The Awakening of a Giant?

By Frank Sherman

Much has been written about socially responsible investing becoming mainstream. US SIF reported two years ago that $1 in every $4 of professionally managed assets in the U.S utilize ESG criteria or shareholder advocacy, a double digit annual increase since the mid-1990s. SRI concerns have also broadened from governance issues (e.g. proxy access, political and lobby spending, executive pay, separate chair) to corporate environmental impact (e.g. sustainability reporting, climate, water) and more recently, social impacts (e.g. human rights, labor rights, diversity).

Another trend in the investment world is the disproportionate growth of passive investing. As open-end and exchange-traded mutual funds managed by large asset managers make up a growing portion of U.S. equity holdings, they take on a growing fiduciary responsibility. When you buy these funds, you transfer your fiduciary responsibility to fund managers to engage companies and vote proxies for you. These long-term and diversified owners have no way to exit a stock, so the only way to influence shareholder value at a portfolio company is through exercising active ownership rights.

Given these trends, it is not surprising to read Morningstar’s recently released proxy voting report stating investor support for ESG resolutions reached a record high in 2019 averaging 29%. This excludes the proposals which were withdrawn based on company agreements. Average support for ESG shareholder resolutions across the 50 fund families analyzed rose from 27% in 2015 to 46% in 2019. However, they found that five of the 10 largest fund families —Vanguard, BlackRock, American Funds, T. Rowe Price, and DFA— voted against more than 88% of ESG-related shareholder resolutions. Their support would have caused 19 of 23 resolutions earning more than 40% support to pass if supported by just one of the largest two asset managers. In response, these fund managers claim to ‘engage companies privately’.

The silver lining highlighted by Morningstar is Blackrock. Recall that two years ago Larry Fink, CEO of BlackRock, the world’s largest asset manager, told CEOs that to sustain financial performance they must “understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth”. He went on to say that companies need to engage their stakeholders and if they wait until they receive a proxy proposal to engage, “we believe the opportunity for meaningful dialogue has often already been missed”. This year in BlackRock’s annual letter, Fink stated that climate risk is changing the fundamentals of the financial system. BlackRock would be aligning its investment approach, including how it votes proxies, with sustainability. Fink committed to using proxy voting to advance TCFD- and SASB-aligned financial disclosures and to an unprecedented standard of proxy voting transparency. They demonstrated their seriousness by joining the Climate Action 100+, a global investor initiative which SGI is a member, representing $34 trillion in managed assets, to engage the world’s largest corporate greenhouse gas emitters to take necessary action on climate change.

Morningstar predicted that BlackRock’s “willingness to vote against management would give engagements on sustainability issues more teeth…as corporate management becomes more open to engaging with shareholder proponents”. I remain hopeful…

Look Back at 2019: The Difference Between Hope & Despair

By Frank Sherman

As I reflect on 2019, there was plenty of news to discourage me: wars continue in the Middle East, and nations continue the proliferation of nuclear arms; refugee and migration crisis across multiple continents; rise of nationalism and hate crimes; growing wealth and income gaps; undeniable climate crisis, water scarcity, deforestation, and biodiversity loss…not to mention the rollback of regulations and social safety nets, polarization of political discourse, and impeachment hearings in our own country. A review of the global progress on the UN Sustainable Development Goals found that, despite progress in a number of areas, progress on some Goals has been slow or even reversed. “The most vulnerable people and countries continue to suffer the most and the global response has not been ambitious enough.”

But late last night, I was sent a message that woke me up. As I looked through the Capuchin Community Services 2020 calendar, a quote caught my eye. “The difference between hope and despair is a different way of telling stories from the same facts” (Alain de Botton, The School of Life, London).

I then thought of Greta Thunberg’s (Time Person of the Year) speech at the UN Climate Action Summit in September excoriating world leaders for their inaction in the climate crisis, and the student March For Our Lives demanding more gun control. I recalled watching CNN’s annual Heroes of the Year Awards honoring the top 10 men and women who are making the world a better place by helping families affected by tragedy, cleaning up the environment, protecting neglected animals, and so much more. I read that worldwide terrorist attacks actual fell by 33% compared to 2017, to the lowest level since 2011. This year scientists learned to spot Alzheimer’s earlier and got a step closer to curing diabetes. China, the largest greenhouse gas emitter, is becoming a leader in electric vehicles.  

