S2 Ep16 Holding Management to Account with Andrew Behar of As You Sow


Michael Young:

Welcome to the Purpose, Inc., the podcast where we discuss corporate purpose and stakeholder capitalism. I'm your host, Michael Young. My guest today is Andrew Behar, the CEO of As You Sow. And if you're not familiar with them, they are the nation's leading non-profit practitioner of shareholder advocacy and engagement. As You Sow has been around for 30 years with a singular focus on values-aligned investing using shareholder power to compel companies to reduce material risk around things including climate change, toxins in food, ocean plastics, diversity, equity, inclusion, racial justice, and wage equity. More at AsYouSow.org. Andrew, thank you for coming on the podcast.

Andrew Behar:

Well, thank you for having me.

Michael Young:

Awesome. So when we spoke originally, you kind of talked about May 25th was a very, very busy day over there at As You Sow. Maybe walk us through that day and what happened.

Andrew Behar:

Sure. So May 25th of this year was a very busy day because there were many, many annual meetings, corporate annual meetings that happened that day. I think there were over 300 actually. We had engaged with companies and had resolutions at five of them. And also, it was the same day that the SEC decided to release a new draft rules on mutual fund naming. So just to take you through what that means, and As You Sow, we do a lot of research about companies on issues, like you mentioned, climate change, toxins in the food system, ocean plastics, racial justice, diversity, equity, inclusion, egregious CEO pay. And so we do a lot of research. So for instance, racial justice, we're looking at 57 key performance indicators on what defines racial justice, diversity, equity, and inclusion, and we look at 1,000 companies. We look at the Russell 1000, and we come up with a scorecard. We have a scorecard; it's on our website at AsYouSow.org. And we sit down with the companies who are scoring low, who we consider laggards. And we say, you scored a five; your direct competitors scored a 32. Here's the five key performance indicators they're doing you're not. And the companies generally go, wow, thank you. This is great because we were looking at how do we deal with racial justice.

And most of the companies out of 210 engagements, the vast majority of them said, thank you. You guys are like McKinsey for free, and they said let's go get to work. So 87 of those companies said, we don't really want to make change right now. So we escalated the conversation by filing what's called a shareholder resolution. And this is a 500-word document. It's a formal SEC filing. And what it does is it gives us as shareholders and shareholder representatives the ability to talk about these ideas with all the other shareholders and then have them all vote at the annual meeting. And so we do that. And so these 87, about half of them, once we filed the resolution said, you know what? Actually, yeah, let's get to work, and we wrote a withdrawal agreement that specifies the company will take certain actions by a certain amount of time, sets out milestones and goals in a time certain way. So about half of them were going to go to a vote, and it just happened that five of them landed on May 25th. Should I just keep going or—

Michael Young:

Yeah, keep going. Yeah, let's hear about each of the five.

Andrew Behar:

So Exxon we've been dealing with for a long time. Exxon we started filing resolutions back in 2010, and we have filed, well, probably 26 resolutions now at Exxon. The company doesn't tend to listen to their shareholders real well. They tend to want to ignore their shareholders, and you saw one of the results of that was last year, that Engine 1 ran a slate of new shareholders, new directors and three of them got elected. So that is a result of shareholders basically not being heard even after getting majority votes. And in 2017, there was a 62% vote, and the conversation continues. And what we asked the company is this is really about climate change. This is the company going to take action on climate change. Are they going to disclose a credible Paris compliant transition plan? And the important thing here is that when a company discloses this information, if it's material, and material means does it have a financial implication that materiality for an investor means it's information I need to make a buy, sell, or hold decision. And so when a company discloses information but it's not accurate, it's problematic because you make investing decisions based on it. And then what happens is well, you didn't have good information.

