How ‘Stakeholder’ Movement Could Hinder Economic Recovery From COVID-19

Fred Lucas / May 11, 2020

A crisis could be the worst time to pressure companies to adopt policies that aren’t in the best interest of the bottom line or their workforce, conservative shareholders say.

“This is particularly true in an economic crisis,” Justin Danhof, general counsel for the National Center for Public Policy Research, told The Daily Signal in a phone interview.

“Should companies be pressured to invest money in solar panels on their roof that they would prefer to use to rehire their laid-off workers?” Danhof asked.

Progressive groups, however, continue to have success in promoting environmental, social, and governance policies, dubbed ESG, with business leaders.

“Environmental” typically means supporting green investments in alternative energies and divesting from fossil fuels. “Social” applies to various issues deemed to be part of the social justice movement, which include pay or labor standards. “Governance” refers to increasing representation for women and minorities on corporate boards.

Out of 429 such shareholder resolutions filed over the last year across the nation, more than 300 were headed for votes at annual corporate board meetings held in the spring by publicly traded companies, according to As You Sow, an umbrella group for the ESG movement.

“This is about risk reduction. I don’t see this as political. I see this as a fiduciary matter about reducing risks and improving the finances of a company,” Andrew Behar, CEO of As You Sow, told The Daily Signal in a phone interview. “I don’t understand where politics is supposed to come into this. The Business Roundtable and the World Economic Forum view it as a fiduciary matter.”

The economic crisis spawned by COVID-19 should not deter companies from a stakeholder model, Behar added, but rather encourage it.

“I’d say now is a good time to take this approach,” Behar said. “This is a time that poses a lot of risk, and companies should look for ways to reduce risk.”

Conservative activists and business executives, however, have been pushing back through a coalition called the Shareholder Equity Alliance.

The alliance is calling for the investment management corporation BlackRock Inc. to reverse its decision to shift to the ESG-centered “stakeholder” model and return instead to a “shareholder” model as a fiduciary duty to investors.

The reason? The Federal Reserve selected BlackRock to conduct financial transactions on the Fed’s behalf and advise the central bank on responding to economic problems caused by the COVID-19 crisis.

“The left doesn’t hide a single thing they are doing here, and they’ve been doing this for so long with no pushback. I love that there is an awakening on the right to these environmental, social, and governance proposals,” Danhof told The Daily Signal.

The term ESG was coined in 2005 and since then, the movement has exploded to more than $20 trillion of all professionally managed assets, according to Forbes.

As You Sow teamed with the Sustainable Investments Institute and Proxy Impact to produce a resource called “Proxy Preview” with suggestions on how to pressure companies and reports of progress made in moving companies to the left.

The 2020 report, released in March, says that two-thirds of investors’ proposals demand more oversight on political influence, climate change, and fair treatment for women on boards and in the workplace. Other proposals seek action on human rights and tie executive pay to performance on environmental and social issues.

The Proxy Preview notes that Starbucks agreed to move from single-use packaging to reusable packaging and that Verizon agreed to conduct a child risk assessment and to increase use of renewable energy from 2% to 50%.

Stakeholder Capitalism

“Fifty years of shareholder advocacy for employees, communities, supply chain, customers, and shareholders have helped to prompt the World Economic Forum and Business Roundtable to finally adopt and endorse the idea of stakeholder capitalism,” Behar said in a press release after release of the Proxy Preview.

“But the 2020 proxy season will test if investors and companies will help define a new economic paradigm or if these endorsements are just empty words,” Behar said.

The ESG movement scored a major victory last fall when 181 major businesses, including BlackRock, signed onto the Business Roundtable’s new “Principles of Corporate Governance.” The document vows: “We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.”

The World Economic Forum adopted a manifesto on stakeholder capitalism in January.

Danhof directs the National Center for Public Policy Research’s Free Enterprise Project, which was designed to combat liberal dominance in shareholder influence. He introduced an Investor Value Voter Guide to counter the ESG movement and educate investors who seek to vote in line with conservative or religious values.

The Investor Value Voter Guide states that most American investors are two steps removed from an actual vote. That’s because many investment fund managers vote for proposals based on recommendations issued by proxy advisory services.

Two firms, Institutional Shareholder Services and Glass Lewis, control a combined 97% of the proxy advisory market and consistently support liberal proposals, according to the guide.

“We have no problem with talking about stakeholders. A smart company will care about its community and its employees because that’s in their interest,” Danhof said. “What the left does is distort it to say these are mutually exclusive from profit and the interest of shareholders. [But] public companies are stewards of their shareholders’ money.”

‘Politicization of Business’

Groups on the left such as People for the Ethical Treatment of Animals, Greenpeace, and the Service Employees International Union, known as SEIU, back many of the ESG proposals, Danhof said.

