PORTFOLIOS ON THE BALLOT

Proxy season allows shareholders to tell companies how they want their capital applied in the real economy. Among other matters, shareholders can press for an end to extractive practices that threaten diversified investors’ financial interests in preserving a resilient economy. Portfolios on the Ballot highlights upcoming 2023 proxy votes that address diversified investors’ common interests in a just and sustainable economy. In particular, POTB identifies:

• Proposals and “vote no” campaigns designed to accelerate reductions in greenhouse gas emissions at companies that appear to be prioritizing their own cash flows over the risk that the climate crisis poses to the entire economy (and consequently to diversified portfolios). Matters include both proposals and votes against directors. Companies targeted include ExxonMobil, Chevron, BP, and Shell.
• Proposals at Amazon, Meta Platforms, and Alphabet to protect digital and human rights. These companies have created huge enterprise values for themselves but are creating ever-greater risks to the social institutions that sustain a resilient economy. This prioritization of profits over people may increase these companies’ cash flows, but it’s a terrible trade for their diversified shareholders, whose portfolios depend on a thriving economy.
• A proposal at McDonald’s addressing the abuse of antimicrobials in its supply chain. While this practice may improve its margins and thus its share price, it contributes to antimicrobial resistance, a $100 trillion threat to the global economy, and a corresponding risk for the diversified portfolios that rely upon a high-functioning health care system.
• A proposal at State Street, one of the world’s largest asset managers, seeking a report on whether it could serve its clients better by stewarding companies away from practices that threaten the systems that undergird its clients’ diversified portfolios, even when those practices might be financially beneficial to the individual companies.
• A proposal at BlackRock, asking the world’s largest asset manager to report on whether and how it could improve its pension fund clients’ investment returns by stewarding its holdings to “engineer decarbonization in the real economy,” thereby improving financial returns to BlackRock shareholders.
• Proposals and director no-vote recommendations at major banks including JPMorgan Chase, Royal Bank of Canada, Goldman Sachs, and Citigroup asking them to end fossil-fuel financing that exacerbates systemic risk to diversified portfolios from climate change.
• Proposals asking companies to disclose how paying their workers less than a living wage (Kroger and Dollar Tree) and selling tobacco products (Kroger) externalizes costs onto their shareholders’ diversified portfolios.
• A proposal at Verizon asking it to discontinue political expenditures that may increase its own financial returns at the expense of diversified portfolios.

Background

Modern investing requires diversification. Optimizing the financial risk and return of a portfolio requires broad diversification. This allows savers to earn the high returns available from risky assets (such as common stock), while diversifying away the idiosyncratic risk that would accompany concentration on one company or sector.

Diversification prioritizes overall market returns. This diversification means that the most important factor determining investment returns over the long term will be the return of the market itself, rather than whether any particular company in a portfolio does better or worse than the market.

Diversified investors considering sustainability questions should prioritize overall market returns to protect their portfolios. When considering an ESG or sustainability-linked vote, investors should ask, “How will my vote affect my overall return from the market?” because overall returns are what allow investors to meet their financial goals and liabilities.

Often, the answer to this broad question is the same as the answer to the narrow question, “What vote will optimize returns at the company in question?” For example, the question whether to support a resolution favoring shareholder rights may be “yes,” because those rights will create greater accountability, so that the company is more likely to protect shareholders’ financial interests, improving both company returns and total market returns.

For some sustainability questions, however, the interests of individual companies are not aligned with their diversified shareholders’ interests in optimizing overall market returns. It is not always the case that the vote that is best for company returns is best for portfolio returns. As the votes discussed in this publication illustrate, the strategy that maximizes cash flows for a company may involve the creation of social and environmental costs that threaten the systems that support the economy upon which diversified portfolios depend.

Shareholders can and should vote in their own interests (or the interests of their beneficiaries), even when those interests conflict with isolated company interests. Shareholder stewardship is not constrained, by law or commercial reality, to advocacy designed to preserve or enhance a company’s long-term value: if a portfolio company creates social or environmental costs that threaten their overall portfolio returns, investors can (and should) use their stewardship tools to oppose such behavior, even if doing so could reduce enterprise value at an individual company. (A memo explaining this concept is available here.)