So what we're asking the company and what we asked Exxon, and last year, we got a 49% vote about this, was about that we want the information to be verified and audited, that because it's material, it's financial. And so it should be in the audit. And so what we said was basically if the board audit committee accepted this information that was not accurate, then the audit committee of the board was actually in breach of their fiduciary duty. So we brought back this resolution again, and this was co-filed with another group. And this time we actually got a majority vote. We got a 51% vote, which essentially means when you get a majority vote that if the company doesn't take action on it, then shareholders are not going to be happy with the board, and you're more likely to be able to get a no-confidence vote against the board or to run a board slate the next year. So we feel really good about that. We believe that all companies should be disclosing accurate information. And in fact, the SEC just came out with a new rule. It's a proposed rule on climate disclosure that says that all companies will need to disclose accurately, have it verified, and then put it in the audit. So it's standardized, and you compare it company to company. So this is kind of a precursor to what's going to become the SEC rule soon. So Exxon was a good story.

The other one we had was Chevron. And Exxon and Chevron always put their annual meetings, also known as AGMs or annual general meetings, on the calendar at exactly the same time so you can't go to both. So at Chevron, what we were asking them about was a net zero 2050 plan, basically a climate transition plan. How are they going to reduce emissions by 5% a year over the next 10 years? Now this is something that the International Energy Association has said must happen if we're going to avoid climate catastrophe. This is what the UN says has to happen. And we haven't seen the oil companies really step up. In this case, we got a 38.7% vote, which is a good solid vote. Now these are non-binding votes just by the way. So again, we got a majority vote at Exxon. But even so, the company doesn't have to do it. It's just a matter of will shareholders then take other action, which is what happened last year with their board after that 62% vote. So Chevron, we're continuing conversation with them that we've been having for a long time. And so that was another annual meeting.

The next one was Meta. Also, it's the new name for Facebook. And what Meta was about, and this is a continuation of a resolution that we have filed for basically the last five years, is we're asking them to deal with this issue of hate speech, disinformation, child pornography, and sex trafficking on their site. And the company has responded to our resolutions in the past, and they actually have been taking a great deal of action. They created what they call a community center, a set of rules that needs to govern what is put on Facebook, what is put on—essentially they own the pipes. And then what they're saying is we're not responsible for the content. And what we're saying is actually, you are responsible for the content because it's creating damage. It's harming people. People are actually being hurt by it, not to mention how democracy is being hurt by it, allowing people to organize in terms of hate speech, in terms of, well, January 6th insurrection was basically organized on Facebook. The company has spent $13 billion, and they say that they've hired 40,000 people to deal with this. And frankly, we just don't see the impact of all of that work, of all that effort, and all those resources. It has not actually changed the site significantly.

And so what we're saying to them with this resolution is maybe we're going about it in not the best way. Maybe it’s a strategy question and that we should be thinking about this in a whole other way. Now we have some suggestions. As shareholders, we're not allowed to actually make those formally because that's called ordinary business. We can just ask the company for a report on it. But as a side note, we believe that if a person posts child pornography right now, Facebook takes down the pornography, but they don't remove access for that person, even if the person is a repeat offender. You can repeat offend infinitely on Facebook and not be removed. And we think that's the problem. If you're going to try to actually get these posts that are causing harm to stop, you've got to stop the people who are causing the harm. And yes, they can create another account, but that's another issue. It's really what is the methodology that they're going about. Now this got a 19.2% vote. But what's interesting at Meta is that Mark Zuckerberg has a ten to one voting preference. This means that no matter if every other Meta shareholder voted for your resolution, you still would not get a majority vote, that he has complete control. So anything happening at Meta, it's because Mark Zuckerberg wants it. If there's hate speech, it's because he has decided that. If there is disinformation, it's because he wants it. Now that number represents 63% of the independent shareholders, so basically the non-Zuckerberg shareholders, 63%, a big majority said, yeah, we got to take care of this. This is bad for the company. But because Zuckerberg is essentially an authoritarian regime, he can override that with his vote. So Meta was the next one.

