Working Together to Protect
Our Common Resources
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Welcome to our October newsletter - there is much to report from a very full + productive September!
Rick spoke on a number of panels last month, a few of which were recorded and are viewable by the public, including GRASFI 2020 and Humanity Rising (Rick on at 1:01:45). This month he will be presenting at an ESELA online event as well as the ICCR fall conference, so please tune
in if you are able!
In this month's newsletter, we recap the release of our policy white paper with B Lab, including an important critique from Marty Lipton. We also cover our comment to the DOL on their latest move to limit proxy voting by ERISA fiduciaries, as well as a recap of our guardrail project workshops from last month. We wrap with an important update on our shareholder proposal
strategy. As always, please reach out if you would like to get more involved!
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LAWS MATTER: A PROPOSAL TO RESTRUCTURE CORPORATE LAW
On September 28, after more than a year of work, TSC and B Lab released their policy White Paper, From
Shareholder Primacy to Stakeholder Capitalism: A Policy Agenda for Systems Change.
The paper outlines proposals for changes to corporate and securities law that would end the era of shareholder primacy. We propose (1) giving tools to corporate executives, investment managers and other fiduciaries to account for their social and environmental impacts and (2) having these fiduciaries take responsibility for their role in maintaining a more just, inclusive, equitable, and prosperous economic system.
With the rules in place, investors could work together to establish sustainability guardrails that end extractive corporate behavior and refocus business on quality jobs, healthy communities, human dignity, and a more resilient ecosystem.
The profit motive is essential to a healthy capitalism, but current rules encourage the corporate and financial sectors to generate harmful profits by externalizing costs onto workers, communities, and the environment. Not only do these tactics harm workers and accelerate disproportionate harm to communities most impacted by climate change, they harm the human shareholders behind retirement savings and represented by institutional investors. As diversified investors, they have more at risk as
stakeholders in the well-being of the overall economy, society, and the environment, than as shareholders of individual companies.
The gap between the needs of human shareholders and the behavior of corporate America has created growing inequality; perpetuated the racial wealth-gap; caused stagnant or declining standards of living, job-quality, and well-being for the working and middle classes; and led to an existential ecological crisis. If more evidence were needed, our inability to adequately respond to the COVID-19 pandemic and structural racism prove that current business models provide neither the resilience nor the
equitable opportunities we need for an inclusive economy that allows all people to thrive with full human dignity.
The failure of shareholder primacy is being increasingly acknowledged by leaders in business and finance, as well as both major U.S. political parties. The chairman of the world’s largest asset manager called for better corporate stewardship of the environment. And just last year, many of the largest and most
recognized corporate leaders in the United States released a new Statement on the Purpose of a Corporation, pledging to work for the benefit of all stakeholders, including customers, employees, suppliers, communities, and investors.
But outspoken money managers, heroic CEOs, and corporate contributions to civil rights organizations cannot overcome a system that rewards profits reaped from the exploitation of natural resources and workers. We must change the system itself, so that extractive profits are no longer available to companies and investors. Such systemic change requires collective action by investors and companies, but collective action will not materialize unless we change laws to create a shift away
from individual company based shareholder primacy. These are the changes the White Paper proposes.
New laws can set the stage to end the pressure on executives to unduly suppress wages, thus endangering the productivity of the national workforce. They can create accountability so that ever-rising share prices do not excuse responsibility for climate destruction. They would remove any excuse that the hands of directors and other fiduciaries are tied, and that all they can do is to hope that someone else will solve the problem caused by their own profit-driven decisions. The policies in the
White Paper are a first step to a just, inclusive, equitable and prosperous economy that will endure long into the future.
AN IMPORTANT RESPONSE
One of the immediate responses to the paper was a thoughtful critique from Wachtell, Lipton, Rosen and Katz, a law firm known as a
fierce defender of the prerogatives of corporate management. Martin Lipton, its long-time leader, invented the “poison pill” defense. (Full disclosure-- he did so with the assistance of the long-time dean of Delaware corporate law and my mentor, Lew Black.)
In recent years, Lipton has proposed a vision for the conduct of business that is very close to what we imagine in the White Paper. His New Paradigm, along the World Economic Forum's Davos Manifesto and the Business Roundtable's Statement, strongly endorse measures by business to account for all stakeholders in their decision-making. The difference in our approaches is that they rely on the voluntary actions of individual companies to reimagine the ethos of business. In contrast, we do not believe that company-level decisions will be sufficient to address systemic issues like climate change, pervasive racial injustice, and growing inequality.
It is not that we doubt the good intentions of corporate executives: the question is one of economics, not individual goodwill. A market economy depends on competing companies striving to maximize their profits; we rely on that competition to price and allocate goods and services. Capitalism's upside is that competition encourages profits that result from efficiency and innovation; its downside is that it can also encourage profits that come from exploiting the planet and its inhabitants.
The real difficulty is that profits from those two sources cannot be easily distinguished: on a P&L, a dollar earned from efficient energy use looks just like a dollar earned by skimping on emission controls.