2023 System Stewardship Proxy Opportunities

Below is a non-exclusive list of 2023 proxy season matters that may have broad systemic effects on diversified portfolios. The subject matters, which include human rights violations, greenhouse gas emissions, and antibiotic abuse, are types of company practices that may increase the company’s financial value but impoverish the social and environmental systems that support investors’ broad portfolios.

While supporting these matters will not necessarily reduce the value of the individual companies, in some cases it may. However, due to the systemic risks involved, these are instances where shareholders should prioritize their analysis of the matter’s financial impact on their entire portfolio over its impact on the individual company.  

1.     McDonald’s use of antibiotics threatens public health.

Action Item: A shareholder proposal at fast food giant McDonald’s (NYSE: MCD) asks the company to adhere to the World Health Organization Guidelines on Use of Medically Important Antimicrobials in Food-Producing Animals.

Impact on Diversified Shareholders: Overuse of antibiotics by companies such as McDonald’s (the largest beef purchaser in the United States) exacerbates antimicrobial resistance (“AMR”), one of the top ten global public health threats facing humanity. If the efficacy and availability of these life-saving drugs are compromised, the entire economy will suffer, and when the economy suffers, investors lose. By 2050, AMR could cause $100 trillion in lost global production, thus lowering the economy’s intrinsic value.

Bottom Line: McDonald’s is using antibiotics to increase its own margins at the expense of public health. This is a bad trade for McDonald’s diversified shareholders, who rely on broad economic growth to achieve their financial objectives. Voting FOR this resolution is a request that McDonald’s change its policies and adhere to the WHO Guidelines to save lives, contribute to a more resilient economy, and protect its diversified investors’ portfolios.

2.     Meta Platforms threatens economic stability.

Action Item: A shareholder proposal at Meta Platforms (NASDAQ: META)—parent company of Facebook, Instagram, and WhatsApp—asks for a report on the potential to calibrate executive compensation to address the costs externalized by Company operations, including costs imposed on the global economy and the environment.

Impact on Diversified Shareholders: Recent news reports have established that the company prioritizes its own profits over moderating the negative effects of content that encourages vaccine hesitancy, climate-change denialism, ethnic violence, and other damaging phenomena. The Company’s prioritization of web traffic and user engagement threatens social institutions and the ability of the global community to address catastrophic threats. These threats matter to Meta shareholders, because the value of diversified portfolios rises and falls with GDP. The proposal contemplates compensation adjustments to offset any incentive to create negative externalities that will be absorbed by the economy and, ultimately, the Company’s own diversified shareholders.

Bottom Line: Voting FOR this resolution is a request for a process that will mitigate the risks the Company is creating for its own shareholders by prioritizing profits over accuracy and social stability.

3.     State Street’s stewardship ignores systemic impact.

Action Item: A shareholder proposal at $4 trillion asset manager State Street (NYSE: STT) requests a report on what the company could do to address the conflict of interest between portfolio companies’ executives and State Street’s clients.

Impact on Diversified Shareholders: Most of State Street’s clients (or their beneficiaries) depend upon diversified portfolios to reach their goals, just like the company’s own diversified shareholders. Yet State Street’s stewardship policies do not account for diversification—they focus on stewardship that raises the value of individual companies without regard to the impact this has on diversified portfolios. As discussed in the background section above, that focus is misguided when costs externalized by a company pursuing profits are reinternalized in the portfolios of its diversified shareholders. As one of the most powerful asset managers in the industry, reordering State Street’s priorities could create significant value for both its clients and shareholders.

Bottom Line: Voting FOR this resolution will help to align State Street’s stewardship with the interests of its diversified client base and, correspondingly, its diversified shareholders.

4.     BlackRock’s stewardship fails to address climate risk.

Action item: A shareholder proposal at $10 trillion asset manager BlackRock (NYSE: BLK) requests a report on whether and how BlackRock could improve its pension fund clients’ investment returns by stewarding its holdings to “engineer decarbonization in the real economy,” an objective BlackRock has explicitly eschewed.

