Proponents have come up with several new ideas that raise broad sustainability issues for companies and investors this year. Four new proposals from The Shareholder Commons ask about the social impact of investment stewardship practices and companies’ general financial priorities, two more seek a report on how companies consult with their stakeholders about risks and one asks for a report on whether retirement plans align with corporate climate goals. There are 14 proposals in all, with six SEC challenges that have yet to be resolved.

Sustainability reporting: Boston Trust Walden has already withdrawn proposals at East West Bancorp and Green Dot asking for a sustainability report after each agreed to do so. Still pending is its resolution at Cathay General Bancorp that proposes “a report describing the company’s environmental, social, and governance (ESG) policies, practices, and performance goals and metrics.”

A NEW INVESTMENT THEORY FOR DEALING WITH SYSTEMIC RISKS

JON LUKOMNIK
Managing Partner, Sinclair Capital; Co-Author: Moving Beyond Modern Portfolio Theory: Investing that Matters

JAMES P. HAWLEY
Senior ESG Advisor, Truvalue labs; Co-Author: Moving Beyond Modern Portfolio Theory: Investing that Matters

The definition of what it means to invest is changing. Today, investors are looking beyond their trading terminals and tackling investing risks in the real world, where value is created, as well as in the capital markets, where it is priced.

That is a welcome evolution. But, it’s also a radical paradigm shift. For nearly three-quarters of a century, public market investing has centered on security analysis, trading, and portfolio construction. That paradigm is largely the legacy of the adoption of modern portfolio theory (MPT), which brilliantly taught us all the math of diversification, giving us the ability to extract the most efficient risk/return portfolio from the extant market. Unfortunately, diversification only works on idiosyncratic risks.

Societal impacts: As noted above, The Shareholder Commons has filed proposals with a common theme that says long-term impacts that occur when companies externalize their costs harm society at large and financial markets and longterm investment results for universal investors. (See pp. 29, 47, 49.) Two of TSC’s proposals are more general:

• Adopt policy—One proposal, filed on behalf of James McRitchie, asks BlackRock and State Street to “adopt stewardship practices designed to curtail corporate activities that externalize social and environmental costs that are likely to decrease the returns of portfolios that are diversified in accordance with portfolio theory, even if such curtailment could decrease returns at the externalizing company.”

• Report on risks—The other, filed on behalf of John Chevedden and the Australian pension fund HESTA, asks Alphabet and Meta Platforms to report on “(1) risks created by Company business practices that prioritize internal financial return over healthy social and environmental systems and (2) the manner in which such risks threaten the returns of its diversified shareholders who rely on a productive economy to support their investment portfolios.” It contends that misinformation distributed through company platforms imposes unaccounted for costs with negative long-term impacts on society and financial markets.

COST EXTERNALIZATION: A BAD TRADE FOR DIVERSIFIED SHAREHOLDERS

SARA E. MURPHY
Chief Strategy Officer, The Shareholder Commons

The Shareholder Commons has filed or otherwise supported 19 shareholder proposals in 2022 that focus on systematic risks, including mis/disinformation, climate change, and antimicrobial resistance. The common thread running through these proposals is how a company’s externalized costs affect shareholders by reducing the value of other assets in their portfolios. For instance, our proposal at BlackRock asks that it adopt stewardship practices aimed at curtailing corporate activities that externalize social and environmental costs likely to decrease diversified portfolios’ return, even if such curtailment could decrease returns at the externalizing company.

SEC challenges—All four companies have challenged the resolutions at the SEC. The financial firms argue the resolution concerns ordinary business, would be illegal, could not be implemented and is too vague. The SEC agreed somewhat more specific 2021 proposals at these companies, on the ultimate societal costs of proxy voting practices, were ordinary business. Both Alphabet and Meta say this year’s iteration is too vague, while Meta again says it is ordinary business.

