Investors talk big on corporate responsibility, but act feebly
The noise about how capitalism is changing to a system in which social purpose is restored to the centre of companies' and investors' aims is now deafening. But look below the surface and the actual governance record of many companies and investors is dreadful. Most shareholders are too supine even to defend their own rights.
Despite decades of efforts by morally conscious investors and activists to promote the ideas of stewardship and responsible investing, support for these principles is still shockingly weak.
Consider three facts. Warren Buffett, for many people the outstanding capitalist of the past 50 years, told the Financial Times in an interview last year that companies should not invest with a view to “doing good”.
For directors to do so, he said, was to misuse shareholders’ money, and involved a risk of erroneously imposing their view of what was good on society.
“It’s very hard to do,” he was quoted as saying. “If you give me the 20 largest companies, I don’t know which of the 20 behaves the best, really. I’ve been a director of 20 publicly owned [companies] and I think it’s very hard to evaluate what they’re doing… it’s very, very hard.”
He also told the FT his company Berkshire Hathaway had invested heavily in renewable energy only because of the tax credits available.
Other business leaders have gone further, even criticising investors for their trendy obsession with environmental, social and governance (ESG) issues.
One can see where Buffett is coming from. People should decide how they want to invest their own money; company managers should not do this for them, but should fulfil their primary role of making as much money for shareholders as possible.
However, his admission that even as a director of a company “it’s very hard to evaluate” how the company behaves is breathtaking. We should applaud honesty, and Buffett is often refreshingly honest. But he reveals here an appalling problem.
If company directors (and by implication presumably managers, since they should inform the directors if the directors can be bothered to ask) cannot tell whether the companies they run are behaving well, who can? How on earth are investors supposed to work it out?
Second fact. A staff group at tech company Amazon, called Amazon Employees for Climate Justice, declared last week that the company’s legal and human resources teams had written to some employees to question them about public comments they had made about Amazon’s climate change policies. Some were threatened with sacking.
Amazon told the BBC this was in line with a standard policy that controls how employees can make public statements, adding that it had recently eased this policy.
Nevertheless, Amazon was clearly trying to stop its employees speaking out about its environmental impacts.
The staff group is particularly important because it is one of the highest profile initiatives by workers to pressurise their employers to act more strongly on the environment. The group appears to have been highly effective. It first met Amazon management early in 2019, at which point Amazon told them it had no plans to publish its carbon emissions or commit to reducing them.
Staff then wrote an open letter to Jeff Bezos, CEO. Amazon then swiftly promised to make half its emissions from goods deliveries carbon-neutral by 2030. Staff were not satisfied, wanting Amazon to go fully carbon-neutral by that date, including the emissions from its vast data centres. They brought this as a shareholder resolution to Amazon’s annual meeting in May.
Bezos refused to discuss it and the motion failed, but in September Bezos said Amazon would switch to 100% renewable energy by 2030 and go carbon-neutral by 2040.
Still dismayed by Amazon’s use of its artificial intelligence systems to help oil companies find oil, and by Amazon’s financial support for thinktanks and 68 Congresspeople who lobby and vote against climate action, over 1,000 staff went on strike as part of the Global Climate Strike in September.
This episode poses two questions for capital markets, in particular for Amazon’s bond and equity investors. Why have investors left it to Amazon’s rank and file employees to steer it towards a sane climate change policy, putting their own jobs at risk in the process?
And why do so many large and powerful investors continue to chicken out of backing shareholder resolutions on environmental, social and governance issues, and to find excuses for not using the powerful tool of divestment to force change, when the Amazon employees show how effective vocal pressure can be, even from a small and apparently powerless group?
Concerned shareholders repressed
Third. A group of US investors called the Shareholder Rights’ Group this week released an open letter they are submitting to the Securities and Exchange Commission, as part of its consultation into two rule changes that would drastically reduce investors’ ability to use shareholder resolutions to put pressure on companies over ESG.
The changes include raising the minimum percentage support a motion needs to have from investors before it is even allowed to be put to a full shareholder vote. Motions introduced several years running, which receive a 10% smaller vote in support one year from the year before, such as support falling from 30% to 26%, would be banned for the next three years.
As the shareholders point out, these rules, if in place at the time, would have prevented shareholder motions that successfully pressured Chevron to start controlling its waste methane emissions, and that unsuccessfully attacked Wells Fargo’s weak measures to prevent predatory lending as much as 12 years before its fake credit card scandal wiped billions from the company’s market cap in 2016.
Which US investors are standing up so boldly for shareholders’ rights? Vanguard, Fidelity and BlackRock, perhaps? Calpers and Calstrs? No. A collection of minnows — specialist ethical and activist investors led by the indefatigable Boston Common Asset Management.
While it is true that some big investment firms have commented separately and in their own names on some of the SEC's proposals, and in some cases objected to them, the Shareholder Rights Group's objection is particularly strongly argued, well researched and convincing. If the biggest firms backed it, this trenchant voice would be greatly magnified.
Indeed, it is hard to see how, if several $1tr-plus asset managers endorsed the SRG's complaint that the economic harm that could flow from the proposed "reforms" was orders of magnitude bigger than any potential benefit, the SEC could possibly go ahead with them.
The relative silence of the mainstream investing world, when shareholders’ rights are so pointedly under attack, is one more scandal that reveals that, 14 years after the launch of the UN Principles for Responsible Investment, the investment community as a whole is still only paying lip service to them.