The one after that was Amazon, and the resolution at Amazon was really about their 401k plan. Now the Amazon 401k plan, like almost every 401k plan of the S&P 500, is the holdings in it are target date funds, which mean that when you join, you can say, I want the fund for when I retire in 2050 or 2060. You can set a date, and the fund adjusts itself to become, it's a diverse fund, but it becomes, like you have more bonds when you start and, I'm sorry, more equities when you start, more bonds when you end so that it's less risk as you progress over the years. But this target date fund is invested in big oil, in private prisons, and in particular, every person at Amazon who has a 401k plan has companies burning down the Amazon. And so we did a lot of work. We interviewed a lot of Amazon employees, talked to them about it, asked them, what do you think about this. None of them were aware that they were owning companies that were in the midst of deforestation or ones that own private prisons. We filed a similar resolution at Comcast as well.

So what we asked Amazon was, our company says really good things about climate, and we're doing things, like we have 100,000 electric vehicles. Yet, on the other hand, all the money, $1.3 billion, is invested in just the opposite. What does that do for our brand? What do people think about Amazon when we're saying one thing and we're doing another, when we're doing one thing in operations but our investments are going in the other direction or the investments of all of our employees. So it's that contradiction. It's that cognitive dissonance that we were asking them for a report on. Will it harm the brand? So at Amazon, in order to come back the next year with the same resolution, you need a 5% vote. In this case, and this is a first year resolution, we had a 9% vote which is almost double of what we needed. We had a second resolution at Amazon also about plastics, about decreasing the use of plastics in all of their packaging. And Amazon uses a lot of packaging, and they use a lot of plastic. And they can decrease it massively. Now this one got a 48.9% vote. And if you exclude Jeff Bezos, it's about a 59% vote of independent people. So not a majority officially, but certainly there is a great sense of Amazon shareholders that plastics are a big problem. And in terms of the 401k one, we're going to come back next year. I think that generally new resolutions get single digit votes because it's a new idea. People haven't thought about it. People might not even know what a 401k plan is, what these holdings are. So we're introducing a new concept. Part of what shareholder advocacy is about is introducing new ideas and getting shareholders to think about it, getting in this case employees to think about it and management. So we think we will see change because this is not something that is difficult to fix. And if Amazon employees ask for it and say we want a fossil-free fund, a deforestation-free fund, a prison-free fund, they should be able to get that and management should be able to provide it.

The fifth annual meeting that we went to was Travelers Insurance. Now Travelers Insurance, and also, we had also filed at Chubb Insurance but the AGM was on a different day. So both these insurance companies, they underwrite extraction projects. So you cannot drill an oil well without insurance. And so what shareholders are saying is there's a lot of risk, there's a great deal of risk in underwriting these extraction projects. And we saw the oil industry losing money for 10 years, and now they have a spike right now basically because of Vladimir Putin and his unprovoked attack of Ukraine, which has driven prices globally through the roof. And the oil companies are just gouging everybody at the pump. And so you've got basically a blip right now. In any case, we're asking the insurance companies to disclose which projects they are underwriting so that we know what kind of risk is associated. Chubb, we got a big majority, 72%. At Travelers, we got a smaller but still a majority, which is pretty remarkable for a first, again, this is our first time doing these, a 55.8% vote.

So it was a busy morning. We had our various staffers. You have to attend these meetings. You have to actually present the resolution. And so we had staffers at all of those. Meanwhile, the SEC released a new set of rules having to do with fund naming, so mutual funds. And this would refer back to what's in a 401k plan. So As You Sow has a platform called Invest Your Values, and you can find it at InvestYourValues.org. And in it, you can go in and you can type in the name, like you type in Vanguard or you can type in a ticker of a mutual fund that you may own. And it will show you everything inside of it. Now most people don't know what's inside a mutual fund. It is a basket of stocks, but the prospectus generally only shows you the top 10 holdings. So if you own a Russell 1000 fund, a fund with 1,000 holdings in it, we will show you 1,000 companies and what they all do. We will show you which ones are involved in fossil fuels, which ones are involved in pipelines, which ones are coal-fired utilities, ones who are burning down the Indonesian Amazon rainforest, private prisons, weapons, assault weapons, ammunition, issues around gender equality. All these different things you can discover is in your fund.