Impact on Diversified Shareholders: Unmitigated climate change will cause economic damage. Indeed, BlackRock itself forecasts a cumulative loss in global output of nearly 25% in the next two decades. This type of economic loss will devastate long-term portfolio returns of BlackRock’s pension fund clients, jeopardizing their ability to support future retirees. Despite this danger, BlackRock denies a duty of care to actively diminish this risk.

Bottom Line: Voting FOR this resolution will help to align BlackRock’s stewardship approach with its pension fund clients’ interests in securing their beneficiaries’ retirements.

5.     Majority Action campaigns for authentic climate action.

Action Item: Majority Action has issued guidance on director votes, urging votes against directors at U.S. oil and gas, electric power, insurance, and financial services companies that are demonstrably out of alignment with limiting warming to 1.5°C.

Impact on Diversified Shareholders: The actions of companies that directly or indirectly affect climate outcomes pose risks to the economy as a whole and to investors’ entire portfolios. The sectors targeted by Majority Action are key drivers of the production and consumption of fossil fuels and require timely transformation to avoid catastrophic climate change and protect the global economy. The campaign demands accountability at the highest corporate level for the relatively small number of large companies whose actions are significant drivers of climate change. 

Bottom Line: Voting against the directors the Majority Action campaign targets will send a strong message to these companies that shareholders prioritize the climate system and its value to their entire investment portfolio over the financial performance of any individual company.

6.     Follow This proposals target scope 3 emissions.

Action Item: NGO Follow This has organized shareholder proposals asking oil majors ExxonMobil (NYSE: XOM), Shell (NYSE: SHEL; AMS: SHELL.AS; LSE: SHEL.L), BP (NYSE: BP; LSE: BP.L), and Chevron (NYSE: CVX) to adopt medium-term targets for reducing the emissions caused by the use of their products (Scope 3 emissions). The targets must be designed to limit global warming to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C.

Impact on Diversified Shareholders: By insisting that these companies create real targets for decreasing the emissions for which their products are responsible, these resolutions go beyond climate activism constrained by the false narrative that companies may only engage in emissions reductions that optimize internal financial returns. Inevitably, this constraint leads to incremental changes that do not address the full scope of the climate crisis. Insisting on medium-term targets aligned with scenarios that avoid the most catastrophic effects of climate change prioritizes systemic concerns over individual company cash flows, and thus protects diversified investors from corresponding catastrophic risk.

Bottom Line: Voting FOR these resolutions will send a strong message to these companies that shareholders prioritize the climate system and its value to their entire investment portfolios over the financial performance of any individual company.

7.     Members of the Investor Alliance for Human Rights take on Big Tech.

Action Item: Members of the IAHR have been engaging leading tech companies on human/digital rights concerns and announced a series of proposals filed for the 2023 proxies of Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Meta. According to their press release, the proposals “raise a variety of human rights concerns at each company ranging from inadequate content moderation and the proliferation of hate speech to a lack of transparency and accountability through the use of opaque algorithms and artificial intelligence, violations of privacy rights, risks of the targeted advertising business model of Big Tech, as well as corporate governance concerns such as the dual-class share structures prevalent in the tech sector that limit voting rights for shareholders.”

Impact on Diversified Shareholders: These tech companies affect billions of users around the world. The proposals address a variety of issues, including dangerous content, algorithmic transparency, digital rights, the governance of these powerful institutions, and equity throughout the organizations. Due to the deep and broad global reach of these tech giants, the importance to diversified shareholders of these proposals’ global economic impact may far outstrip their impact on the companies’ own financial returns.

Bottom Line: Diversified shareholders should consider whether votes FOR these proposals can serve to protect their entire portfolios from any threats these three companies pose to global economic health and stability.

8.     Investor coalition seeks end to new fossil-fuel exploration and development financing.

Action Item: Proposals at JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), Royal Bank of Canada (TOR: RY.TO; NYSE: RY), and Morgan Stanley (NYSE: MS) filed by Sierra Club Foundation, Trillium Asset Management, Stand.earth, and Harrington Investments ask the companies to phase out new fossil-fuel exploration and development financing. In the same vein, Climate Votes is asking investors to vote against the directors at these banks who are responsible for climate oversight and have failed to align their companies’ goals, lending, underwriting, capital expenditures, and strategic planning with the goals of the Paris Agreement.

