Happy new year! As we embark on another solar orbit, the world around us may feel tumultuous. With the largest economy poised to enter a deregulatory period, investors’ duty to their clients and beneficiaries has not changed. In our September newsletter, we described tools investors can use to help them steward companies away from harmful behavior that creates systemic risk. In this newsletter, we discuss one such tool called “guardrails,” which are minimum parameters within which investors incentivize their companies to operate to prevent broader portfolio damage. Guardrails are part of our system stewardship toolkit for fiduciaries seeking to optimize diversified portfolio value on behalf of their beneficiaries and clients. We also flag below a January 30 vote on one such guardrail at Walgreens Boots Alliance, where we recommend that investors vote AGAINST board chair Stefano Pessina.

Guardrail Fundamentals

Guardrails allow investors to establish limits on corporate behaviors that excessively externalize social and environmental costs. While guardrails don’t replace engagement on specific issues, they can raise minimum performance expectations, allowing companies to strive to provide the best product or service efficiently instead of externalizing costs and extracting value from common resources at the expense of their own diversified investors. System stewardship involves redirecting the behavior of companies that threaten common resources—not divesting from them. The primary implementation mechanisms for companies that don’t conform to a guardrail are engagement, shareholder proposals, and voting against one or more directors. We’re currently supporting investors in implementing two guardrails on systemic threats: one on poverty wages and the other on antimicrobial resistance. We describe both in detail later in this newsletter.

Anatomy of a Guardrail

There are several steps in a guardrail strategy. First, investors determine minimum parameters for companies to protect social, environmental, and economic systems. The determination should be made in consultation with subject-matter experts. For example, in the context of climate change, a guardrail might be an expert-mediated greenhouse gas emissions budget. Guardrail standards allow companies to maximize returns within sustainable boundaries. Unlike current ESG standards, guardrails must be developed outside of companies, so that they are set with a view toward maximizing the overall value of the economy and diversified portfolios, not the value of individual companies or industries involved in the negotiation. This strategy avoids the trap of engagement on a company-specific basis. Individual companies are internally focused, and not structured to address the broad systemic concerns that matter most to diversified investors. Moreover, without very clear shareholder support for the prioritization of systemic effects, companies will likely use their own financial performance as the final arbiter of their success. Once a guardrail is established, investors announce the guardrail and take steps to ensure companies stay within it. These steps include:

• Voting against directors at public companies that don’t operate within the guardrail;
• Voting in favor of shareholder proposals asking companies to adhere to the guardrail;
• Voting against going-private transactions that don’t include guardrail guarantees; and
• Ensuring that companies entering the market through IPOs are committed to the guardrail.

Guardrail strategies need not be limited to publicly traded companies. Investors also use their influence as limited partners to ensure that private equity, venture capital, and hedge fund sponsors bring portfolio companies within guardrails. Even companies not adequately subject to such governance tactics can be affected through their participation in supply chains.

Demonstration Guardrails

The Shareholder Commons is currently supporting investors in running two guardrails—one on antimicrobial resistance (AMR) and the other on poverty wages and pernicious income inequality—to demonstrate the concepts above in practice. Our case studies provide the empirical and fiduciary basis for our guardrails.

AMR

To constrain the growing threat of AMR, which could cost the global economy more than US$100 trillion by 2050, investors are asking companies to follow World Health Organization Guidelines on Use of Medically Important Antimicrobials in Food-Producing Animals (the “WHO Guidelines”). More details, including individual company proxy actions as they become available, can be found on our antimicrobial resistance guardrail page.

Poverty Wages

To constrain rising income inequality and discourage poverty wages, investors are asking companies to pay a living wage (as distinct from the often insufficient, statutory minimum wage) not only to their direct employees, but also down through their supply chains. Closing the living wage gap worldwide could generate as much as an additional US$4.56 trillion every year through increased productivity and spending, which equates to a more than 4 percent increase in annual GDP. More details, including individual company proxy actions as they become available, can be found on our poverty wages guardrail page.