Now there's a lot of these funds are based on environmental, social, and governance principles. And for 30 years, they've been great companies like Trillium and Green Century and PAX and Parnassus, and all these different companies, Calvert, that have been creating funds based on environmental, social, and governance, which means that they’re less risk, that management teams are addressing these risks. But lately, a lot of people have been saying, I want to invest in ESG, I want to invest in ESG. And so there's been companies like Vanguard and Blackrock who have taken funds and renamed them ESG without changing the holdings. And many people have probably heard Elon Musk complaining, why does this ESG fund have Exxon in it? Well, the reason is because Vanguard renamed their fund that had Exxon in it ESG and didn't change the holdings. And that's allowable under the SEC rule under fund naming. So we did a study in January, or it was finished in January. We'd been doing it for six months before. We had noticed in our system looking at 3,000 funds that there were 90 funds with ESG in their name and 60 of them got a D or an F—we have an ABCDF scoring —on ESG. So 60 out of, actually, it was 94 funds, were getting bad grades.

And so we had a look at why, and we did a lot of analysis of their prospectus and what's inside them and all this stuff. And what the researchers came to is that the prospectus does not correlate to the fund, that you could have the same prospectus and a fund that gets A on ESG and a fund that gets F on ESG. And the reason for this, it's not an ESG problem; it's a naming problem. It's a labeling problem. So we brought this to the SEC, and we showed them all the data that we had. And they had been actually looking at this over the last few years. But on May 25th, they came out with a new rule that will basically not allow this kind of misleading naming anymore, that a fund name has to reflect what's inside of it, that the prospectus has to actually say what type of ESG fund it is, how they're defining ESG, what they're doing in terms of their risk adjusting and essentially, all the information you would need to say, oh, okay, this is a real ESG fund, that the thesis underlying the fund matches the name. So that's what the SEC disclosed. So we were listening in on that. And also, now we're in a comment period. So we're going to be writing comments. There's 60 days to write comments. Because when this new rule becomes implemented, it's going to change how, well, I think how a lot of the big asset managers are going to be able to name their fund, things like BlackRock naming a low-carbon transition fund LCTU. It got $1.25 billion the first day. That’s a record. Now, LCTU, the reason it got so much investment is people were putting their money in to avoid climate risk. But what's inside? Well, if you look inside, if you look on our system InvestYourValues.org, you'll see that it holds Exxon and Chevron, all the big oil companies, Duke and Southern, all the coal-fired utilities, deforestation, private prison. It's just business as usual fund. It's the extractive economy fund, but if you named it the extractive economy fund, you would not have gotten that kind of investment. So this is being cleared up basically, that this is a problem that's been happening. And I think the SEC is addressing it quite well, and I think we're going to see some rapid change on this issue.

Michael Young:

Andrew, thank you for that. That was an incredible survey, and those are five very powerful companies. And as I was listening, my question, and you addressed it, was sort of the rate of change. No question change is needed. How do you think about the rate of change, particularly around some of these very urgent questions around climate, around how employees are able to invest their savings, disinformation, hate speech? How do you see the timeline? Is it accelerating? Presumably, and I'll just ask another question, presumably ESG was about influencing the cost of capital and capital allocation ultimately. And maybe unpack some of the rule change. Could we now actually start to see the teeth of ESG biting organizations who have kind of hidden under a shelter of an ESG fund whereas that's not going to be able to happen in the future? So rate of change and also, maybe your thoughts on capital allocation as the result of some of the initiatives that you're undertaking, that others have undertaken, as well as new regulatory changes, knowing that capital allocation is a form of enforcement really, even though that's a private sector activity or initiative.

