Linking Investor Engagement with Financial Value
Julie Gorte, Impax Asset Management
Some observers tend to see vote totals on shareholder proposals as binary — either they pass or they don’t. But it is useful to understand the nuances, too. In accounting, a shareholder holding at least 20 percent of a company’s shares has a significant or active interest, and that is something that can influence management decisions. That provides a different lens through which to see the 30 percent average support for shareholder proposals than a simple pass/no pass view. It’s also an indicator that it’s not just a bunch of frustrated political activists interested in these proposals; it’s an indication that a significant proportion of a company’s investors see them as relevant to the company’s financial performance.
Julie Gorte
Senior Vice President for Sustainable Investing, Impax Asset Management
Goldman Sachs’ equity research report “Shareholder Engagement in the Age of Transparency” says: “We believe shareholder resolutions can offer additional insight into emerging material risks and externalities for issues, as well as management responsiveness.”[1] The report also notes that support for environmental and social shareholder proposals has been rising for several years, with nearly 30 percent of votes going in favor of shareholder proposals. Considering that insider ownership for U.S. companies averages about 13.6 percent,[2] it is quite possible that the support for these proposals among outside shareholders is significantly higher.
A recent study [3] that looked at 847 engagements with 660 companies around the globe over a decade (2004-2014) found that successful engagements — those that did improve ESG performance — were correlated with higher sales growth without changing profitability. Moreover, a portfolio of firms that were engaged by shareholders outperformed a matched portfolio of companies that were not engaged by 4.7 percent. Another study,[4] which examined 2,152 ESG engagements at 613 publicly traded firms over a decade (1999–-2009), also found that the companies that were the subjects of these engagements had higher abnormal returns of around 1.8 percent during the year following the engagement, and the successful engagements were associated with higher abnormal returns of 4.4 percent over the following year (and zero for the unsuccessful ones).Results such as these help to explain why the votes in support of these proposals have gone up: They are about things that can and do affect financial performance. For example, of the proposals that did receive majority votes of support in 2018,[5] the engagements included topics that absolutely had financial relevance: the opioid crisis, coal ash risks, climate change and greenhouse gas emissions. Consider that one drugmaker’s stock price lost 80 percent of its value[6] after it was indicted for misleading doctors and public health officials about the effects of its opioid addiction treatment, and one of the major manufacturers of opioids, Purdue Pharmaceuticals, is reportedly looking into declaring bankruptcy in the face of expanding litigation.[7] On the climate change front, 2019 witnessed what The Wall Street Journal described as the world’s first climate change bankruptcy,[8] after PG&E declared Chapter 11 as its liabilities and penalties for destructive wildfires skyrocketed.
Bankruptcies and stock price collapses happen all the time, of course; is there any evidence that proactive work to be more sustainable might lessen them? Yes, plenty. Several recent papers have focused on what we often call tail risk — highly impactful events that can have major implications for value but that are relatively rare historically. One recent paper [9] provides quantitative evidence that investors see strong ESG practices as a hedge against what we call a left-tail risk, or large drop in value. This could be because better sustainability practice reduces firms’ vulnerability to litigation and environmental disasters, both of which can make noticeable dents in companies’ reputational value. Another recent article noted that ESG, while not a traditional style factor, was known to reduce risk in portfolios. [10] A 2018 report from MSCI [11] sheds additional light on that idea, noting that investors are interested in how ESG integration changes both systematic and stock-specific risks in portfolios over multiple time periods. Portfolios with higher ESG ratings had better risk-adjusted returns than their parent indexes.
Climate change, which is one of the main topics in shareholder proposals, is another good example of the connection with financial value. If not addressed, climate change could cost us perhaps five percent of gross domestic product annually in perpetuity,[12] and investors see it as a material source of several kinds of risk and opportunity. One recent paper [13] constructed a portfolio that had long positions in more carbon-efficient firms and short ones in carbon-inefficient firms, and that portfolio generated abnormal returns of 3.5–5.4 percent per year. Another study showed that low-carbon indexes have generally outperformed mainstream benchmarks.[14]
FOOTNOTES:
Derek R. Bingham, Tristyn Martin, Sharmini Chetwode, Christopher Vilburn, Evan Tylenda and SoYoung Lee, “Shareholder Engagement in the Age of Transparency,” Goldman Sachs Equity Research, June 12, 2019.
“Insider and Institutional Holdings by Sector (US),” Damodoran Online, Stern Business School, New York University, Jan. 2019.
