Corporate Governance Webinar

At the heart of this webinar is the conviction, born of evidence, that transparent and accountable corporate practices correlates to higher shareholder value and lower volatility in share prices. A company run well will deliver superior financial returns, over the long term, than a company that does not adhere to principles of transparency and accountability,

On Thursday, August 29, we were joined in our quarterly webinar by two leaders within the Interfaith Center on Corporate Responsibility (ICCR): Tim Smith of Walden Asset Management and John Keenan of  American Federation of State, County and Municipal Employees (AFSCME).

We are very grateful for the presence of both our guests in this webinar, for their commitment to work on these issues, and their generosity in sharing their wisdom with us.

As always, we welcome your feedback via a confidential evaluation found here. Slides from the webinar are found here.

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. 

The long and winding road

by Pat Zerega

Senior Director Shareholder Advocacy, Mercy Investment Services

This weekend, we saw Rocketman, the story of Elton John. It brought back memories of so many songs we grew up with.  For some reason I kept thinking of the song the long and winding road as a parallel to the story (even though it was written by the Beatles, Elton John performed it on occasion). Part of the reason it came to mind is that the song reflects how I feel about the private prison work and GEO specifically. It might be helpful to review some of the history that got us to today.

Around 2003, John Celichowski, O.F.M., Cap. and Valerie Heinonen, O.S.U., began approaching the private prison companies. At that point, their stock was considered ‘penny stock’ with few members at ICCR owning GEO, CCA or Cornell. The first resolution oat GEO received 3.2% and a similar resolution brought CCA to the table without going to vote. Fr. John moved on to leadership in the community and passed the mantle to Fr. Mike Crosby.  A variety of approaches including lobbying and human rights policy development continued with GEO and CoreCivic (formerly Corrections Corporation of America) through 2011. Dialogues were often contentious (my participation was through the Lutherans), and at one point the CEO of GEO wondered why we didn’t just “sell the stock and leave them alone.” We continued to focus concern with the people in custody.

In 2011, a resolution calling for a human rights policy was filed. At the same time, the Jesuit Social Research Center had obtained a grant to work with private prisons around human rights and training, so the Jesuits began to lead both dialogues. This grant brought in prison experts to help lead the way and both companies developed polices and entered into dialogue.  

We all know writing a policy is not the be all and end all of work. We need to see that the policy doesn’t sit on the shelf but is implemented, training occurring and the culture changing. Shareholders expected to be able to find that out through dialogue and increased transparency in reporting on the prison companies’ websites.

Since that time, the dialogues have focused on several issues including medical care and segregation from the general population, but shareholders felt like we were not seeing the real impact hoped for with a human rights policy. Abuse allegations remained high, and news coverage of these events continued. In the spring of 2018, we began to see many reports concerning immigration detention conditions in private prisons. ICCR hosted letters to both private prison companies with more 50 signatures asking for the prisons not to become involved with government detention contracts.

CoreCivic answered the letter and continued to engage in a meaningful way, this spring presented its first ESG report. They are working on other ways to be transparent on human rights issues.

In the late summer of 2018, GEO, however, put a ‘pause’ on dialogue. This was new to me. I’ve had companies stall or not answer letters, but to actually write and say they didn’t want to talk was new ground.

Our group was frustrated and decided to file a resolution in the fall of 2018 asking for a report (that was indicated in GEO’s own policy) concerning how implementation of the human rights policy. Many shareholders joined the group of Jesuits and Mercy Investment Services addressing this issue, and in November the resolution was filed.

As expected, the resolution was challenged, but the SEC denied the no action thus, agreeing it had to be on the ballot. Shareholders filed a proxy memo indicating reasons why it should be left on, alerted proxy advisors of the resolution, and the week before the AGM learned that both proxy advisory firms were supporting the resolution. As that information became public, we also received an unexpected email from GEO, telling us they would no longer oppose the resolution and filed such a statement with the SEC. The company never quite supported the resolution, nor changed the proxy on their site, nor put the SEC statement on their site, nor did they reach out to talk with us. So, we prepared to present at the AGM (a virtual-only AGM, but that too is for another day), and garnered nearly 88% of the vote.

(Photo by Pat Zerega, Door County Wisconsin 2016)

The story of course does not end there. Shareholders have met since then to discuss next steps and have sent a letter requesting to return to the dialogue table with all interested parties and explain what we are looking for in the requested human rights report. Thus far, there is no answer to that request, but we know there is always another twist in the road ahead.

