. Representatives from institutional investors with a total of more than $1
trillion in assets, including a number of Warburg Pincus and BC Partners investors, participated in the forum, along with multiple labor groups that represent G4S employees.
ON THE REGULATORY FRONT
We have previously detailed our comments to the Department of Labor and the Securities and Exchange Commission, as well as our White Paper proposing a broad platform of legislative and regulatory action to empower systems-first shareholder
activism. In the last month, we had two more opportunities to further these efforts. First, we responded to the Consultation Paper on Sustainability Reporting from the International Financial Reporting Standards (IFRS) Foundation, a public
interest organization that develops global accounting standards and promotes and facilitates their adoption. Second, we provided a response to the U.S. Office of the Comptroller of the Currency (OCC) over a proposed regulation that would limit the ability of regulated banks to make broad category-based decisions about whom they lend to.
The IFRS Response
IFRS is trying to determine whether and how to design a set of internationally recognized sustainability standards. Our response emphasized the need for “inside-out” standards that measure the effect of a corporation’s operations on society and the environment, rather than the more traditional type of “outside-in” sustainability disclosure, which only addresses how social and environmental issues affect a corporation’s financial performance. We described three areas that sustainability disclosure should address:
- Outside-in, traditional financial materiality: information specifically reflective of how a company will perform financially over the long term.
- Inside-out, systems-first materiality: how a company’s actions will affect society and the environment and consequently affect the return of a diversified portfolio.
- Inside-out, civil society materiality: information to assist other stakeholders, including regulators, employees and customers, to understand how a company affects critical social and environmental systems.
We also emphasized the need for global uniformity, in order to allow shareholders and other stakeholders to press all companies to meet minimum levels of sustainable conduct:
[Globally standardized] inside out reporting will empower shareholders to engage with companies to reduce behavior that creates negative social and environmental externalities that threaten the values of diversified portfolios. However, such activism will be effective only if the behavior in question can be addressed at all companies, allowing for competition on an even and sustainable playing field.
Global capital markets will be able to engage in such leveling activism only if there is uniform reporting across all markets.
In explaining why such uniform, inside-out disclosure is essential for a fair and sustainable economy, we emphasized our theory of change: diversified shareholders have a collective interest in engaging with portfolio companies on a “systems-first” basis, in order to preserve the value of their broad portfolios:
TSC believes that an adequate disclosure regime must reflect this fundamental reality and provide shareholders with not only “outside in” information, which describes how companies are affected by social and environmental issues, but also “inside out” information, which tells shareholders how a company’s activities will affect critical social and environmental systems, and thus the overall economy and
the performance of their diversified portfolios. Such information will enable shareholders to use their collective power to curb corporate activities that harm social and environmental systems in pursuit of individual company profit.
The OCC Response
The new rule now adopted by the OCC should be understood for the political statement that it is. The Trump administration was frustrated by the fact that more and more banks are making categorical decisions not to lend to certain types of borrowers or to fund certain types of projects that create
social and environmental risks.
While the OCC argues that such decisions implicate its obligation to make sure that borrowers have “fair access to financial services,” the examples provided in the release accompanying the proposed rule made it clear that the OCC was trying to pre-empt lending decisions that appeared to support ideas consistent with progressive politics; in particular, the examples of categorical lending proscriptions were private prisons, gun manufacture, big agriculture and drilling in the Arctic National
Wildlife Refuge.
In our response, we cited the evidence that making such categorical lending decisions is a necessary part of a bank’s business in managing risk, and that such categorical decisions were actually the epitome of “fairness” as contemplated by law, because all borrowers were treated identically.
We went on to explain that the proposed rule would have a particularly negative effect on diversified investors. The rule would prevent the very type of activism that The Shareholder Commons encourages, which involves shareholder engagement with companies to prevent them from exploiting common resources and vulnerable communities:
But for the diversified shareholders who own large, publicly traded banks, these issues are not merely political—they are economic: the collective costs of such externalities are absorbed by diversified shareholders because they degrade and endanger the stable, healthy systems upon which overall corporate financial returns depend. Thus, while individual companies
(including banks) can “efficiently” externalize costs from their own narrow perspective (and the perspective of a shareholder of just that company), the diversified citizen-shareholders pay these costs through a lowered return on their diversified portfolios. Quite simply, diversified shareholders lose when companies in their portfolios harm the economy, because the value of diversified portfolios rises and falls with GDP. This harm can accrue from direct action of operating companies, but also
through lenders as well, if they profit by lending to companies engaged in activity that destroys economic value. Stewardship of the externalizing companies—including banks—provides an opportunity to increase return at the portfolio level.
Despite receiving tens of thousands of comments, the OCC acted almost immediately after the comment period closed, in order to beat the clock as the administration came to an end. We hope that with the change of administration and Senate control means that the Congressional Review Act (which allows congress to overturn certain recently adopted regulations following a change in administrations) can be used
to overrule it, or that it be challenged in the courts. The many comments that were received will provide good grounds for such a challenge.
Speaking of the Congressional Review Act, with the changes in Washington, we look forward to the new opportunity for movement on many of our proposals for rules that support systems-first investing. For a reminder of those issues, see this post on the White
Paper.
THAT'S ALL FOR NOW
Thanks for reading. We hope that you found this material insightful and engaging. Please reach out if you'd like to discuss any of our work - TSC exists to advance these ideas, so conversations with interested individuals are precisely what we are here to do!
Wishing you all a happy, safe, and healthy winter season - don't forget to breathe.
Fondly,
Team TSC
Rick, Jenn, and Sara
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