I also find hope in the work of Seventh Generation Interfaith and ICCR. We added 10 new members with the merger with the Midwest Coalition to our coalition bringing the total to 39. This year our members engaged several companies in the food and apparel sector asking them to conduct human rights impact assessments and to develop a human rights policy. We continued our work with Midwestern electric utility companies to accelerate their decarbonization plans and ensure a just transition for employees and local communities. We leveraged the Business Roundtable’s statement on the Purpose of a Corporation to promote transparency in corporate political spending and lobbying. We challenged pharmaceutical companies to base their executive remuneration policies on innovation and patient outcomes rather than predatory pricing. We challenged companies to trace their supply chains back to the wildfires in the Amazon and asked them to meet their 2020 deforestation targets. We asked food brands and restaurants to improve their nutritional profile and follow marketing-to-children guidelines to fight obesity. We hosted our annual conference, this year on impact investing, in October. Our quarterly webinars, blog articles and weekly newsletters kept our members informed on our issues and trained on our tactics.

How will you tell your story this holiday season?

Blessing to you and your family and a hopeful New Year!

SEC’s Proposed New Rules Threaten Shareholder Democracy

Last December, our blog gave an update on efforts by trade associations to restrict shareholder rights .

On Tuesday, November 5, the Securities and Exchange Commission unveiled the exact nature of that threat and voted 3-2 on two separate measures to propose changes to rule 14a-8 that would severely restrict investors’ access to the corporate proxy. The changes would require that:

  • Shareholders own $2,000 worth of company stock for a minimum of three years (up from one) before they can submit a shareholder resolution. They can submit proposals earlier if they own $25,000 for one year and $15,000 for two years. Small shareholders can no longer come together to aggregate their shares to file a resolution.
  • Re-submission vote thresholds were raised from 3%, 6% and 10% for the first three years to 5%, 15% and 25%.
  • Proxy service providers (such as ISS and Glass Lewis) will be required to provide a draft of their proxy advice to companies for comment ahead of issuance. There are several other restrictions on these companies.

These proposed changes are significant threats to our voice as shareholders. They have received significant push-back in the media (Reuters, MarketWatch) and by several investor groups (ICCR, US SIF, CII). “Between the filing threshold increases and the doubling of percentages for resubmissions, it means that smaller investors are going to find it much more difficult to file resolutions,” says Josh Zinner, CEO of ICCR. “It’s a blow against shareholder democracy.”

The 60-day comment period opens once the proposed rule changes are published in the Federal Registrar. Our members are encouraged to sign on to Ceres and ICCR comment letters or, better yet, send in your own comments to the SEC. You should also consider sending letters to your Congressional representatives. Finally, consider submitting op-eds and letters to the editor to your local paper and newsletter stories and blog posts on your websites.

To learn more about the issue and concerns, you read the statements by Commissioner Robert Jackson and Allison Herren. “There is a common theme that unites the two proposals before us today”, said Commissioner Herren. “They both would operate to suppress the exercise of shareholder rights.”

With regards to a second proposed rule change, ISS (Institutional shareholder Services) has filed a lawsuit against the SEC. The final resource is a website, supported by ICCR, that is gathering evidence and sharing reports concerning the shareholder proposal process (Investor Rights Forum).

A lot more to come on these proposals. Please lift your voice in opposition!

Riverwater Partners Employment Clauses Engagement

By Cindy Bohlen

Chief Mindfulness Officer & Analyst, Riverwater Partners

Riverwater Partners, a Responsible Investment RIA based in Milwaukee, WI, is working in collaboration with Meredith Benton, Whistle Stop Capital, and Molly Betournay, Clean Yield Asset Management, and a few other investors, on an engagement campaign with companies to end the use of Forced Arbitration and Non-Disclosure Agreements in the context of employee harassment and discrimination claims. Riverwater chose to participate in this campaign because we believe the cost and effort to end the use of these tools is insignificant compared to the risks associated with their use, which include human capital costs, legal risk, and brand exposure.

In June, Riverwater sent letters to CEOs and Investor Relations of 24 portfolio companies highlighting said risks, stating that Attorneys General from all 50 states have signed a letter calling for the end of mandatory arbitration in sexual harassment cases, and citing examples of high-profile companies that have ended their use. As of August, we have received responses from eight companies, most indicating they do not use Forced Arbitration/Non-Disclosure Agreements at all. A few with union employees stated that negotiated contracts require certain disputes to be determined by arbitration; given that these terms are negotiated by experts on behalf of the employees, we believe this is fair. In all cases, we are encouraging companies to disclose these policies publicly, as investors have begun to focus on the issue.

Riverwater is in the process of following up with companies that have not yet responded. Our goal is to educate them regarding the risks of using Forced Arbitration and Non-Disclosure Agreements, and to encourage them to either disclose publicly if they are not using such tools, or to end use. We will consider further action, including shareholder resolution, if we deem it appropriate. We welcome participation by others who are concerned about this practice. Please feel free to contact Cindy Bohlen of Riverwater at cbohlen@riverwaterllc.com with interest.

Note from SGI: Efforts like this to end mandatory arbitration of sexual harassment claims help to put a stop to the culture of silence that protects perpetrators at the cost of their victims. We salute Cindy for her participation in this important work.

