WSJ Nearly Gets it Right on Accountability to Shareholders for Political Expenditures

We can’t argue with this part:

The fiduciary responsibility of a CEO is to safeguard the company’s assets and acknowledge this overriding principle: “It’s not our money but that of the shareholders.”

And we agree that shareholders (they say small but we say all shareholders) should be allowed to sue corporate managers and boards for political expenditures.

But the reasoning that follows in the Wall Street Journal op-ed by Jon L. Pritchett and Ed Tiryakian is skewed. Their definition of “political” would not be recognized by any dictionary and they are wrong in the examples they pick (and ignore) of corporate decisions unrelated to financial metrics.

The authors mean by “political” a decision that puts principle above immediate financial gain. They use as an example Target’s decision to make their bathrooms free from trans-phobia, attributing a drop in stock price to this particular decision. Is there a single Wall Street analyst report suggesting that this is the case? Is there no way to tie this decision to not just human decency but to Target’s brand choice of inclusion and dignity for all customers?

We would argue that the decision had no impact on the stock price and challenge the authors to prove otherwise. And on the topic of politics we would think a better example from Target would be their making a political contribution to a candidate who opposed gay rights contrary to the company’s longtime gay-friendly brand (they liked his economic policies), which led to extended protests and a lot of bad publicity, and then which led to an apology. That is what we consider politics, not making bathrooms available to customers.

The “Christmas cups” at Starbucks example the authors give in the article qualifies as fake news. Starbucks did have Christmas cups. They were red, which is a color associated with Christmas, and just as Christmas-y, or more so, than their previous cup with snowflakes or the one with a snowman, which somehow never offended anyone. Did the year the cup featured ice skaters constitute a “political decision?” It is the very definition of “ordinary business.”

The same applies to the near-unanimous decision of the CEOs to resign from President Trump’s advisory councils. The CEOs who left are experts at cost/benefit and risk/benefit analysis. They understand that associating themselves with a president who cannot bring himself to explicitly oppose Nazis and the KKK carried significant risk of damage to the reputation of their companies and their brands. As for benefit — the councils met just once and were not doing anything. To the extent that any potential prestige was beneficial to their companies, they rationally concluded that it had was disappearing quickly. An article in the Harvard Business Review the same week as the departure from the President’s advisory councils explicitly points to diversity as a brand and reputation enhancer for companies and Professor Jeffrey Sonnenfeld calls the decision to leave “courageous.” David Gelles, who covers business for the New York Times, wrote about the “forthright engagement” of executives.

Even this past week, it was easy to discern careful calculations made by executives who chose to speak out against Mr. Trump. Many faced calls to resign from the presidential advisory councils, and the prospect of boycotts if they did not.

But they also faced notable and new kinds of pressure from within — from employees who expect or encourage their company to stake out positions on numerous controversial social or economic causes, and from board members concerned with reputational issues. In the past week, business leaders have responded with all-staff memos and town-hall meetings.

In short, while companies are naturally designed to be moneymaking enterprises, they are adapting to meet new social and political expectations in sometimes startling ways.

So, Pritchett and Tiryakian have no basis to assume that the decision to leave the councils was motivated by anything other than their fiduciary responsibility to shareholders. We disagree with the authors’ idea of what constitutes “political.” We do agree entirely, though that investors should be able to sue for misuse of corporate assets in truly political expenditures like campaign contributions and lobbying, as for example to thwart environmental or occupational safety or product safety rules. A good first step is to require companies to disclose those payments. We suggest this as the topic for their next op-ed.

Update: Trump’s Business Councils Disband in Light of His Support for Racist Groups

The New York Times reports that there was something of a race between the CEOs who wanted to abandon ship from President Trump’s business advisory councils and the President, who wanted to shut them down before there could be any more embarassing defections.

President Trump’s main council of top corporate leaders disbanded on Wednesday following the president’s controversial remarks in which he equated white nationalist hate groups with the protesters opposing them. Soon after, the president announced on Twitter that he would end his executive councils, “rather than put pressure” on executives.

Rather than putting pressure on the businesspeople of the Manufacturing Council & Strategy & Policy Forum, I am ending both. Thank you all!

— Donald J. Trump (@realDonaldTrump) Aug. 16, 2017

Moreover, the panels have not been seen to be particularly effective. After a few high profile events for the groups early in the Mr. Trump’s presidency, there have been few meetings since, and none more are planned.

“So far they haven’t done much,” Ms. Admati said. “They had a few meetings with a bunch of fanfare, but it was more symbolic than anything else.”

IRRCi Research Competition 2017

The Investor Responsibility Research Center Institute (IRRCi) has opened its sixth annual competition for research that examines the interaction between the real economy and investment theory. Practitioners and academics are invited to submit research papers by October 6, 2017, for consideration by a blue-ribbon panel of judges with deep finance and investment experience.