Homework with the Trafficking in Persons Report

The Trafficking in Persons Report, or TIP Report, is an annual report issued by the U.S. State Department’s Office to Monitor and Combat Trafficking in Persons. The TIP Report ranks governments based on their perceived efforts to acknowledge and combat human trafficking. Thursday, June 20th, the 2019 edition was issued.

The report categorizes countries of the world with regard to their adherence to the standards of the Trafficking Victims Protection Act (TVPA) of 2000. Each country is tiered according to compliance:

  • Tier 1 (those governments who fully comply with the TVPA’s minimum standards)
  • Tier 2 (while not fully complying, governments with significant efforts to bring themselves into compliance with those standards)
  • Tier 2 watch list (not fully complying along with a significant absolute number of trafficking victims, or a failure to increase efforts, or a determination that the country is in fact committed to making significant progress in the coming year)
  • Tier 3 (those governments who do not fully comply with the minimum standards and are not making significant efforts to do so)
  • Special cases (countries where a civil or humanitarian crisis makes gaining information difficult).

Remember that tier 1, which includes the United States, is simply compliance with the minimum standards. A tier 3 designation means that the U.S. can restrict assistance or withdraw support for the country at global funding organizations like the International Monetary Fund. Some regard the tier 2 watch list with suspicion as some determinations have suggested a reward to governments allied with the U.S. who otherwise would be in tier 3.

The report intends to offer “homework” to governments based on their tier. The image below lists the countries of the tier 2 watch list, tier 3, and special case categories. The report includes a country by country analysis of human trafficking.

I don’t want companies to avoid sourcing from these countries: I prefer companies to promote improved standards and conditions in those countries. Even if the governmental authorities do not adhere to a recognized global minimum, companies have a responsibility to act responsibly, to act in accord with the protection of human rights. A company, working in those countries, must take extra steps to reduce human trafficking and to care for the victims of trafficking in their supply chains.

The resolutions that SGI members introduced at Kraft Heinz, Macy’s, TJX, and Wendy’s aimed to do just that. We asked those companies to do a human rights impact assessment, to look through their supply chains at the most vulnerable workers. They then would mitigate the human rights abuses  and remedy those workers whose rights were violated. Over time, those learnings are compiled and integrated into the ongoing processes of the company to insure greater adherence to human rights in their supply chain.

Now for some personal homework. I would recommend printing off the image above. Perhaps, you may want to laminate it to carry it with you.

When going to bed this evening, take a look at the countries of origin for the clothing you have worn. I’d be willing to bet that much of your clothing comes from a country listed above. Many of the electronic items that we use daily have supply chains woven through these countries. I bring that to your attention, kind reader, not to shame you or make you feel guilty, but, in the hopes, that we might see– along with the companies who provide us those products– that we have real power to change the situation in those countries.

Climate Change is now a Climate Crisis

By Frank Sherman

Recently, we took time to reflect on another eventful engagement season and to chart the strategic direction for the coming year.

Looking back at the 2019 engagement season and more than one-hundred climate engagements by ICCR members, we observe:

  • In a notable exception, the electricity generation sector is at a decarbonization tipping point driven by cheaper renewable energy, growing industrial and public demand, and changing public opinion. Securitization laws, distributed energy resources (e.g. rooftop solar) and community solar projects are growing in popularity. The “electrification of everything” shows promise of demand growth, energy savings and environmental sustainability. A growing number of utility companies (nine, according to NRDC) have followed Xcel’s lead by committing to carbon-neutral electricity production by 2050 or sooner.
  • In the face of regulatory rollbacks, natural gas production and distribution companies are committing to voluntary methane leakage reduction targets to salvage the ‘bridge-fuel’ story. With 6000 mid- and small-scale producers, the majors are now advocating for a stronger regulatory regime! Investors have been successful in tying support for meaningful regulation to reputational risk.
  • As investors shifted from demanding scenario assessments to Paris-compliant business plans, U.S. oil & gas companies continued to defend their business-as-usual business model while their European counterparts broke rank. A BP supported climate resolution obtained a 99+% vote while Shell agreed to set GHG reduction targets for their products as well as their operations. In contrast, CA100+ investors at Exxon Mobil recommended voting against the Board after the company omitted their GHG reduction target proposal.
  • With noted exceptions (Wells Fargo and Goldman), large financial companies are starting to assess climate risk in their portfolios. Mid-cap companies were slower to respond to our letter campaign, largely it seems, due to limited capacity to conduct broad risk assessment. Investors will connect them with tools they can use to do a straightforward climate footprint analysis.
  • Political spending and lobbying resolution votes, several of which emphasized climate change, increased to 31%.
  • Engagements calling for science based (GHG reduction) targets made slow progress in contrast to the scientific community call for more urgent action.