My Visit to South Texas Family Residential Center in Dilley

By Mark Peters

Director of Justice, Peace and Reconciliation, Priests of the Sacred Heart

The August 25 Washington Post ran a story about the South Texas Family Residential Center in Dilley, Texas, the largest of three in the U.S. specifically dedicated to the holding of mothers and children.  Opened to reporters for the first time, the center was described by reporter Maria Sachetti as clean and well-equipped, very different from the images we’ve all seen of kids in pens at the border. 

I can confirm her story – I was there two weeks earlier and saw everything she described:

…a dental office, with a reclining chair and sterile instruments… cafeteria serving hot dogs, lime-cilantro chicken, tortillas and green salad — all you can eat… Kindergartners [singing] “If You’re Happy and You Know It…” access to a wide array of services, including a 24-hour infirmary, a day care, a library with Internet and email access, a beauty salon, a charter school and a canteen.

I’d been asked by SGI to take part in a tour of the Dilley facility and sit in on a dialogue of ICCR members with CoreCivic, the private corporation that runs Dilley and is one of the “big two” in that field, along with GEO Group.  At one time they were in dialogue with GEO, but the company had “paused” that conversation. (In fact the CEO had suggested they sell their shares and leave them alone!

CoreCivic has been a more willing partner, and after the dialogue I sat in on later that afternoon after the tour of the detention facility, the ICCR delegation saw signs for hope that human rights were getting needed attention.  But one has to wonder what an organization like Catholic Charities could do with the money CC is getting to run this camp, whether it’s full or not (surprisingly it never has been and often is way under its 2400 bed capacity).  The director told us he had “no idea” how Customs and Border Patrol and ICE decide who to send and not – mothers have reported an almost “eenie-meenie-minee-moe” approach at the border.

The Post reporter’s story is excellent in my opinion, and I encourage you to read it.  I especially call attention to her explanation of the Flores Agreement and the impact the Administration’s plan to nullify it would have on the length of time families are forced to stay in these camps (in a “vast stretch of scrubland in a tiny former oil-boom town, an hour south of San Antonio”), where the temperatures are often above 100 degrees and people generally don’t leave their air-conditioned pods.

The women who’ve left and were interviewed by Sachetti all agreed that, while “far better than the Border Patrol holding cells or the safe houses they stayed in during their trip through Mexico,” they still considered Dilley a jail.  Most currently stay less than the 20 day Flores limit, but if Flores is negated stays are expected to go to 3 times that and could legally be unlimited.  What will it do to the admittedly good morale (for the circumstances and relative to the trauma they’ve just passed through) we witnessed if that becomes the case.  We need to be telling Congress to keep the Flores Agreement!

I and the others were very surprised by what we saw in Dilley and relieved to know that not every detention facility is as bad as the worst of them (I can only vouch for this one, but I would also have to say that we all felt it was not “staged,” that we were seeing normal life there).  The next day, we heard a group that provides pro bono legal services say that residents were not being allowed to see them without an appointment, which should be their right, but we weren’t able to ask the CoreCivic official about that.  Follow-up is planned.  I’m grateful to SGI and ICCR for the opportunity to participate in this visit and commend the dialogue team for their dogged efforts to ensure that human rights are not trampled.  Perhaps what we saw would not have been that way without the efforts of them and so many others to let government and business know we are watching.

Corporate America Develops a Conscience?

By Frank Sherman

There has been a lot of media coverage this week of the Business Roundtable CEOs new commitment and statement on the purpose of corporations. Leaders of companies including JPMorgan Chase, Apple, Amazon and Walmart have abandon their 40+ year sole focus on shareholders to embrace a “fundamental commitment” to all their stakeholders: putting employees, suppliers and communities on a pedestal that once belonged only to shareholders.

Anand Giridharadas, author of Winners Take All: The Elite Charade of Changing the World, has been an effective critic of the statement.  “I absolutely see the change. It has become socially unacceptable as a company or a rich person not to be doing good. But what many are failing to do is ask: ‘What have I done that may be drowning out any of the do-gooding I’m doing?’ ” (Fortune, Aug 19, 2019). He cites the 2017 tax bill, supported by the Business Roundtable, in which the lion’s share of the benefits ended up in the hands of the top 1%, increasing the income inequality underlying many social problems.

The ‘enlightened’ CEOs are also taking heat from the right. The Wall Street Journal editorial page was quick to criticize (WSJ, Aug 19, 2019)… “A close reading shows there’s less substance here than meets the media spin, but it’s still notable that the CEOs for America’s biggest companies feel the need to distance themselves from their owners. Yet these CEOs are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient.”

