Working Together to Protect
Our Common Resources
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Welcome to our September newsletter!
Hard to believe that summer has come and gone. It was a busy one here at TSC, as we prepared the soil for a fruitful fall. We're excited to hone our strategic initiatives this month and look forward to accelerating our work to focus shareholders on the preservation and regeneration of economic, social and environmental systems in order to protect their
investments over the long haul.
Some of you may have seen the proposed new DOL rule limiting the use of an ESG lens for proxy voting at ERISA-governed
plans. Stay tuned for a special edition newsletter later this month where we take a deeper look at the issue.
We were featured on two podcasts in August: a PRI episode with Paul Chandler taking a deep dive into our
work, and a discussion of benefit corporations on Boardroom Governance with Evan Epstein. These are good introductions for anyone interested in either subject; please share them with anyone who might want to listen.
In this month's Ramble, Rick opines on the misconstruction of a 50 year old article by Milton Friedman that is going to get a lot of press this month. Spoiler alert: market-based economics supports the work of activist shareholders trying to save the planet!
If the theoretical is too much, jump straight to our September Call to Action. We think it is time to begin using the shareholder proposal process to call the question whether companies and asset managers are willing to continue rewarding profits earned from the exploitation of common resources and vulnerable communities.
Finally, if our once-a-month newsletter isn't enough, peruse our calendar to see where else you can hear us and other ways to get involved in our growing movement.
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SEPTEMBER RAMBLE:
HAPPY ANNIVERSARY, MILTON FRIEDMAN
Prepare for a profusion of op-eds marking the 50th anniversary of Milton Friedman’s famous NYT article titled The Social Responsibility of Business Is to Increase Its Profits. These reflections will
herald corporate executives’ rejection of the idea that companies should focus solely on making money for shareholders, a thesis now supposedly being replaced by “stakeholder capitalism,” which holds that companies should be organized around serving the interests of workers, society and the planet, as well as those of shareholders. This celebration is exemplified by the Business Roundtable’s “Statement of the Purpose of the Corporation,” penned by an organization of CEO’s who earn salaries around 250 times that of their median employees and by the “Davos Manifesto,” adopted at this year’s giant party for billionaires held at an exclusive resort in a tax haven. Each of these documents prescribes greater management discretion to balance non-shareholder interests, while providing no clear method for holding these managers
accountable for protecting those interests.
Don’t trade in your shares for stakes just yet. Here is some advice for the dealing with the coming platitudinous storm:
Beware of . . .
- . . . CEO’s who criticize Friedman’s emphasis on shareholder value but who also negotiate for eight figure annual compensation packages that consist primarily of stock: with all that stock, the value of shares is going to overshadow any interest in stakeholders.
- . . . claims that stakeholder capitalism is working because companies that pay attention to their stakeholders make more money for shareholders than companies that ignore stakeholders. Three reactions to this common refrain:
- First: no kidding.
- Second: isn’t shareholder return an odd metric of success for a new version of capitalism aimed at promoting the interests of stakeholders?
- Third: what is the standard for determining whether stakeholders are truly being served, rather than simply allowing management to arbitrarily decide what they need?
- . . . conflation of “long-termism” with stakeholder interests. This is just an attempt to have it both ways by claiming that if we can focus on the distant future, everyone’s interests will magically align, avoiding the need to make any hard choices. It is true that sometimes long-term value for shareholders and stakeholders line up, but it is also true that
sometimes they don’t: consider how much money tobacco companies have made addicting children around the globe over the very long time since it was learned that their product is deadly.
Bottom line: These “win-win” claims accompanying business proclamations of a new stakeholder model are a clear sign that the purported rejection of shareholder primacy is chimerical; indeed, these claims buttress the doctrine by asserting that profits and stakeholder value go hand-in-hand. To use Friedman’s own words, this is simply “cloaking”
profit-seeking activities in “hypocritical window dressing.”
Consider what has changed in the last 50 years
Since Friedman wrote his article, capital providers have coalesced into large institutions with extremely diversified portfolios. Because of this overwhelming diversification of the market, most investors are generally more stakeholder than shareholder with respect to any single company, because the impact that a company has on society and the environment
will affect their entire portfolio. This means that they are in a position to represent stakeholders, at least partially, through the rights they have as shareholders.
These diversified investors will benefit if the companies that they own reduce the externalized costs that burden everyone else, even if those particular companies must surrender profits at the margin. For example, the overall market returns to diversified shareholders will will be protected from the risk of environmental catastrophe and social
instability if shareholders insist that companies stop reaping profits from harmful emissions, questionable supply chains and corruption of the political process.
Think harder about the implications
of what Friedman actually said
Friedman himself stated that profit was primary only because that is what shareholders demanded in exchange for their investment: if they demand something else—like actually looking after stakeholders—that is their right as owners. His primary belief was that letting markets choose how to allocate resources was a good default rule for society because market participants would make trades to benefit each side, increasing societal wealth overall (i.e., “private vice” turns to “public virtue.”) But free markets do not always equal profit maximization-- free markets principles allow shareholders to decide what goals companies should pursue in exchange for their invested capital, whether that goal is profit maximization
or a low carbon footprint.