It would be great if companies could simply decide to focus on the good profits and leave the bad behind. But in a market economy, companies that do the right thing and only the right thing will be put at a competitive disadvantage. They need a level playing field to compete on; otherwise, in the struggle for margin, talent and reduced capital costs, there will be unrelenting pressure to conclude that every dollar of profit available is a good dollar.
Business leaders often argue that no conflict really exists because the interests of shareholders and other stakeholders always converge, at least over the long run. Often this is true-- many companies have done extremely well by doing good. But it will not always be the case—consider the billions of dollars tobacco companies have made since it was discovered that it was deadly and addictive, the amount that the oil and gas industry invested in climate denial over decades, or the millions
in contributions to dark money pools that have supported racial gerrymanders across the country. These are not short-term decisions that companies made in order to make their next quarter: these are investments with returns measured over decades in which companies have clearly increased the financial value they delivered to their own shareholders while burdening our economy with disease, climate change and racial injustice.
This tension cannot be wished away. The White Paper proposes a solution: rules that facilitate and encourage investor-sanctioned guardrails. Such guardrails would allow shareholders to insist that all companies that they own forgo profits earned through the exploitation of people and planet.
Unlike executives, the institutional shareholders who control the markets are diversified, so that their success rises and falls with the success of the economy, rather than any single company. This means that these institutions suffer when individual companies pursue profits with practices that harm the economy. We believe that by leveling the competitive playing field, these changes will pave the way for the type of corporate behavior imagined by the New
Paradigm, the Davos Manifesto and the Business Roundtable Statement.
Indeed, far from being “state corporatism,” as the memo claims, what we propose is “human capitalism,” where workers, citizens and other humans whose savings fund corporations are given a say in the kind of world they live in. Will it be one in which all compete in a manner that rejects unjust profits? Or, in contrast, will it be one in which corporations continue to lobby against regulation that protects workers while the corporate executives make 300 times the median salary of
their employees?
We are glad to begin this dialogue—many of the changes to fiduciary law that we recommend would clarify that the executives and institutions have the discretion to focus on the very issues that the New Paradigm raises up. But we firmly believe that this will not happen unless we first level the sustainability playing field, and that the way to do so is to give diversified shareholders the tools to ensure that they use that discretion to benefit the broad group of stakeholders represented
by diversified shareholders such as the retirement savers protected by ERISA.
DID SOMEONE SAY ERISA?
On October 3, The Shareholder Commons and B Lab submitted their comment on the recent proposal (the “Proxy Proposal”) from the Department of Labor
(the "DOL") that would limit the independent voting of proxies by trustees subject to ERISA, the federal law that governs private retirement plans. The Proxy Proposal was one of a series of recent regulatory actions from the Department of Labor and the SEC that tilt the scales against shareholders and in favor of management on engagements related to social and environmental issues.
The Proxy Proposal operates by threatening pension plan trustees with liability if they spend resources on determining how to vote on their proxies at the meetings of the companies they invest in. Specifically, it discourages trustees from (1) voting on matters at a company that represents a small part of the total portfolio, (2) using professional proxy advisors, and (3) voting against the recommendations of management.
Another DOL rule proposed earlier in the year raises the bar for fiduciary action on any environmental or social issue. A separate rule recently adopted by the SEC will actually make it more expensive for fiduciaries to use professional proxy advisors, especially if the advisors recommend votes against management, while a second SEC rule will make it more difficult for shareholders to even make environmental and social proposals at all.
Together, these rules create significant obstacles to institutional investors and other shareholders acting to limit harmful social and environmental impacts of the companies they own. These rules represent a perverse form of anti-capitalist state corporatism, where the federal government is preventing shareholders from stewarding their own capital, at least where that stewardship might interfere with the wishes of corporate executives. In contrast, the rules proposed in the White Paper
are intended to give investment trustees (who control a very significant proportion of our private capital) the tools to use their governance rights to steward that capital in a manner that clearly serves the interests of their beneficiaries (savers and workers), rather than the interests of corporate managers. Importantly, however, those tools operate under a reimagined view of what most benefits shareholder beneficiaries: social, environmental and economic systems that are healthy and
fair.
BRINGING IT BACK TO REALITY
This month's issue has been full of the theory of how shareholders can help to reimagine capitalism. But what can they start doing now?
In September, we held four workshops with dozens of asset owners, asset managers, shareholder activists and other interested stakeholders to begin designing a strategy for asset owners to start establishing guardrails that prevent companies from profiting from the exploitation of common resources and vulnerable communities. You can read about the results of that process in our preliminary findings report.
This week, we are distributing a new type of shareholder proposal designed to force companies and asset managers to put their cards on the table: do they believe that creating value at individual companies is more important than preserving critical social and environmental systems? This brief includes proposals that (1) ask companies that have declared an intent to become "stakeholder" companies to explain why they haven’t adopted a corporate structure that rejects shareholder primacy and (2) ask companies to report the external costs of practices that weigh on society and the environment. Please contact us if you have an interest in sponsoring or supporting such proposals.
THAT'S ALL FOR NOW
Thanks for reading all the way to the end. We know these are difficult times, but we believe that together we can build a better path forward. In what is likely to be a turbulent month, we wish you all safety, sanity, and health.
And don’t forget to breathe.
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