Working Together To Protect Our Common Resources

Salutations, readers.

Fall is underway, as is conference season and much else! Rick and Sara are in the UK as we speak, reconnecting with peers and partners and building support for Beta Stewardship. We are thrilled to be partnering once again with Dr. Ellen Quigley and the fabulous team at the Cambridge Centre for the Study of Existential Risk on our first Universal Ownership Summit. We'll have more to report next month and look forward to sharing progress.

In the meantime, we're happy to share some recent wins and milestones below. As always, we can be reached at any time should you want to continue this conversation.

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Vanguard and Universal Ownership

Late last month, the Europe-based organization Universal Owner, led by founder Thomas O’Neill (also a cofounder of InfluenceMap), released an important report on Vanguard, the world’s second largest asset manager, which controls assets worth US$7.2 trillion, including U.S. equities worth US$5.7 trillion.  

The report explains that Vanguard is a “universal owner,” a term with which our readers are familiar, because it invests in the entire market and for the long term. This broad diversification means that Vanguard and its clients largely depend on the success of the markets overall and that the performance of individual companies is a secondary element in their success (or failure). But Vanguard still focuses its climate stewardship on climate risk mitigation at individual companies, rather than prioritizing an overall strategy to slow warming and reduce greenhouse-gas emissions and concentration globally. As the report explains, “reducing the risk that individual companies face from climate change is not the same as reducing the risk that individual companies pose to the climate.” 

By choosing not to prioritize protection of the climate system, Vanguard is declining to serve the interests of its diversified investors. The report concludes that “[i]n failing to act as a universal owner, Vanguard is therefore abdicating its fiduciary responsibility to act in the best interests of its beneficiaries.”  

If this sounds familiar, it may be because it echoes the blockbuster report from international law firm Freshfields that we summarized in our last issue. That report specifically highlighted the need for diversified investors to focus on systemic issues: 

The more diversified a portfolio, the less logical it may be to engage in stewardship to secure enterprise specific value protection or enhancement. Diversification is specifically intended to minimise idiosyncratic impacts on portfolio performance… 

Yet diversified portfolios remain exposed to nondiversifiable risks, for example where declining environmental or social sustainability undermines the performance of whole markets or sectors… Indeed, for investors who are likely to hold diversified portfolios in the long-term, the question is particularly pressing since these are likely to be the main ways in which they may be able to make a difference. 

These recent reports suggest that it is time for Vanguard to change its orientation from company-first to systems-first investment. We will be watching for progress. 

TSC Weighs in on the Shareholder Proposal Rule 
On October 15, The Shareholder Commons added its voice to a lawsuit that seeks to invalidate new rules that make it harder for shareholders to submit proposals at the annual meetings of U.S. corporations. The U.S. Securities and Exchange Commission (SEC) changed the rules in the waning days of the previous administration. The new rules would preclude 41 percent of the proposals TSC supported from being resubmitted next year. 

The lawsuit was brought by the Interfaith Center on Corporate Responsibility (ICCR), As You Sow, and James McRitchie. TSC filed its own argument in a “friend of the court” (“amicus”) filing, which emphasizes that the new rules are especially problematic for proposals that raise concerns about social and environmental damage created by corporations in search of increased profits. 

The brief points out that such damage hurts diversified portfolios, which may be threatened when individual companies boost their own profits with practices that undermine important social and environmental systems. While many large institutional shareholders are diversified, they may be reluctant to make proposals at public companies, because those companies are often their clients: one of the largest sources of revenues for institutional investors is the management of defined contribution retirement plans, such as U.S. 401(k) plans. 

As a result, a significant proportion of social and environmental shareholder proposals are brought by individual holders with diversified portfolios. However, under the new rules, shareholders would have to hold relatively large positions in companies in order to bring proposals. But for a small shareholder, that might mean concentrating a large portion of her savings in a single company, which is risky and counter to the advice that investors should not put all their eggs in one basket.  

But the choice forced by the new rules would affect the types of proposals that are brought. It is diversified shareholders who have the greatest financial incentive to bring proposals that rein in profitable corporate behavior that creates significant costs to the economy. Shareholder engagement on these issues can protect the economy, as well as the return of the markets overall. But by forcing small holders to choose between diversifying and making shareholder proposals, the Amendments essentially remove any incentive for small shareholders to participate in such private ordering that preserves a healthy economy. The Commission failed to account for any change to the types of proposals presented that the Amendments might engender, or the economic impact of any such change. 

The brief argued that the changes would harm shareholders as both investors and human beings: 

In sum, Main Street investors need the ability to (1) remain diversified and (2) engage with issuers on conduct that threatens the social and economic systems that companies rely on over the long term. It’s also the case that those investors have additional interests in preserving those systems, as they must live in a society that depends on the health of the planet and communities in order to thrive. … 

The economic analysis that the Commission undertook failed to consider that the Amendments might not simply reduce the number of proposals but might also be more likely to reduce a particular type of proposal, i.e., those that relate to systemic issues that affect the economy as a whole. 