Impacting the climate science and changing political landscape, 2018 was the wettest year on record while wildfires in California resulted in the first climate change bankruptcy of Pacific Gas and Electric. Global carbon emissions reached a record, and the U.S. power sector reversed its’ multi-year decline.  The IPCC special report warned that countries’ pledges to reduce their emissions are not in line with limiting global warming to 1.5°C. Some are responding to the crisis – 80 countries are planning to increase their climate pledges ahead of schedule. The UK is the first member of the G7 to legislate net zero emissions, joining Finland and Costa Rica.

The 4th U.S. National Climate Assessment Report starkly warns of risks to the U.S. economy while the Trump administration’s environmental rollbacks are poised to increase GHG emissions significantly. Public opinion is finally shifting with over 70% of Americans saying climate change is a reality, with most believing human activity is primarily responsible. Republican millennials support a carbon tax 7-to-1 with 85% stating that the Republican position on climate change is hurting the party. The Midterm elections flipped the House of Representatives and 7 state governorships to Democrats. Twenty-one states have now joined the U.S. Climate Alliance committed to the Paris Climate Agreement. Four states (CA, WA, HI, NM) and Puerto Rico have targeted 100% clean energy by 2050 or sooner, with nine additional states (IL, MA, MI, MN, MS, NC, NY, PA, WI) proposing similar legislation. The Green New Deal resolution changed the conversation on Capitol Hill and the Climate Action Now Act put the House on record as supporting the Paris Accord.    

Financial markets are not immune to this crisis. Munich Re predicts climate change will price regions out of insurance. The broad acceptance of the TCFD guidelines increases pressure on companies to improve disclosure.

Considering the broader investor landscape and NGO campaigns, the CA100+ global initiative focused on large emitters and led by large asset managers, pension funds, and sovereign funds. Some ICCR members participate in the CA100+ teams while others continue parallel engagements to reinforce the message. Still others are shifting focus to mid-cap companies. We believe that more coordination is needed to increase effectiveness.

Efforts to make methane emissions reduction targets the norm have been limited to the oil & gas majors and larger natural gas producers. The EPA’s proposed rollback of the New Source Performance Standards regulating oil and gas emissions will further erode the regulatory floor, especially as the EPA now proposes to deregulate methane. We look forward to publication of an EDF study on methane measurement and mitigation and Union of Concerned Scientists has formed a working group to study CCS.  

Efforts towards a Just Transition have born fruit as investors and companies have a growing awareness of the unintended, negative consequences that decarbonization has on people. We made a good start with last October’s investor statement, representing $3.7 trillion in assets, and the CA100+ framework, which includes just transition questions; however, most companies lack the policies and practices to address these issues. Addressing the needs of employees, customers and local communities will accelerate transition rather than deter it.

Recalling Fr. Mike Crosby’s prophetic statement, “We are at a Kairos moment,” we look forward to developing with our allies a new strategy statement regarding future engagement of the oil & gas sector to help investors differentiate between fossil fuel companies making progress and those protecting business-as-usual models. Rollout will be stepwise with more guidance forthcoming. Finally, alongside our allies, we have reviewed a draft climate change principles which reflect an increased urgency and stepped up action.

Finally, let us turn to our 2020 engagement strategy. Given our progress in recent years within the electric utility sector, we expect to expand engagements further into mid-cap companies and push for net-zero carbon targets. We will collaborate with NGO’s and other partners to engage the state utility commissions and give input on the Green New Deal. ICCR is planning a multi-stakeholder Roundtable in December to discuss the challenges of decarbonization and promote a just transition.

Investors engaging the financial sector are promoting a shift from simply assessing climate change risk to their own operations to assessing the climate-related risk they facilitate through their lending and underwriting. Coordinating with the Climate Safe Lending Initiative, they plan to engage the top five U.S. banks and some regional banks in 2020 on climate risk. Investors will ask banks to follow the TCFD recommendations, complete a climate impact assessment, pledge no new fossil fuel investments, and ultimately, decarbonize their portfolio (Banking on Climate Change: Fossil Fuel Finance Report Card 2019). Planned for early September, an investor brief and webinar will educate interested investors. As well, we will ask smaller banks to join the Platform Carbon Accounting Framework to calculate their carbon footprint.

Our methane work will continue to promote best practices in measurement and management to minimize methane leakage. We plan to engage companies on including their “non-operated assets” (i.e. joint ventures) in their methane targets, and step up engagement of distributors and retailers to source “sustainably produced” natural gas. At the same time, we recognize that natural gas can no longer be viewed as a “bridge fuel” to clean energy and agree that no new gas power plants can be justified given the climate crisis. On the other hand, replacing industrial and residential uses of natural gas remains a challenge.