Public benefit corporation: Investors gave just 3.1 percent support to a proposal that asked Apple

to become a Social Purpose Corporation and to adopt specific social purposes such as (A) benefitting (1) the corporation’s employees, suppliers, customers, and creditors; (2) the community and society; and (3) the environment and (B) exercising reasonable care to ensure the Company’s operations do not impose social and environmental costs materially contributing to the degradation or destruction of important social and environmental systems.

Retirement plan alignment: As You Sow has a new proposal that asks Amazon.com and Comcast to examine their employees’ retirement plan options and report, “reviewing the Company’s retirement plan options with the board’s assessment of how the Company’s current retirement plan options align with its climate action goals.” It says each company should explain why if it will not offer low-carbon investment options.

SEC action—Both companies argue the proposal is ordinary business since it is about employee compensation and benefits.

ESG Pay Links

Only four resolutions address ESG pay links. The Teamsters and Vermont Treasurer have revived a proposal that earned 11.7 percent at AmerisourceBergen in 2019. The proponents want it and Johnson & Johnson to include one-time litigation and compliance costs in performance metrics used to set executive incentive compensation, because such costs have come from harmful behavior. The opposing view, expressed in 2019 by AmerisourceBergen, is that companies need flexibility and discretion to design and administer compensation programs, and that excluding non-recurring or one-time events provides a more accurate picture of company performance. The proposal asks that each company adopt a policy

that no financial performance metric shall be adjusted to exclude Legal or Compliance Costs when evaluating performance for purposes of determining the amount or vesting of any senior executive Incentive Compensation award.

“Legal or Compliance Costs” are expenses or charges associated with any investigation, litigation or enforcement action related to drug manufacturing, sales, marketing or distribution, including legal fees; amounts paid in fines, penalties or damages; and amounts paid in connection with monitoring required by any settlement or judgement of claims of the kind described above.

“Incentive Compensation” is compensation paid pursuant to short-term and long-term incentive compensation plans and programs.

The policy should be implemented in a way that does not violate any existing contractual obligation of the Company or the terms of any compensation or benefit plan. The Board shall have discretion to modify the application of this policy in specific circumstances for reasonable exceptions and in that case shall provide a statement of explanation.

HOW TO MAKE ESG PAY LINKS MORE EFFECTIVE

MELISSA WALTON
Executive Compensation & Say on Climate Associate, As You Sow

Shareholder resolutions requesting companies disclose plans to achieve net-zero emissions by 2050 received increased support in the 2021 proxy season. While this is a positive development, companies must do more to cut emissions in half by 2030 to meet the Paris climate treaty goals. One lever in meeting 2050 net-zero pledges is linking executive compensation to hitting climate targets.

At Kroger, Zevin Asset Management asks the company about “the feasibility of integrating environmental, social, and governance (ESG) metrics into performance measures or vesting conditions that may apply to senior executives under the Company’s compensation plans or arrangements.” It has not been voted on before at the company.

Finally, at Wells Fargo, NYSCRF has resubmitted a longstanding proposal seeking detailed information about the extent to which it ties malfeasance to compensation. It earned 26 percent last year, up slightly from around 21 percent in each of the previous three years. The proposal asks for a report on:

(1) whether and how the Company has identified employees or positions, individually or as part of a group, who are eligible to receive incentive-based compensation that is tied to metrics that could have the ability to expose Wells Fargo to possible material losses, as determined in accordance with generally accepted accounting principles;

(2) if the Company has not made such an identification, an explanation of why it has not done so; and

(3) if the Company has made such an identification, the: (a) methodology and criteria used to make such identification;

(b) number of those employees/positions, broken down by division;

(c) aggregate percentage of compensation, broken down by division, paid to those employees/positions that constitutes incentive-based compensation; and

(d) aggregate percentage of such incentive-based compensation that is dependent on (i) short-term, and (ii) long-term performance metrics, in each case as may be defined by Wells Fargo and with an explanation of such metrics.