Working Together to Protect
Our Common Resources
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Welcome to our August newsletter!
So much to report—the Department of Labor is fighting ESG investing, while corporate political spending and tax avoidance continue to undermine our collective interests. At The Shareholder Commons, we are continuing to pursue systemic solutions to these issues, such as guardrails and policy changes. Read on to learn more.
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CATCHING UP, KEEPING UP
The Guardrail Project
As we mentioned in our last newsletter, we hosted a webinar to kick off The Guardrail Project two weeks ago. A recording of the event is available here, and provides a good grounding in the theory behind our work,
as well as our plan for shareholder-sanctioned limits (“guardrails”) on corporate activity. These guardrails will protect our social and environmental systems from further degradation by corporate executives in search of profits.
Department of Labor Proposal on ESG Investing
Another webinar recording from July is available here (audio only). This webinar, co-sponsored by The Pre-Distribution Initiative and TSC, provided advice to those interested in filing comments to the rule recently proposed by the Department of Labor. This rule is intended to make it harder for retirement funds to invest in a manner that protects our fragile environment and social fabric. The Trump administration’s theory is that considering so-called “ESG” (environmental, social and governance) investing
sacrifices financial returns. This concern has no basis in fact, and TSC has filed its own comment, accessible here and discussed in detail below. Another comment, co-authored by a host of experts who demonstrate that smart investment requires close attention to ESG matters, can be found here.
Political Corruption and Corporate Hypocrisy
One of the guardrails we would like to impose would limit corporate political contributions (something that is difficult for the government to accomplish due to recent Supreme Court precedent extending broad political speech rights to corporations). This recent report from the Corporate Accountability Project shows that corporations like Coca-Cola, Pfizer, Wal-Mart and many, many others who trumpet their sustainability bona fides are in fact contributing to the fight against sustainability through opaque chains of trade associations and dark money pools. These companies are simply hypocritical on climate, LGBTQ concerns, racial justice and other issues, and
shareholders need to hold them to account.
Avoiding Tax Avoidance
Another important guardrail will address fair payment of taxes. Companies like Apple and Amazon brag about their climate policies, but then avoid their fair share of the tax burden, leaving governments unable to do the fiscal work necessary to decarbonize the world’s economy in an equitable manner. The Shareholder Commons recently signed this letter in support of HR 5933, requiring corporations to disclose information on a country-by-country basis to expose tax avoidance and ensure that we emerge from the COVID-19 pandemic on a path to a sustainable and fair economy.
Benefit Corporations
Last month’s newsletter reported on the increasing popularity of benefit corporations, which can put people before profits. Since then, another benefit corporation, Vital Farms, has filed with the SEC
to go public. Rick has post a law review article (corporate law nerd alert!) on the direction that the benefit corporation movement seems to be headed. Here
is the abstract of the article:
Ever since Adam Smith described the efficiency of markets in an age where freedom and property rights were coming to be seen as key elements of the good society, capitalism has honored the concept that capital return at individual enterprises is a good heuristic for their social return. In a complex and interdependent global economy, however, that concept is being challenged, as many question whether the costs of unfettered profit-seeking outweigh its benefits. This has led some to challenge
the utility of the shareholder primacy doctrine, and others to challenge the utility of capitalism itself. This article argues that benefit corporation law represents an important opportunity to establish a better set of ground rules for capitalism that would preserve the capital allocation function of markets while addressing the negative social and environmental impacts that have become associated with capitalism.
COMING ATTRACTIONS
Garrett Institute
Rick will be interviewing Leo Strine, the Former Chief Justice of Delaware, and one of the most important voices on corporate governance at the 2020 Garrett and Corporate Counsel Virtual Institute on September 23, from 9:15-10:15. Information about the three-day institute can be found here.
ABA Business Law Annual Meeting
Rick will also be participating on the following virtual panel at the American Bar Association Business Law Section Annual Meeting: Governance and Systemic Risk: How Can Individual Companies Address Collective Risk at
Global Scale? The panel takes place from 10:00-11:30 eastern time on September 21 and is open to all meeting attendees.
CII Annual Conference
As the Guardrail Project gathers momentum, we will be holding a panel discussion at the Council of Institutional Investors 2020 Fall Conference: Corporate Governance in the Wake of Covid-19 Our panel will take place September 17, from 3:15-4:15. This description of the event is a good primer on the entire Guardrail Project:
The first half of 2020 has clarified the dangers of our current system—brittle supply chains left us unable to withstand a long-anticipated virus, while civil unrest in response to racial injustice shook us at the core. These pathologies do not result from a shortage of resources or capacity, but from a lack of vision in our economy, where profits equal success,
whatever the real cost.
At the Shareholder Commons, we seek to spark a coalition that will cohere around a unifying principle—profits based on costly exploitation of the global commons and vulnerable communities are untenable. For example, asset owners and managers can use their
voting power to insist that every company in their portfolios, and every company in those companies’ supply chains, hew to a 1.5˚ science-based carbon target. They can insist that companies end contributions to trade organizations that poison our political system. They can insist on a global minimum wage.
Unlike other forms of activism, guardrails level the playing field by increasing the level of sustainability at all companies. This “all in” approach solves the dilemma that company managers otherwise face when the most profitable path is systemically
unsustainable.