Two research papers – one academic and one practitioner – each will receive the 2017 IRRCi Research Award along with a $10,000 award. The winning papers will also be presented at the Millstein Center for Global Markets and Corporate Ownership at Columbia University in December 2017 in New York City.

The panel of respected judges includes:
Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
James Hawley, Professor and Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College
Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital
Nell Minow, VEA Vice Chair and Huffington Post Columnist

Business Leaders Respond to White Separatists Where Trump Failed

President Trump has been widely criticized by politicians of both parties for his failure to speak out forcefully about the racist demonstration in Charlottesville, Virginia that became deadly when a white man with a picture of Hitler on his Facebook page intentionally rammed the crowd protesting the demonstration, killing one person and injuring more.

Business leaders have been more effective at communicating their unequivocal opposition to the display, with marchers carrying Nazi and Confederate flags.  Airbnb not only canceled reservations made by people who were coming to Charlottesville to attend the event; it cancelled their accounts.   GoDaddy will be taking down the neo-Nazi website and Google has said they will remove it from their search engine.  Even the maker of the tiki torches carried at the event has expressed regret that they were used. The CEO of Merck, Kenneth Frazier, Intel CEO Brian Krzanich, and the CEO of Under Armor, Kevin Plank,  have resigned from President Trump’s Advisory Council in protest over his failure to respond appropriately to the demonstration.

merck statement

The New York Times asks, What About Other Executives? So do we. At Slate, Daniel Gross writes:

[S]even months into the Trump administration, we’re seeing that showing up and uttering pro forma support may not be a viable PR, business, or personal strategy for CEOs who want to lead their companies while being true to themselves.

 

Some CEOs have discovered that mouthing even anodyne support for Trump can have a really negative impact on their business relationships and stock price. In February, Kevin Plank, the CEO of apparel-maker Under Amour and a member of the manufacturing council, said “to have such a pro-business president is something that is a real asset to this country.” In response, some of the company’s leading endorsers, including Stephen Curry, expressed their anger, customers rebelled, and the stock was ultimately downgraded.

 

Other CEOs have discovered that while the policies of Trump and the GOP may be theoretically good for “business,” they are really bad for their particular business. Duh. Musk was the first to bail from Trump’s manufacturing council after Trump announced the U.S. would pull out of the Paris Agreement on climate change.

Meanwhile, companies are coming to two collective realizations. First, while the Trump administration is delivering favorable policy to energy companies, Wall Street, and for-profit colleges, the prospects for broad-based tax reform (or even tax cuts) aren’t particularly good. Second, given Trump’s unpopularity, his power to inflame the public against any single company has diminished.

Updated to add additional resignations.

Recommendations of the Task Force on Climate-related Financial Disclosures

The Financial Stability Board’s industry-led “Task Force on Climate-Related Financial Disclosures” has issued its final report with standards and guidance for voluntary climate-related financial risk disclosures in SEC filings.  The most significant aspects are the imprimatur of the G20 and the credibility and support it lends to investor initiatives calling for portfolio companies to adopt its recommendations. The report notes:

As you know, warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors. It is difficult for investors to know which companies are most at risk from climate change, which are best prepared, and which are taking action.

The Task Force’s report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions. Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy.

The industry Task Force spent 18 months consulting with a wide range of business and financial leaders to hone its recommendations and consider how to help companies better communicate key climate-related information. The feedback we received in response to the Task Force’s draft report confirmed broad support from industry and others, and involved productive dialogue among companies and banks, insurers, and investors. This was and remains a collaborative process, and as these recommendations are implemented, we hope that this dialogue and feedback continues.

Since the Task Force began its work, we have also seen a significant increase in demand from investors for improved climate-related financial disclosures. This comes amid unprecedented support among companies for action to tackle climate change.

Another Shareholder Proposal? McDonald’s Deserves a Break Today – WSJ

Sigh.  Another whine about those pesky shareholders from those who insist they are the ultimate capitalists.  James R. Copland of the Manhattan Institute, which is funded by right-wing foundations (whose names should be disclosed in published material like this column), writes in the Wall Street Journal that poor McDonald’s should not have to bear the terrible burden of shareholder proposals.  He argues that the oxymoronically named CHOICE Act would not go far enough in merely requiring investors to hold one percent of the stock to submit a shareholder proposal; he wants to eliminate all “social” shareholder proposals entirely.  Since “ordinary business” proposals are already prohibited, that reminds me of the baseball manager who said that his team couldn’t win home games and couldn’t win away games “so all we have to do is find another place to play.”

He writes:

According to an SEC survey, it costs more than $100,000 merely to respond to a shareholder proposal and include it on the ballot. The far greater cost comes from the distractions such proposals create for directors and senior executives, as well as the risk that companies will change their policies under pressure.