A decision in the case is expected in the first quarter of 2022. 

You can read the full brief here

Broadridge Financial Agrees to Climate Measures and More Transparent Proxy Audits     

Earlier this week, TSC issued a press release announcing the withdrawal of a shareholder proposal after Broadridge Financial Solutions, Inc. (NYSE: BR) committed to a new approach to climate concerns and greater transparency about its proxy services. Broadridge will announce climate plans within six months and will disclose information on independent audits of its proxy process, information security, vote count accuracy, and regulatory compliance. This announcement came after TSC successfully defended against the Company’s attempt to have the proposal excluded by the SEC. 

More specifically, Broadridge has agreed to explore Science-Based Targets for carbon reduction and a membership in the Net Zero Financial Service Providers Alliance and to publicly announce its decision within six months. Broadridge will also provide shareholder James McRitchie with copies of audits of its work related to proxy voting, including audits of accuracy, controls, regulatory compliance, and information security. Broadridge will make a summary of the audits available by October 29, 2021 and will seek the agreement of the auditors to make the full audits publicly available. 

Mr. McRitchie, a long-time Broadridge shareholder, had worked with TSC to submit a shareholder proposal asking the Company to convert to a public benefit corporation (a “PBC”), and to adopt a specific public benefit of contributing to accurate, timely, cost-effective, and transparent proxy voting for diversified investors.  

Broadridge asked the SEC to allow it to exclude the proposal from its proxy statement, in part because, unlike previous PBC shareholder proposals, it included a specific public benefit. The SEC declined to exclude the proposal, stating that “the Company’s corporate structure is not a matter relating to the conduct of its ordinary business operations, but rather, an important issue that is appropriate for stockholders to address at a meeting.” 
TSC in the News 
We were delighted to see Bloomberg journalist Matt Levine address the Fox PBC proposal in several of his recent Money Stuff columns, including here, here, and here. He cogently explains why voting to insist that Fox stop spreading disinformation about climate, the need for vaccines, and other matters may be bad for Fox profits but good for Fox shareholders: 

The argument here is that (1) most of Fox’s shareholders are diversified (other than Murdoch of course), (2) diversified shareholders, in some sense, own the entire world, and (3) if a company’s activities are bad for the world, they are bad for its (diversified) shareholders, even if they are lucrative for the company. This is a theory that we talk about a lot around here, and it is in some sense a new theory. A decade ago there were plenty of diversified shareholders and index funds, but it was not common to talk to shareholders as though they were owners of the whole world. You would say, in your shareholder proposals, ‘this is good for Fox’s long-term value’ or whatever. You wouldn’t say ‘this is bad for Fox, but good for the world, and as a Fox shareholder you own a lot of other companies too so you should care about the world, not just Fox.’  

In modern markets, the paradigmatic shareholder is broadly diversified, and there is less reason to care about what any particular company does. What you want is for the huge diversified shareholders who have influence over every company to use that influence in a broadly desirable way. Companies are just data points; what you care about is aggregates. We talked the other day about a shareholder proposal at Fox Corp. that explicitly argued that the proposal might be bad for Fox’s bottom line, but will good for all the other companies that Fox shareholders also own. That is the way of the future.” 

. . . . 

What is new here is the explicit, coordinated appeal to common shareholders to use their voting power in one company for the benefit of their other companies. The main thing that I want to say is that this is interesting, and logical. Public companies are largely owned by large diversified institutional shareholders (though not so much Fox), and it does make sense for them to act in a way that is good for their overall financial interests rather than for each individual company to try to maximize its own price at the expense of the others. Why shouldn’t modern corporate governance work for the actual shareholders, rather than for an old-timey conception of what a company is. 

Are you listening Vanguard? SEC? Time to move past “old-timey” and onto “the way of the future.” 

TSC Welcomes a New Team Member  

TSC is thrilled to welcome Eduardo Flores-Zazueta. Eduardo will serve as a Program Associate, supporting Rick and Sara’s work, with a focus on communications and community engagement. Eduardo joins TSC from Catholic Charities of the Archdiocese of Galveston-Houston, where he worked as a Data and Reports Coordinator. Eduardo is an accomplished professional with multidisciplinary experience. Before working for Catholic Charities, he also spent time as a research analyst with Amerisource Business Capital and interned with Houston area nonprofits Baker Ripley and The Alliance for Multicultural Community Services.  

Eduardo has a Bachelor of Arts in International Studies with a minor in Latin American Studies from the University of St. Thomas in Houston, Texas. Before moving to Houston, Eduardo grew up in Mexico and the midwestern United States. His experience in these distinct settings shaped his understanding of the business world and instilled in him a desire to serve others and a commitment to sustainability work.  
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