Tamas Barko, Martijn Cremers, Luc Renneboog, “Shareholder Engagement on Environmental, Social, and Governance Performance,” European Corporate Governance Institute, May 31, 2017.
Elroy Dimson, Oguzhan Karakas, Xi Li, “Active Ownership,” The Review of Financial Studies, Aug. 12, 2015.
Heidi Welsh, “Proxy Season Review: Social, Environmental & Sustainable Governance Shareholder Proposals in 2018,” Sustainable Investments Institute, Nov. 9, 2018.
Theron Mohamed, “A UK Drugmaker’s Stock Crashed 80% After It Was Indicted for a ‘Truly Shameful’ Opioid-Addiction Scheme, Markets Insider, April 10, 2019.
Berkeley Lovelace Jr., “OxyContin-maker Purdue Pharma Reportedly Exploring Bankruptcy Amid Litigation Over Opioids,” CNBC, March 4, 2019.
Russell Gold, “PG&E: The First Climate-Change Bankruptcy, Probably Not the Last,” The Wall Street Journal, Jan. 18, 2019.
Michael Shafer and Edward Szado, “Environmental, Social, and Governance Practices and Perceived Tail Risk,” July 26, 2018.
Carlo Svaluto Moreolo, “ESG: The Sustainability Factor,” Investments & Pensions Europe, April 2018.
Guido Giese, Linda-Eling Lee, Dimitris Melas, Zoltan Nagy, Laura Nishikawa, “Foundations of ESG Investing,” MSCI, May 2018.
Nicolas Stern, “The Stern Review: The Economics of Climate Change,” Cambridge University Press, March 2014.
Soh Young In, Ki Young Park, Ashby H.B. Monk, “Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns,” Stanford Global Projects Center, April 19, 2019.
Oliver Oehri, Christoph Dreher, Christoph Jochum, “Climate-friendly Investment Strategies and Performance,” Center for Social and Sustainable Products and South Pole Carbon Asset Management Ltd., Nov. 7, 2016.
Investor Coalition Fights Opioids Crisis
By LAURA E. WEISS, CQ
It began as a suggestion from a county health official to leaders of a group of nuns’ money management program. They were addressing climate change, modern-day slavery and immigration — why not the opioid epidemic?
A year and a half later, the mammoth coalition of investors born from that idea wields $2.2 trillion of influence, urging the largest U.S. drug companies to take accountability for playing a role in the opioid crisis. The group, Investors for Opioid Accountability, has cut deals with companies in the business of making or distributing opioid painkillers to review how they oversee sales of the highly addictive drugs and make other corporate governance changes aimed at improving supervision of opioid sales.
“No one is untouched by the opioid crisis in the country — or even globally now as it’s beginning to turn out — but we lead with the investor lens because that is our responsibility and our duty to give an investor voice to it,” says IOA co-leader Meredith Miller. She says the coalition”s 46 members — including state treasurers, public pension funds, faith-based investors and union benefit funds — are hearing from their ministries, citizens or union members about the crisis.
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IOA’s shareholder proposals include requests for reports on board oversight of risks related to opioid sales, mechanisms for recouping executive pay in the case of misconduct, disclosure of lobbying spending, independent board leadership and other adjustments to oversight mechanisms and how the CEO and other top leaders are paid.
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IOA has claimed several victories so far. The coalition’s opioid risk report proposal won support from 62 percent of investors in Assertio Therapeutics Inc., which makes opioid painkiller Nucynta. The same proposal neared majority approval at AmerisourceBergen Corp., one of the “big three” U.S. drug wholesalers. IOA says it has a commitment from another large distributor, Cardinal Health Inc., to publish risk reports, recoup executive pay in cases of misconduct and split the roles of CEO and board chair. McKesson, the country’s sixth-largest company, and several manufacturers have also agreed to changes including reviews of how directors oversee opioid sales, avoiding votes on IOA’s proposals.
Gender Pay Equity
Natasha Lamb
Managing Partner
Arjuna Capital
There are gender pay gaps … and then there are median gender pay gaps. Understanding the difference between the two may determine just how much progress women make in terms of fairer compensation in the next decade.
So first, the definitions:
“Equal pay” gap: What women are paid versus their direct male peers, statistically adjusted for factors such as job, seniority, and geography. Often referred to in the context of “equal pay for equal work.”
“Median pay” gap: The median pay of women working full time versus men working full time. This is an unadjusted raw measure used by the Organization for Economic Cooperation and Development (OECD). Women in the US, for example, make 80 cents on the dollar versus men on this basis.