Impact on Diversified Shareholders: As the proposals note, climate change poses a systemic risk, with estimate GDP loss of 11-14% by mid-century under current trajectories. By continuing to finance new fossil-fuel exploration and development, these companies are exacerbating climate change and its negative impacts on diversified investors, imposing substantial costs on the companies’ diversified shareholders.

Bottom Line: Voting FOR these resolutions and AGAINST these directors will send a strong message to these companies that shareholders recognize the fundamental risk climate change poses, and that they prioritize the climate system and its value to their entire investment portfolios.

9.     Low wages and racial/gender disparities drag down economy and diversified portfolios.

Action Item: Proposals at Dollar Tree (NASDAQ: DLTR) from United Church Funds and Kroger (NYSE: KR) from Sisters of the Presentation of the Blessed Virgin Mary, SD ask those companies to report on (1) whether the companies participate in compensation and workforce practices that prioritize their financial performance over the economic and social costs and risks created by income inequality and racial and gender disparities and (2) how such costs and risks threaten returns of diversified shareholders who rely on a stable and productive economy.

Impact on Diversified Shareholders: Research shows income inequality harms the entire economy, which reduces diversified portfolio returns. These proposals highlight that while the companies may increase their margins and improve their own financial performance by paying their workers less than a living wage, that profit comes at the expense of society and the environment and is a bad trade for most shareholders, who rely on broad economic growth to achieve their financial objectives and secure their retirement.

Bottom Line: Voting FOR these proposals will signal to these and other companies that shareholders value the economic stability that arises from a secure and healthy workforce over any single company’s margins.

10.  Tobacco products threaten public health.

Action Item: A proposal at Kroger led by Sisters of St. Francis of Philadelphia asks the company to disclose the external public health costs created by its sale of tobacco products and how those costs affect shareholders who rely on overall market returns.

Impact on Diversified Shareholders: The proposal notes that health and productivity costs from tobacco consumption amount to almost 3% of global GDP annually. The entire economy suffers from these public health costs, and when the economy suffers, diversified investors lose. Kroger’s sale of tobacco products may increase its own returns, but it does so by externalizing costs onto diversified shareholders.

Bottom Line: Kroger is using tobacco to increase its own margins at the expense of public health. This is a bad trade for Kroger’s diversified shareholders, who rely on broad economic growth to fund their retirement, education, and other critical needs. Voting FOR this resolution is a request that Kroger account for its full impact on its diversified investors’ portfolios.

11.  Trillium targets harmful political spending.

Action Item: Trillium Asset Management has filed a proposal at Verizon (NYSE: VZ) asking the company to adopt a policy prohibiting political and electioneering expenditures.

Impact on Diversified Shareholders: As the proposal notes, “Political contributions by one company can take the form of rent-seeking which may lead to externalities that weigh on other companies, taxpayers, and consumers – possibly slowing real overall economic growth. This may raise concerns for widely diversified investors who are more exposed to the broader economy and suggests that they should support a cessation of political contributions.”

Bottom Line: Diversified shareholders should vote FOR this proposal to curb corporate political influence that may increase individual company value at the expense of the broader economy.

A Final Note

In an increasingly complex and interdependent global economy, the optimal strategy for shareholders to achieve their financial goals must include stewardship targeting business practices that put the entire economy at risk. In particular, shareholders must protect themselves from the risk that the companies they own recklessly pursue their own financial success without regard for the effect their business models have on their own shareholders’ diversified portfolios.

The proper pursuit of such system stewardship will mean leaving behind the worn-out idea that shareholders should want companies always to prioritize their own financial returns. If choosing to maximize enterprise value harms a company’s predominantly diversified shareholders, then it is the wrong choice. The 2023 proxy season includes many opportunities for shareholders to tell companies that they want their capital used in a manner that preserves the critical systems upon which they rely.

(Updated April 6, 2023)