Guardrail Project, Phase 2
Following a series of kick-off webinars, the next phase of the project is to convene small, high-level workshops of asset owners, managers, subject matter experts and other stakeholders to strategize around 6 core topics. Each session will be a self-contained, practical conversation intended to inform a guardrail strategy for the 2021 proxy season. These workshop groups are currently
being formed and will be scheduled during August and early September:
- Workshop 1: Climate/environment guardrail
- Workshop 2: Political spending/corruption guardrail
- Workshop 3: Workers/human rights guardrail
- Workshop 4: Company engagement and burden sharing
- Workshop 5: Investment community and beneficiary advocacy
- Workshop 6: Beyond public companies
The workshops will be scheduled for 2 hours each, with moderate (30-45 minutes) pre-reading requested for participants to prepare for the conversation. TSC also asks that each participant attend one of the kick-off webinars or review a recording in order to ensure solid grounding in the project’s strategy and objectives.
Please use this form to indicate your interest in each conversation(s) and availability for attending the relevant workshop(s). Following the conclusion of the small group workshops this summer, TSC will be arranging a larger virtual convening in October, in partnership with The Ford Foundation, to bring the various conversations together in
anticipation of engagement for the 2021 proxy season. Stay tuned for more information and scheduling this larger convening towards the end of August.
OUR LETTER TO THE DOL
As noted above, the Department of Labor has issued a proposed new regulation under ERISA, the federal law that protects workers’ retirement plans. The proposal will actually hurt workers, by penalizing the administrators of retirement plans if they use investment strategies that rely on ESG (environmental, social and governance) principles. It is quite clear that the proposed new
rule is motivated by climate denial and a desire to ignore (or perhaps exploit) the growing inequality in our country. The following summarizes the comment we submitted, [along with B Lab US/CAN]. The full text can be found here.
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The Department proposed new ERISA rule on ESG investing may interfere with the obligations of retirement plans with respect to “stewardship.” Stewardship includes proxy voting and other ways of changing the behavior of the companies that a retirement plan is invested in. The DOL should encourage such activity by benefit plans because sound social and environmental systems increase the overall financial returns of investors by creating a healthy economy.
1. Diversification and the Importance of Overall Market Return
Sound investing requires diversified portfolios. This principle is reflected in ERISA itself, which requires retirement plans to diversify. The wisdom of a diversified investment strategy can be summarized through the philosophy of the late John Bogle, founder of Vanguard, one of the largest mutual funds companies in the world, “Don’t look for the needle in the haystack; instead,
buy the haystack.”
Once a portfolio is diversified, the most important factor determining return will be how the market performs as a whole (“beta”), not how the companies in that portfolio perform relative to other companies (“alpha”). As one work describes this, “[a]ccording to widely accepted research, alpha is about one-tenth as important as beta [and] drives some 91 percent of the average portfolio’s
return.” (Lukomnik, et al.)
2. Market return and ESG
This distinction between individual company return and overall market return is important because shareholder return at an individual company does not reflect “externalized” costs, i.e., those costs it generates but does not pay. In other words, companies let others pay the real costs of harmful emissions, resource depletion, and inequality. Those “others” include other companies that are in
the portfolios of diversified shareholders (including retirement plans). Thus, when companies externalize costs, retirement plans suffer the consequences through a lowered return. Shareholders can use stewardship to end this behavior.
A recent study by a major asset manager showed just how serious this problem is. It discerned that 55% of the profits attributed to publicly listed companies globally
were consumed by external costs absorbed by the rest of the economy. As the economy absorbs those costs, growth and productivity will fall, leading to decreasing overall market returns. For example, one recent financial analysis shows a 6%
increase in global GDP if the world abides by the Paris Agreement. Inequality perpetuated by corporate conduct also has devastating economic (and human) costs as shown in Heather Boushey’s Unbound: How Inequality Constricts Our Economy and What We Can Do about It.
3. The Need for ESG Stewardship
Given the critical importance of overall market return, and the danger to that return from corporate activities the damage social and environmental systems, plan beneficiaries clearly need protection from individual companies that improve their own performance with behaviors that damage overall market return. In order to protect themselves, retirement plans must use their power over corporations to end conduct that exploits common resources.
Because investors collectively have the power to vote against the management, they have the power—and the responsibility—to steward companies away from abusive activities and towards authentically productive profits. A recent report from PRI, a coalition of asset owners and managers representing $89 trillion of assets under management, reaches this
conclusion: that collective investor action to manage social and environmental systems is needed in order to satisfy the fiduciary duties of investment trustees.
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For all of the reasons expressed above, we propose that the Rule be withdrawn or modified to clarify that ESG actions are not disfavored and that ESG stewardship must be considered by plans in order to fulfill their statutory fiduciary duties. More specifically, we respectfully request that the final rule include assurance that plans will not be penalized for allocating resources to
stewardship intended to protect social and environmental systems and to thereby increase the return of the plan on its diversified portfolio.
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We are excited to announce a new position, Head of Investor Engagement, which will have broad responsibility for strategizing engagement tactics for asset owners and
managers in service of The Guardrail Project. Ideal candidates will have a background in managing activist shareholder campaigns, a deep knowledge of the investor ecosystem, and a passion for bringing more effective sustainability parameters to the capital markets.
Please feel free to reach out to us if you are interested to learn more, and we appreciate your sharing this with your network.
THAT'S ALL FOR NOW!
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.
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