Equal pay gaps measure whether women are being paid commensurate with their peers for the work they are doing today. But median pay gaps measure whether or not women are holding as many high-paying jobs as men. Narrowing the median pay gap means putting more women in leadership (and reaping the performance benefits that diversity affords). And that’s where investors come in. Concerned shareholders in major US financial and tech companies want to make sure the pay gap difference is understood—and acted upon.
Consider the case of Citigroup. While it is true that women at Citi are paid 99% of what men are paid on an equal-pay basis when adjusting for job function, level, and geography, the median pay gap at the financial giant paints a very different picture: Women at Citigroup earn just 71% of what the men earn.
What accounts for the difference? Women are dramatically underrepresented in high-paying positions at Citigroup—and nearly all other major corporations. So, when more US companies begin disclosing their median pay gaps, the numbers are going to be shocking. In fact, Citi’s 29% median pay gap could very well end up being at the lower end for large US financial and tech companies.
This kind of disclosure is not going to happen on its own. But investors are intent on making headway, and establishing benchmarks from which to measure company progress. Between 2016 and 2018, shareholder proposals and concurrent dialogues led by my firm, Arjuna Capital, persuaded 22 companies, including Citi, JPMorgan, Wells Fargo, Bank of America, Bank of New York Mellon, Amex, Mastercard, Reinsurance Group, and Progressive Insurance to publish their gender pay gaps on an equal-pay basis.
Tech giants like Apple, Amazon, Microsoft, Google, and Facebook have been compelled to do the same. And commitments from leading companies often have a domino effect through an industry, putting pressure on more companies to act. The adjusted equal pay gap picture is, in many ways, the easy part of the gender equity story to tell. But it is only half the story. Now, shareholders like us want companies to follow Citigroup’s lead and disclose their median gender pay gaps.
Today, Arjuna Capital is announcing an important new phase of our work: a median pay gap shareholder resolution engaging a dozen major US companies across the banking, tech, and retail sectors, including: Adobe, Amazon, Intel, Facebook, Alphabet/Google, Bank of New York Mellon, Bank of America, Wells Fargo, AmEx, JPMorgan Chase, and Mastercard.
The 12th company we targeted with the shareholder proposal—Citigroup—opted to respond almost immediately, disclosing its median pay gap data through a blog, and pledging to narrow this wider gap. On Jan. 16, 2019, Citi became the first US company to reveal its global median pay gap.
The result was a bit of rough sledding for Citi. National and financial news outlets zeroed in on the shock factor in the data. Headlines read: “Citigroup Admits It Pays Women 29% Less Than Men;” and “Citgroup’s business is money, but not a lot of it goes to its female employees.” Others got it right with headlines focusing on the significance of Citi’s groundbreaking decision to release median figures: “Citigroup is revealing pay day data most companies won’t share” and, perhaps most bluntly, “Citigroup Bravely Announces It Pays Women Like S—t.”
Citi had the courage to break the mold and disclose median pay numbers, and that bravery will pay off in the long run, not only for the company but for its investors, by improving gender diversity throughout the company. A recent study cited in the Harvard Business Review found that wage transparency, in countries that mandate it, not only narrowed the wage gap but increased the number of women hired and promoted into leadership positions.
Citi also made it clear that it is taking the proactive steps needed to fix the median gender pay gap. Its goal is to increase representation at the assistant vice president through managing director levels, to at least 40% for women globally and 8% for black employees in the US by the end of 2021. (Yes, there is a minority pay gap and a minority median pay gap problem, too.)
Multinational companies, including Citi, that operate in the United Kingdom are now under regulatory mandate to disclose median gender pay gaps. In 2018, peer Bank of America revealed a 41% gap for its UK operations. Citigroup reported a 36% median gap for the UK, but prior to January’s announcement, the company had not published median information for its global operations, including the US.
Revealing the whole story of the gender and racial pay gap is essential to create change. Indeed, what gets measured (and disclosed) gets managed. As it stands, the World Economic Forum estimates the gender pay gap costs the economy $1.2 trillion annually. The 20% median income gap for all women working full time in the United States is a disparity that can equal nearly half a million dollars over a career. And the income gaps for African-American and Latina women are at 60% and 55% respectively. At the current rate, women will not reach pay parity until 2059. This depressing statistic is not only bad for women, it’s bad for the economy, and it’s bad for the companies that can benefit now from women’s leadership and talent.