But Steven Pearlstein, Pulitzer Prize-winning columnist for The Washington Post, professor of public affairs at George Mason University, and author of the book Can American Capitalism Survive? has a different take from the BRT statement. His article in the American Prospect five years ago (When Shareholder Capitalism Came to Town, Apr 19, 2014) partly blamed the BRT for corporate America’s sole focus on shareholder value leading to the corruption of capitalism. However, Pealstein was optimistic about the BRT statement. “It’s important because it signals a shift in attitude in norms. That’s already occurring. It’s sort of confirming something that’s happening that’s, I think, the pendulum swinging back in the right direction, after having swung too far in favor of shareholders.” Pealstein met J.P. Morgan Chase’s CEO and chair of the BRT, Jamie Dimon, in his office last year to discuss the growing public distrust of corporations and CEOs.

When asked by PBS host John Yang if this may just be a P.R. gimmick, Pearlstein gave some practical advice that all stakeholders can benefit.  “Yes, it is good for P.R., but if they don’t follow through, if we continue to see companies that say, I’m giving up my American citizenship so that we don’t have to pay U.S. taxes anymore because our shareholders are making us do it; if companies say, we’re going to crush our unions because our shareholders are making us do it; they won’t be able to get away with that anymore.”

It’s up to us to remind these CEOs of their new found conscience!

MCRI merges with SGI Coalition for Responsible Investing

By Barbara Jennings, CSJ

After two years of discussion about the best path forward, the St. Louis-based Midwest Coalition for Responsible Investment (MCRI) merged with Milwaukee-based Seventh Generation Interfaith (SGI) coalition to make both organizations stronger. 

MCRI began in 1977 focusing on the issue of the day:  South African apartheid. Michael Crosby, OFM Cap, the founder of SGI, visited St. Louis to explain the process of shareholder engagement and encouraged the formation of a regional socially responsible investment coalition.  Several Catholic institutions in the area decided to form MCRI. Other connections between St. Louis and Milwaukee:  beer towns, Midwest agriculture, defense industry, and racial disparity. 

MCRI joined the Interfaith Center for Corporate Responsibility shortly after it was formed. This connected us to many Catholic religious’ women and men congregations, as well as to representatives of other faith traditions.  We expanded our tactics beyond the traditional “negative screens” (e.g. no weapons, tobacco, gambling, birth control) to include corporate engagements, proxy voting and shareholder meeting attendance.

MCRI’s first resolution in 1978 asked McDonnell Douglas to build up its commercial business over military contracts which were dependent on foreign policy and regional conflicts. The proposal was presented by Sr. Mary Ann McGivern, SL. From that auspicious beginning, the work of MCRI expanded. By 1980, MCRI had thirteen institutional members. That same year, the coalition sponsored a local conference entitled “Corporate Responsibility: Why the Churches Must Be Involved.”  It was well attended by both treasurers and social justice representatives.       

Under the leadership of Susan Jordan, SSND, MCRI’s issues expanded to include nuclear waste (Union Electric, now Ameren), foreign military sales (General Dynamics, McDonnell Douglas/Boeing), and agricultural pesticides and GMO’s (Monsanto, now Bayer).  Other issues on which we engaged companies on were infant formula in Central America, AIDS medication from the pharmaceutical industry, and labor slavery in various supply chains.   

By 2007, Barbara Jennings, CSJ, who had been on MCRI’s Advisory Committee in the 1990’s, became the Executive Director of MCRI.  The issues at ICCR had grown tremendously, almost too much so that the saying at ICCR meetings was “We never met an issue we didn’t like.”  In 2015, ICCR adopted a human rights lens to all its’ work. Priority issues included climate change, human trafficking / labor rights, water stewardship and food justice.

MCRI continued to work with Ameren concerning their disposal of coal ash. A 2018 resolution received 53% vote, a rare majority for a shareholder resolution!  The coalition worked with Monsanto for several years on water issues. The company now uses low drip and recycling of water in their labs after a 2010 successful withdrawal of a resolution. After many years of engagement with Boeing, the company hired a third party auditor to delve into their supply chain for labor infringements.     

So, the work will go on….and with a more supportive business atmosphere than in 1977.   What has changed?   A greater awareness of the risks posed by climate change? Recognition of the liability posed by pollution?  Understanding that companies can outsource manufacturing but not the responsibility associated with it? The internet and social media together with increased societal expectations has placed more responsibility on corporations to account for their environmental and social impacts.

Each of the nine MCRI members (SSND, GSPMNA, CSJ, CPPS, OSU, SJ, SM, CSJ Congregational Center, and JAG Capital Management) will continue in corporate engagements as part of SGI’s coalition. I ask that you please stay active to bring the faith-based investor voice to corporate board rooms.

As for me, I have joined the SGI Board of Directors and will continue to remain active in this work. I was proud to be part of this journey and thank you for your support.