Andrew Behar:

So rate of change on climate is clearly, we are way behind schedule. Every company needs to reduce their greenhouse gas emissions by 5% a year over the next 10 years without question. And then going beyond that, we're going to have to get to net zero by—I know 2050, that's what people are saying, but really sooner is really important. And we're seeing big companies are actually doing it. We got a 98% vote at General Electric last year. We got a 92% vote at Boeing. These are both resolutions around emissions reductions, and both companies have committed to disclose their Scope # emissions and reduce them 5% a year. So we're seeing companies are really taking this up, and investors should be taking note that the companies who are leading the way should be getting more investment. They're simply going to have less risk and should be included in their investment portfolios, that companies who do not have a climate transition plan should be excluded from their portfolios. These are the riskier companies, and that's assuming that you want to have a less risky portfolio. So maybe I shouldn't—by the way, I'm not allowed to give any investment advice. We're a 501c3 nonprofit, and I'm not an investment advisor at all. So I take back that advice. But just in terms of risk reduction, you want to be looking at companies that actually have management teams that are able to look at a problem, come up with a solution, address it, and also, be able to make course corrections as they go.

So on climate change, yeah, we’ve got to get that moving. On ocean plastics, we are beyond the pale. The oceans are simply dying, and it's because we're just dumping our waste into them. And a lot of it is plastic, which plastic is made from fossil fuels, it's made from oil, it's made from fracked gas. And so we need to halt that. We need to halt single-use plastics. I mean plastic microfibers were found in Antarctica. They're in everything. They're in every droplet of sea water. They're in every bit of snow in Antarctica now. We're poisoning ourselves as a species. It's really out of control. And so that also, we are definitely behind time on that one too. Toxins in the food system, which we didn't have a resolution on that, but we work on both antibiotics in meat, trying to get that out of the meat system and also, pesticides. So there's a lot of companies that spray pesticides like glyphosate, Roundup on wheat, oats, and beans right before they harvest them. Now some leading companies are not doing that anymore. Kellogg’s signed a pledge based on our resolution in 2019, and their entire supply chain, they are literally not spraying with this known carcinogen right before they harvest. Others are now following suit. Of 17 AG companies, Kellogg’s was the only one in 2019, 12 of them are following that in 2021 when we redid the survey. And the reason is because customers look at it and go, oh, Kellogg food is safer to eat, let's buy that, and they started getting more market share. So their competitors looked and went, oh, why are they getting more market share? Well, it's safer to eat. Oh, we should probably stop poisoning our customers too. Great idea.

So that's how leadership spreads because it's a market force. It becomes a market force, and that is what change really is made of, is how do you get the market to do the work. And there are these leader companies that are leading the way toward what we refer to as a regenerative economy that's based on justice and sustainability. There's other companies that are just decided that they're going to be part of an extractive economy or continue to be part of an extractive economy that it frankly is just winding down. And like I said, yes there is a little spike right now on oil and gas because of Putin. And that's not a good thing, but it will also, if you can see, western Europe is shifting to 100% renewables now to get off of the Russian gas. So it might in the long run, we hope that it's going to actually create a much more rapid shift to renewables because frankly, the internal combustion engine is obsolete, and we can power the planet with renewables right now. It is simply a matter of getting it done. We have the technology.

So racial justice, I think we're long overdue. I think we're 400 years overdue. And after the George Floyd murder, the uprisings that happened last year were an expression of that. It is time to simply have justice and to treat people equally. And so each company needs to have policies and practices to implement this, and interestingly, they are adopting it. We had 27 resolutions on this issue, 27 companies said, let's get to work. This is important to us, and in order for us to attract the best and the brightest employees, we need a culture that is about diversity, equity, inclusion, and justice. And so every company that we talk to is on the path toward improving. And this is a critically important issue. So you asked for a rate of change, we're in a turbulent moment in history where we're creating a whole new economy that is really based on a philosophy that shareholder advocates have been putting forth since the 1970s. When the first shareholder advocates, which were Jesuit priests and nuns, showed up at the General Motors meeting to say, we're shareholders of General Motors, and we're not happy with our involvement with apartheid South Africa, the management and board of General Motors were like, what are you doing here. And they said, we're shareholders, we have rights, and they filed some of the first resolutions.