Friedman also recognized that sometimes profit maximization can lead to bad results, especially where companies can “externalize” costs—he specifically recognized this with respect to pollution. External costs that a company creates are not bargained for: they are unilaterally imposed on others; this means that there is no market force ensuring the gains
to the company outweigh the external costs of their activity. Sometimes a vice is just a vice.
What would real stakeholder capitalism look like?
Stakeholder capitalism can be authentic, but it is unlikely to be led by large businesses--such companies and their leadership are over-exposed to company specific issues, and therefore predisposed to undervalue the cost of externalities.
Shareholders themselves, however, are ideally situated to lead a movement for stakeholder capitalism, as long as large institutional shareholders like pension funds and endowments recognize that they have a responsibility for the social and environmental systems that all of their investments are embedded in (and that their beneficiaries have to survive
in without the help of multimillion dollar salaries).
Keep some hard truths in mind:
- For individual companies, rejecting the shareholder primacy constructed around Friedman’s market-centered ideas necessarily means sacrificing some return that their shareholders would otherwise receive in favor of actual stakeholder interests, such as workers, society, or the environment. Only then would corporations be deprioritizing
shareholders.
- There will be winners and losers in a transition to stakeholder capitalism, and the losers are concentrated in the financial industry (which takes two cents of every invested dollar annually) and at the top ranks of corporations, both of which profit from the systemic overemphasis on individual company and portfolio performance.
- Leadership of groups like the BRT are often opposed to such stewardship from shareholders, arguing that they should be protected from shareholder opinion with dual class shares and classified boards. This is a decidedly non-market idea, and combined with removal of the profit focus, could give corporate managers free rein to decide how to allocate resources
without constraint. This completely removes capitalism from stakeholder capitalism since resources are being allocated without regard to market forces. (And unlike restraints that come from government regulation, this allocation is also being made without democratic constraints.)
Final Thought
Muhammed Ali said that “a man who views the world the same at fifty as he did at twenty has wasted thirty years of his life.” So it should be with the 50 year old ideas articulated in Social Responsibility, which for too long have driven the belief that maximizing the values of individual companies in a portfolio will maximize the value of the
overall portfolio and the broader wealth of society. It is now time to realize that in a complex and interdependent economy, this is too simple a picture. The fact is that unfettered profit-seeking leads to untenable inequality, climate damage and other harms to all of us, which in turn negatively affects our economy and livelihoods.
But that does not mean we abandon market forces. Instead, we must expand our conception of where markets can operate to put a value on important systems, and recognize that the power that investors wield over private capital creates a corresponding responsibility for stewardship. With this recognition, we can create mechanisms to hold companies accountable
for the costs they impose on society and the environment, and require companies to pursue profits earned through efficiency and innovation, rather than extraction and exploitation.
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CALL TO ACTION:
SUPPORT SHAREHOLDER PROPOSALS
THAT MOVE BEYOND THE BUSINESS CASE
The Shareholder Commons seeks to refocus our capital markets on the interests that investors hold in common with one another and with other citizens. These common interests range from overall stock market performance to the quality of life on our planet and the durability of our civilization; they far outweigh the interests that investors have in the
relative financial performance of individual companies. This is true even if we limit the analysis to portfolio performance, as 80%+ of the return on equities derives from overall market performance.
Diversified investors thus have a strong pecuniary interest in protecting critical economic, social and environmental systems from harms caused when individual companies externalize costs in order to generate profit, as these costs can far outweigh the benefits from a portfolio perspective. Institutional investors therefore have a responsibility to limit
extractive behavior in order to protect returns to their beneficiaries.
The time has come to raise the visibility of this issue through shareholder proposals that focus on the external costs companies are burdening society with. Proposals that require boards and asset managers to address this issue will help the market to move beyond the cramped company business case for ESG and towards the recognition that investors have both the means and the responsibility to
protect critical systems. This responsibility means insisting that companies seek profit only from innovation and efficiency, rather than the depletion of common resources and the exploitation of vulnerable communities.
We have developed several concepts for proposals, detailed in this document. While these are conceptualized as
stand-alone proposals, it should also be noted that the cost of externalities to diversified shareholders creates a pecuniary interest that can be used to support many existing proposals, both in arguing for inclusion in proxy material and in seeking the support from asset managers.
If you are interested in being part of this effort in the 2021 proxy season, please let us know.
UPCOMING VIRTUAL EVENTS
Guardrail Project, Phase 2
Following our kick-off webinar, we are entering the next phase of the project where we convene small, high-level workshops of asset owners, managers, subject matter
experts and other stakeholders to strategize around several core topics, including guardrail development, tactical implementation, and asset owner engagement. Each session will be a self-contained, practical conversation intended to inform a comprehensive guardrail approach. If you are interested in joining one of these workshops, please sign up here:
Following the conclusion of the small group workshops this month, TSC will be arranging a larger virtual convening this fall, 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 later this month.
GRASFI Conference
Join Rick on Wednesday, September 9th at 2pm ET for a panel moderated by Bob Eccles which will explore gap between words and actions in the Business Roundtable's statement on the purpose of a corporation. Registration is free and can be found here.
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.
ABA Business Law Annual Meeting
Rick will 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.
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.
ESELA
Rick will be joining a panel called "Time for a Reset: Shaping Economic and Legal Foundations for the Future" on Wednesday, October 14th at 8am ET as part of ESELA - the legal network for social impact. Registration is free, and can be found here.
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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