WILMINGTON, Del., Aug. 16, 2021 /PRNewswire/ -- The Shareholder Commons (TSC), a non-profit organization advocating for a systems-first approach by businesses and investors, today published the results of its first proxy season campaign engaging with companies on a systems-first basis. The full report, "The Beta Steward Proxy Review 2021: Progressing Toward Authentic Value Creation," is available at https://bit.ly/TSCReview2021.
TSC's approach to the 2021 proxy season centered around beta stewardship, the idea that institutional investors should practice active ownership by restraining corporate behavior that threatens the social, environmental, and economic systems upon which diversified investors rely. This is a shift from the alpha-focused manner in which investors typically engage with companies on environmental, social, and governance (ESG) issues, which tends to focus on improving a company's ESG performance in order to improve its long-term financial performance and reduce enterprise risk. Beta stewardship focuses on the systemic costs and risks that may result from irresponsible corporate behavior, even when such behavior might improve individual company performance.
Beta stewardship starts from the premise that individual company performance is responsible for at most 25% of the performance of a diversified portfolio, according to recent academic research that is also cited in the TSC report. The rest is explained by the performance of the market, and market performance is closely related to the overall economy. That means investors' primary interest is in making sure individual company decisions don't negatively harm the economy as a whole, which will lower portfolio returns for all investors.
"Investors must hold companies accountable for creating systemic risks," said Frederick Alexander, CEO of The Shareholder Commons. "Ignoring or neglecting these risks is an abdication of an investor's fiduciary duty to its clients and beneficiaries, who have a shared interest in preserving a sustainable economy."
"The root problem is that, as currently practiced, responsible investment and stakeholder capitalism are focused on identifying and mitigating ESG risks to the financial returns of individual companies or portfolios. Largely unaddressed are the ESG risks from company practices that everyone else bears," said Dr. Ellen Quigley, Advisor to the Chief Financial Officer (Responsible Investment) at the University of Cambridge, in her foreword to the TSC report. "To take the next necessary step, investors must focus on ending corporate behaviour that externalises costs that others—including their own shareholders—internalise, whether through investments in diversified portfolios or through the lives they live."
In total, TSC supported 24 shareholder resolutions at 23 companies during the 2021 proxy season, with targets ranging from tech companies such as Alphabet, Facebook, and Yelp to financial institutions such as BlackRock, Goldman Sachs, JPMorgan Chase, and State Street. Of the resolutions, one was withdrawn after company management took up the proposal (YUM! Brands), 17 went to a vote, and eight were excluded by the SEC. Of the 17 proposals that went to a vote, 11 met the 3% vote percentage required for provisional resubmission and three exceeded the 10% vote threshold.
TSC plans to continue to work with investors on additional off-cycle proposals later in 2021, and is already in the planning stages for the 2022 proxy season when many of these proposals will be eligible to be reintroduced.
TSC worked on two distinct types of shareholder resolutions:
- Disclosure of the costs imposed on society (i.e., externalized) by a company's contribution to specific systemic risks. These risks include antimicrobial resistance, inequality, corporate governance failures, public health threats, and inadequate voting policies. Disclosure of these risks would provide the basis for a "gap analysis" in which companies compare their ability to reduce a negative social or environmental impact under the constraint of optimizing their internal financial returns with their ability to reduce that impact if optimizing for systemic health. The goal behind disclosure is to provide investors, regulators, and policymakers with information needed to address systemic risks and to illustrate the gap between current investment perspectives and what could be achieved under a systems-first model.
- Conversion to a Public Benefit Corporation (PBC) structure. PBCs are a type of for-profit entity that allows the directors of a company to better serve the interests of diversified shareholders by prioritizing impacts on society, workers, communities, and the environment when those impacts are more likely to be important to such investors than the financial returns of that company. TSC specifically targeted companies that were signatories to the Business Roundtable Statement on the Purpose of a Corporation. These proposals demonstrate that investors can be aligned with a more stakeholder-oriented management style, but that such a re-alignment requires understanding the fiduciary duty to shareholders as encompassing the full range of their interests, including as diversified investors.
"We are both encouraged and humbled by these results," said Alexander. "We recognize that more education is needed—both for companies, which bear responsibility for many systemic risks, and for shareholders, who have a responsibility to hold companies accountable for creating risks to our shared social and environmental systems, and thereby endangering investor returns."
Case Studies on Beta Issues
The report includes three case studies on different beta issues to show how a systems-first approach to shareholder engagement can benefit all diversified investors.
- Addressing antimicrobial resistance by reducing the use of antibiotics in the supply chain (featuring shareholder proposals targeting YUM! Brands and McDonald's)
- Encouraging Business Roundtable members to convert to a Public Benefit Corporation structure (featuring shareholder proposals targeting Facebook and Salesforce)
- Limiting the power of corporate insiders by restricting multi-class equity offerings (featuring shareholder proposals targeting JPMorgan Chase and Goldman Sachs)
Investors and other stakeholders interested in learning more about beta stewardship can sign up for the TSC newsletter at http://eepurl.com/hEQRPj.
ABOUT THE SHAREHOLDER COMMONS
The Shareholder Commons is an NGO helping investors work collectively to reduce the social and environmental costs that businesses create when competing for profits, using shareholder stewardship, thought leadership, and policy advocacy to catalyze systems-first investing and to create a level playing field for sustainable competition. Learn more at https://theshareholdercommons.com
SOURCE The Shareholder Commons