We are find this self-reported, self-serving number highly suspect.  If, as Copland says, the proposals are re-submitted, how expensive can it be to cut and paste the previous year’s rebuttal?  How much time can it take for executives and board members to vote to oppose it again?

He also complains that some companies have made changes to respond to shareholder proposals, even if they did not get a majority vote.  That’s called a market-based response.  Since even a 100 percent vote is advisory only, we have no concerns that the executives and board members who have all of the decision-making power will be unduly persuaded unless the case is effectively made.  This is literally why we pay them the big bucks.

I do share some of Copland’s frustration with the shareholder proposal process, however.  I wonder if he would be willing to support my suggestion for improvement: no more shareholder proposals, but a strict majority vote standard so that instead of raising issues like the transparency of political contributions and the sustainability of the supply chain through non-binding proposals, a majority of shareholders can simply remove directors who are not satisfactory.

 

Source: Another Shareholder Proposal? McDonald’s Deserves a Break Today – WSJ

Nell Minow on Daniel Loeb and Activism

VEA Vice Chair Nell Minow commented on Daniel Loeb’s new position at Nestle on NPR’s “Marketplace.”

Activist investor Daniel Loeb announced over the weekend that his hedge fund, Third Point, has taken a $3.5 billion stake in the Swiss food conglomerate Nestle, and he wants some changes at the company. That may sound like a lot of money, but the investment represents just over a 1 percent stake in the company. It’s enough though to get the company’s attention. That’s because activist investors are looking to drive change, unlike a lot of “passive” investors, who just sell their stock if they don’t like how a company is run. How do activist investors work? Experts say if activists have a reputation for adding value and getting good returns, and if they have appealing ideas, they can win over other shareholders who will help them push for change.

Japan’s big corporates shift to provide AGM agendas online

Japanese firms are beginning to release the topics and agendas of their annual shareholders’ meetings online, before they send them out by mail to investors. The development comes in response to growing calls from international investors.Some of the key firms that have decided to release online notices in advance this year include Yakult Honsha, a Japanese drinks maker, along with Meitec, a major staffing business.

Source: Japan’s big corporates shift to provide AGM agendas online

Uber founder Travis Kalanick resigns as CEO amid a shareholder revolt – The Washington Post

After several tumultuous months that culminated in a shareholder revolt, Travis Kalanick stepped down Tuesday as chief executive of the ride-hailing giant Uber.Kalanick, who helped founded Uber in 2009 and established it as Silicon Valley’s highest flying start-up, will stay on Uber’s board of directors, a company official confirmed. He was asked to resign in a letter from five major shareholders.

Source: Uber founder Travis Kalanick resigns as CEO amid a shareholder revolt – The Washington Post

A better boardroom can reverse Uber’s cultural woes | TechCrunch

Board veteran Betsy Atkins has some excellent advice for Uber. The third edition of her book Behind Boardroom Doors was published this month.

Build internal career networks.  At Volvo Car AB, where I serve on the board, we’ve launched a regular program where I have the opportunity to meet with senior and mid-level women executives on personal career development.  We work with these execs to build on their strengths, clarify their career aspirations, and offer advice on advancement.  This is a new program, but it is already proving a success in energizing and motivating the paths of these current and future female leaders.

Make mentoring personal.  On the board of Schneider Electric, I make it a point to directly mentor a number of women on the company’s senior executive team.  Women in management find it tremendously helpful to have someone in the boardroom take a personal interest in their career strategy and development.  At Uber, new board member Ariana Huffington will be in an ideal position to put her mentoring and career savvy to work in helping rising women execs rebuild the company. The key is a regular ongoing program of mentoring and support.

Go beyond mentoring.  The tech industry, in particular has too few role models for rising female talents.  The mentoring aid above is helpful… but why not go one better?  Companies can ask their Male and Female Execs (and Board Members) to either mentor or sponsor their Female Execs. There is a big difference between mentoring which is periodic advising and coaching and sponsoring where you take ownership for introducing and more actively helping sponsor an individual for their next step up in their career. Women who are already senior managers or board members can kick mentoring up a notch by “sponsoring” women hi-pots.  Take personal ownership of career coaching for your top talents.  Give them advice, introduce them to the people they need to sharpen their skills, and introduce their names at strategic moments.Recognize the women making a difference. 

When I served as chair of the board’s compensation committee at tech firm Polycom, we were active in the annual recognition event for sales staff.  I noted that women were leaders in sales, making up less than 10 percent of the sales force, but were 34 percent of our “President’s Circle” top sales performers.  Making an added effort to celebrate (and promote) this talent is crucial in sending the message that sales is not just a “guy thing” in the company.

While Uber’s woes make the news, they can also serve as a spark for making the support and advancement of women in your company a boardroom mission.

Source: A better boardroom can reverse Uber’s cultural woes | TechCrunch