It remains to be seen how many of the 12 companies targeted by Arjuna Capital will agree to the shareholder resolution in 2019. Our pledge is to continue to work with the companies’ leadership to find common ground on our resolution, and to educate the media and public about the median pay gap. We will applaud all good faith efforts to publish median pay numbers because the most effective shareholder activism is not about shunning; it is about casting light on a problem, calling companies to task, and nudging them through the sometimes difficult process of disclosure and reform.
Citi learned that disclosing its median gender pay gap meant a little PR pain in the near term. But it also established itself as the leading US institution on pay equity, doing the honest and real work to address inequity for women and minorities. Concerned shareholders will continue to press other companies to follow suit, because, unfortunately, there remains glaring inequality in the US workplace. And it is high time to tell the whole story.
Kroger and Tropical Forests
Kroger Co., the largest grocery chain in the U.S., agreed to develop and implement a no-deforestation policy after Green Century filed a shareholder resolution with the company, urging them to take action. After the announcement, they withdrew the shareholder resolution with the company.
According to the agreement, Kroger will implement a no-deforestation policy in its private label Our Brands products supply chain by 2020. It also will report on the progress it makes toward its goals through reliable third-party questionnaires.
As one of the largest retailers in the world with an extensive supply chain, Kroger’s new commitment is the kind of corporate buy-in needed to preserve the world’s forests
From Sustainability to Business Value
Pax World Fund, Feb 2018
ING interviewed 210 finance executives in US-based large-cap and mid-cap companies about the importance of sustainability to corporate strategies. They found that over 80% of firms are embedding sustainable thinking into their business growth plans and that nearly half reported that sustainability concerns actively influence their growth strategies. The firms with the most robust sustainability strategies tend to have had better revenue, borrowing and credit-ratings outcomes.
Read the full text here.
Beverage Container Recycling
As You Sow, an investor advocacy organization, began engaging bottled beverage companies 15 years ago to encourage them to improve their bottle/can recycling rates. After dialogue and the filing of proposals for several years, Coca-Cola agreed to recycle 50% of its PET, glass bottles, and aluminum cans by 2015; PepsiCo agreed to an industry recycling goal for 50% of PET, glass bottles and cans by 2018; and Nestle Waters NA agreed to an industry recycling goal of 60% of PET bottles by 2018. If these companies meet their 2018 goals, it will mean about 20 billion bottles and cans avoiding the landfill and instead providing valuable materials to bottling companies for recycled content in new bottles and cans.
Mark Preisinger, Director for Shareowner Affairs, Coca-Cola, told As You Sow: “I do believe [shareholders’ proposals] helped us get to where we are on the recycled content issue. The dialogue that we undertake with shareholders clearly helps advance agendas like this one inside our company.”
Further, what started out as an adversarial dialogue with Nestle Waters developed a couple of years later into a joint effort by As You Sow and Nestle Waters to convince other large brands to take financial responsibility for the collection and recycling of post-consumer bottles. This led to the development of a $100 million Closed Loop Fund by Walmart, along with Coke, Pepsi, Procter & Gamble and several other brands, to help fund improvements to U.S. recycling infrastructure, which will increase materials recycled.
Linking Executive Compensation to Sustainability Metrics
Pat Miguel Tomaino, Director of Socially Responsible Investing, Zevin Asset Management
The structure of executive pay often causes companies to cut corners, take unwarranted risks, and ignore pressing environmental and social challenges. Exorbitant and unfocused pay packages created perverse incentives that reduced oversight at Wells Fargo, leading to the bank’s fake accounts controversy. After the Volkswagen diesel emissions scandal and BP’s Gulf of Mexico explosion, experts and advocates have pressed to “claw back” misbegotten CEO paychecks — without much success.
Responsible investors can help shape incentives toward positive outcomes even as we examine the deeper problem in executive compensation. To this end, Zevin Asset Management has urged dozens of companies to link senior executive payouts to social and environmental risk metrics and performance goals. Late last year, Citrix responded to our proposal, agreeing to spell out how diversity and inclusion factors influence annual CEO performance evaluations.
Bruce Herbert Presents Proposal at Starbucks
Bruce Herbert At Starbucks’ annual meeting, Bruce Herbert, presents a Harrington Investments shareholder proposal urging the company to embed sustainability into its corporate governance. He emphasized that long-term environmental and social responsibility aligns with shareholder value and argued that codifying these practices ensures accountability. Herbert highlighted how shareholder support is crucial to driving meaningful change and referenced prior company actions and industry standards to strengthen his case. Addressing the board and fellow investors, he made a persuasive appeal for collective action, encouraging votes in favor of the resolution. The video captures the process of shareholder engagement and underscores the role investors can play in shaping corporate sustainability strategies.