“You are looking at people with the same worldview as AOC,” he said, referring to Rep. Alexandria Ocasio-Cortez, D-N.Y., a freshman congresswoman who is an avowed socialist. “By pressuring companies on ESG, these groups are trying to achieve a socialist agenda they can’t achieve legislatively or through the ballot box.

Greenpeace and SEIU didn’t respond to The Daily Signal’s request for comment on Danhof’s remarks.

But Ingrid Newkirk, president of People for the Ethical Treatment of Animals, or PETA, told The Daily Signal that the animal rights organization in the past month bought stock in six meat companies “so that we can urge them to transform their facilities to produce only vegan meats.”

“While some shareholders seek out companies that share their values, PETA purposely seeks out the companies that don’t,” Newkirk said in a written statement, adding:

We buy stock in food, clothing, and pharmaceutical companies so that we can attend meetings and directly call on shareholders and CEOs to end cruel practices involving animals.
PETA is buying into meat companies? That’s shareholder activism, which makes sense, given the link between using animals for food and the spread of zoonotic diseases.

As You Sow has been around about 30 years and has corrupted a laudable goal of corporate social responsibility, said Bill Meierling, executive director of the Shareholder Equity Alliance.

“The politicization of business is tough for business managers who don’t know what to do but capitulate,” Meierling told The Daily Signal. “ESG shareholder resolutions also impose undue costs on production, which means undue cost to consumers and puts America at a competitive disadvantage.”

Only about 30% of all shareholders actually vote, he said.

Bloomberg Businessweek reported that about 22% of all shares from a typical S&P 500 company are in the portfolios of three major asset managers: BlackRock, Vanguard Group, and State Street. This gives them immense voting power, Meierling said.

Fellow CEOs Appeal to BlackRock Chief

BlackRock, with $7 trillion in assets that make it one of the world’s largest financial institutions, announced in January that it was shifting to a “stakeholder” model with a focus on ESG policies. The corporation’s lending and investment power give it influence to shape the economy.

Thirty-one fellow CEOs wrote May 1 to BlackRock CEO Laurence Fink to argue that a publicly traded company is responsible to investors and shouldn’t engage in politics in the midst of an economic crisis.

The letter signed by David L. Sokol, chairman of Atlas Corp. and owner of Teton Capital; Tony Novelly, CEO of Apex Oil Co.; and 29 other executives reads in part:

Over the past year or so, thanks in part to the Business Roundtable’s sanctimonious adoption of it as the new ‘ideal’ for American business, the term ‘stakeholder capitalism’ has taken deep root in the business world. There are, we believe, several issues with this term, with its use, and with the effects it is intended to elicit among business leaders and business consumers alike. These issues loom even larger now, in the most challenging business environment since the Great Depression. …
Additionally, and more to the point, asset managers who capitalize on Americans’ inherent goodness and decency to push their own values under the headings of ‘sustainability’ and ‘stakeholders’ are playing politics with OTHER PEOPLE’S MONEY. An asset or wealth manager’s primary fiduciary responsibility is to his CLIENTS … to manage the CLIENTS’ assets faithfully and in keeping with the CLIENTS’ needs, values, and risk tolerance.
Substituting one’s own political predilections for the obligations owed to the clients is among the most offensive and irresponsible actions a manager can take. This is all the more the case when the manager is not chosen by the individual investor but dictated by law, as is the case with government employee retirement and pension plans.

A BlackRock spokesperson did not respond to The Daily Signal’s inquiries for this report.

‘Unnecessary and Harmful’ Proposals

The Shareholder Equity Alliance’s letter to BlackRock’s Fink asking the company to reverse its “stakeholder capitalism” policy has nearly 80 signatures. It says in part:

This economic crisis makes it more important than ever that companies like BlackRock focus on helping our nation’s economy recover. BlackRock and others must not add additional hurdles to recovery by supporting unnecessary and harmful environmental, social, and governance (ESG) shareholder proposals.

The letter goes on to defend free-market capitalism as the strongest force for lifting people from poverty, but contends that the ESG movement politicizes investments:

Shareholders and society at large benefit when companies are guided by values such as producing quality products and services, having integrity in dealing with customers and vendors, and developing the talents and skills of employees. But when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda.
Most ESG shareholder proposals are sponsored by activist groups that abuse the proxy process to achieve social and cultural changes that are entirely unmoored from the interests of corporate shareholders. Environmental nonprofits, labor unions, left-leaning pension funds, ESG-focused asset managers, and left-wing activists are unconcerned with corporate performance. Their goals are societal and political. …
At this moment especially, all of us—including BlackRock—must be focused on the nation’s economic recovery. Investors, many of whom are terrified that their retirement funds have been lost or are at risk, need to be assured that managers of their assets are focused on those facets of business performance that are likely to produce a sustained return on investment and a return to financial normalcy.
Extraneous political considerations serve only to sow confusion and exacerbate instability, when instability can least be tolerated. In unsettled environments such as this, true ‘sustainability’ is demonstrated by robustness and resilience, not by highly politicized trends and fads.