Working Together to Protect
Our Common Resources
Welcome to our March newsletter. In this issue, we are going deep on "beta stewardship" - you'll find our primer on the subject at the end of this newsletter, if you are unfamiliar with the concept. We are proud to highlight a major success in our campaign at Yum! Brands, and to introduce our newest digest, delivered weekly, for shareholders who are interested in
staying on top of important systems-first voting in the 2021 proxy season. Finally, we announce an exciting new webinar series, with our inaugural event featuring Jon Lukomnik and Jim Hawley on the subject of their latest book, "Moving Beyond Modern Portfolio Theory: Investing that Matters".
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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YUM! BRANDS AGREES WITH TSC
TO PROVIDE SYSTEMIC RISK DISCLOSURES
As Sara Murphy discusses in the next article, TSC is working on 21 shareholder proposals this year, each designed to advance systems-first investing (discussed in more detail in the third article). We are pleased to report that one of these companies—Yum! Brands (NYSE: YUM), the parent company of KFC, Taco Bell, and Pizza Hut—has agreed to implement the proposal. Specifically, the company agreed to:
- study and disclose the system-wide costs of antimicrobial resistance (AMR);
- disclose its findings regarding how antibiotic use in animal husbandry threatens global health and well-being, the global economy, and diversified shareholder interests;
- discuss an optimal, global scenario for the food industry to eliminate or internalize AMR costs;
- and describe how its policies, procedures, and political influence strategies affect the realization of an optimal global scenario.
Yum! thus becomes the first public company to agree to disclose its impact on the broad economy and diversified shareholders. This an important first step. As explained in this article, in the United States and other jurisdictions, company disclosure requirements—even those
related to social and environmental factors—focus on matters that are material to the reporting company’s own financial performance. There is no requirement that companies report on the impacts of their operations on the economy or shareholders who hold diversified portfolios. This gap leaves diversified shareholders without some of the most crucial information they need to act as good stewards for the many companies within their portfolios. We hope to see more companies recognize the importance
of giving a full accounting of the cost of their operations.
KEEP CURRENT ON BETA STEWARDSHIP
TSC has been delegated by a variety of proponents to file, negotiate, and/or present 21 shareholder resolutions this year, three of which have survived SEC challenges and 10 of which are uncontested and expected to go to a vote.
These proposals take a novel approach by focusing on the systematic risks that companies create for diversified portfolios, rather than solely on risks internal to the company in question. The proposals fall into two categories: (1) asking companies to amend their articles of incorporation to become public benefit corporations to clarify that they can prioritize those systematic risks over individual company IRR, and (2) asking companies to quantify and report on the social and
environmental externalities their business activities create, and specifically how those externalities undermine the value of diversified shareholders’ portfolios.
Click here to read our first edition of Beta Steward, TSC’s voting guide to these and other important proposals up for a vote during the 2021 proxy season.
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TSC'S BETA STEWARDSHIP
TSC will be offering occasional webinars with fascinating people whose work contributes to beta stewardship and universal ownership theory. First up will be Jon Lukomnik—one of TSC’s intrepid board members—and Jim Hawley, who will join us to talk about their soon-to-be-published book.
- Topic/Book Title: Moving Beyond Modern Portfolio Theory: Investing that Matters
- Date and Time: Thursday, April 1, 2021 at 11:00 a.m. EDT / 8:00 a.m. PDT / 4:00 p.m. GMT / 5:00 p.m. CET
- Description: Lukomnik and Hawley tell the story of how Modern Portfolio Theory (MPT) revolutionized the investing world and the real economy, but is now showing its age. They explain the complex relationships between investing and the systems on which capital markets rely, embracing MPT’s focus on diversification and risk-adjusted return while situating
both in the context of the real economy and investors’ total-return needs. Hawley and Lukomnik show how the real world already is moving beyond investing orthodoxy.
- Book Discount: Pre-order this book directly from the publisher’s website and receive a 30% discount when you enter the code
MPT30 at checkout.
- Sign-Up: Click here to sign up for this webinar.
SYSTEMS-FIRST INVESTING AND
BETA STEWARDSHIP: A PRIMER
Above, we discuss our success at Yum! and our platform for the coming proxy season. To put these items in context, we have prepared a series of FAQs that discuss the need for investors to move their focus from individual company performance alone to a consideration of the impact companies have on critical social and environmental systems.
What is “systems-first investing”?
Systems-first investing is the simple idea that investors should work to prevent companies from engaging in business strategies that negatively impact people and planet. Even if this behavior boosts financial performance at an individual company, it will damage society, the environment, and the economy, thus dragging down the overall performance of most investment portfolios. It will also reduce the quality of life for the people whom the portfolios are intended to benefit, along with the rest
Don’t companies already incorporate concern for all stakeholders in their decision-making, so that that they already consider systemic issues?
While investors and business have begun to address important systemic issues like climate change and racial injustice, almost all of this activity is conducted through the lens of optimizing financial return at individual companies by promoting efficiency and innovation, enhancing reputation, and staving off regulation. While we can all celebrate the ability of corporations to “do well by doing good,” it will not be nearly enough to address the systemic risks we face. Shareholders must also use
their governance rights to ensure that companies stop “doing better by doing bad.” Investors continue to resist asking individual companies to sacrifice long-term financial return for the good of the economy overall.
Why can’t market competition sort out which businesses create the most value for society?
Profits can be derived from hard work, efficiency, and innovation. But they can also be derived from activities that transfer costs to other companies, people, social institutions, or the environment. Paradoxically, these activities do not harm only communities and other stakeholders, but also most shareholders as well, because investors are generally diversified and rely on healthy social and environmental systems to support their broad portfolios.
How does the systems-first approach operate?
Investors who apply systems-first investing can focus on raising the value of the entire market, rather than just trying to beat or match it. This is called “beta stewardship” to distinguish it from the pursuit of “alpha,” which is the standard measure of relative financial return. Beta stewardship requires tools to ensure that companies stop privileging their individual financial returns over the broad health of people and the planet.
How does TSC practice beta stewardship?
TSC’s efforts this proxy season (described above) are aimed at forcing companies and investors to measure the gap between the impact of current ESG efforts and the potential impact of a systems-first approach. Such a gap analysis can show the difference between (1) what a company’s ESG efforts can accomplish while limited by a profit optimization rule and (2) what they might accomplish if designed to optimize social and environmental impacts.
Competitive pressures may prevent individual companies from transitioning from (1) to (2) unilaterally. Thus, TSC expects that once gap analyses clarify the preferability of a systems-first approach, investors will turn to guardrails to limit corporate behavior that exploits common resources or vulnerable communities for profit.
What are guardrails?
Guardrails are shareholder-mediated parameters that prevent companies from externalizing social and environmental costs that ultimately harm diversified investors and other stakeholders. They enable collective action by establishing a pre-competitive framework. Guardrails preserve critical systems and are imposed by shareholders without regard to individual company performance. By distilling certain key minimum standards, investors can establish a sustainability floor below which no company can
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 Spring - don't forget to breathe.
Rick, Jenn, and Sara
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