It is clear that we recognize the increased urgency and need to step-up our demands. Within ICCR, we reflect this by the change to our Program name from Climate Change to Climate Crisis. This can no longer be considered a gradual change. We are in crisis mode so we need to respond differently!

RBI: Deforestation and Empty Chairs

On Monday night, Toronto was electric, not for the Restaurant Brands International (RBI) shareholder meeting, but for game five of the NBA Finals between the Toronto Raptors and the Golden State Warriors. If the Raptors had won, I worried that I might not sleep well given the ensuing revelry associated with Canada’s first NBA championship. Alas for Canada, but fortunately for my sleep, it was not to be on that night.

Restaurant Brands International, majority-owned by 3G Capital (a Brazilian-American investment fund with substantial ownership of Kraft Heinz and Anheuser-Busch InBev), includes the brands Burger King, Tim Hortons, and Popeye’s. Recent shakeups include a new CEO, José Cil, who took the helm in January.

Over the course of years, SGI has engaged RBI and its predecessors in dialogues. Recently, those dialogues have focused on deforestation concerns. In 2010, Burger King pledged to create a “rainforest policy to include all of its products.” However, nearly 10 years later RBI has yet to issue a comprehensive no-deforestation policy that properly addresses its direct operations and extended supply chain.

Photo from https://www.flickr.com/photos/crustmania/10094847976/

Deforestation, the permanent removal of standing forests, results in devastating consequences. It is the third largest driver of climate change. The destruction of trees and other vegetation can cause climate change, desertification, soil erosion, fewer crops, flooding, increased greenhouse gases in the atmosphere, and the incumbent problems for people near to and far from the actual place of deforestation.

Deforestation is also bad for business. It exposes corporations and investors to a wide range of operational, reputational, competitive, and regulatory risks. Companies that manage this risk likely will perform better in the long run. More than 500 global companies have made substantive commitments and the accountability for those commitments continues to improve.

The meeting itself took place in the new central offices of RBI at the Exchange Tower in downtown Toronto. RBI has a lower floor of the building. Emerging from the elevator, shareholders were received and documents were reviewed. In the next room, a larger space, chairs were aligned for the shareholder meeting with two podiums, one to each side of a small table with two chairs– one for Corporate Secretary Jill Granat and the other for CEO José Cil. Along another wall was an array of products from Tim Hortons: coffee, muffins, donuts, donut holes, and the like.

The agenda included the three common voting items: election of directors, the advisory vote on executive compensation, and the appointment of auditors. As well, three shareholder resolutions were on the agenda: a resolution related to workforce practices (put forward by the Atkinson Foundation and our ICCR colleagues, SHARE), our resolution (from the Capuchin Province of St. Joseph) on deforestation, and a resolution concerning plastic pollution and sustainable packaging (from our ICCR colleagues As You Sow). Later in the meeting, SumOfUs delivered a petition signed by 270,000 people and 500 shareholders concerning deforestation. (Their press release can be found here.) None of the three resolutions had a majority, an unsurprising outcome as 3G and Pershing Square own more than half of the company’s shares. The 8-K document filed with the Securities Exchange Commission show that SHARE garnered 26% of the shareholder vote at the AGM, and our resolution and the As You Sow resolution both netted about 22% of shareholder support. If one excludes the 3G Capital and Pershing Square votes, the deforestation resolution had 57% of independent shares in favor.

“Empty Chairs,” photo by Donald Lee Pardue https://www.flickr.com/photos/oldrebel/6173358287

More striking to me as a participant in the meeting was the absence of the board of directors– not one of the elected members of the board attended the meeting. The first order of business in the meeting was their election. It is reminiscent of that meme: “You had only one job. . . ” Their absence suggests that, to them, the annual shareholder meeting is not an important company function.

RBI, according to Cil and company documents, aims to be the world’s “most loved restaurant brands.” The shareholders present at the annual general meeting are people who love this company, and board members did not see fit to hear from them, their fellow shareholders, about the direction of the company.

Similarly, RBI has ambitious, public goals for growth, from some 26,00 restaurants today to 40,000 restaurants in the next eight to 10 years. We’d like to see a similar ambitious, public goal to care for creation. Consumers will buy from a company that advocates for issues they care about. If RBI cannot make ambitious, public commitments to care for creation, those consumers will turn to companies that do.

The deforestation resolution filed with RBI for the 2019 shareholder meeting can be found here. The exempt solicitation concerning the proposal can be found here. The statement delivered at the shareholder meeting can be found here.