And those ideas, every shareholder resolution that has been filed since then has described what we call stakeholder capitalism. You take care of your employees because you want the best and the brightest. And if people love their job, their productivity goes through the roof. It just goes off the charts. You take care of your community because you don't want to dump in the commons. If you dump in the commons, it's going to come back to bite you. You're going to have a lawsuit. And the commons now extends beyond just like dumping toxic waste in a river. It's all the carbon that you put into the atmosphere. The commons is the whole planet. And that will come back to bite you through your supply chain which is the third area. Take care of your supply chain. There's companies now that are not able to do business, not able to do commerce because their supply chain is collapsing. Well, they didn't take care of it. People have slavery in their supply chain, which also becomes a liability for the brand. And your customers, take care of your customers. You want to win their loyalty, and companies who, these food companies that are poisoning their customers, we don't think that's good for business.

So stakeholder capitalism, you take care of your employees, your community, your supply chain, your customers, well, guess what? You're going to be outperforming as a company. And so your shareholders are going to benefit from that. These ideas, that idea of stakeholder capitalism, the World Economic Forum in January of 2020 declared this the fourth industrial age. They see this shift that we're in the middle of as being at the scale of the Industrial Revolution. The Business Roundtable, 181 companies, the biggest companies in the United States, multinational companies, all signed a pledge for a new purpose of a corporation that's based on these principles. So every company has already agreed to this new philosophy, and now we're in the implementation phase. That's what—it feels a little messy right now, but that's because we're in a shift the scale of the Industrial Revolution. And we're just—basically, this declaration was just what? Two years ago. So this is what we're in the middle of. That was the answer to your rate for change question.

Michael Young:

That was great. That was fantastic.

Andrew Behar:

You want me to jump into capital allocation?

Michael Young:

Yeah. Why don't we wrap on that? And then we'll leave it there. But just how do you think about, knowing that capitalism is nothing if not a system of measurements and rewards, is capital then doing its job in terms of going into the spaces that have reduced risk based on better commitments to material systemic risks to their business?

Andrew Behar:

Capitalism is also based on trust between a company and its owners. The beneficial owners, the shareholders are the ultimate owners. The board reports to us. Management reports to the board. So shareholders have a responsibility to each company to make sure that the board is doing its work. We are the oversight of the boards. So if a board is not agreeing to a climate disclosure, accurate disclosure on all things material, climate reduction plan, racial justice, then the board's not doing its job. And so shareholders need to let them know that. Now companies that are doing that, that are saying, there's all this risk, we want to avoid risk, those are good management teams and good boards. So as investors, we shift our capital into the companies with better management teams. We invest in people. We invest in these teams. And those are the teams, those are the companies that are defining the regenerative economy based on justice and sustainability. So the capital is flowing in that direction, and that is what is establishing this whole movement that will create a thriving economy and a clean, just, and sustainable world. I mean we believe in that. And it's really the capital shift that's making that happen. It's moving your money out of oil and into companies that are building the future, that are building renewables, that are building all kinds of new technology.

And you see that most of the extraction companies in the world are already shifting. The Danish natural gas company DONG is now Ørsted. They moved from natural gas into offshore wind, and they're doing a heck of a lot better. Total is moving. Repsol is moving. So the Europeans are always ahead of us because they believe in the precautionary principle. They believe in ideas about sustainability. So in the U.S., we have to actually move our money as opposed to the companies coming up with a transition plan. The new folks who joined the Exxon board, their mandate was to help Exxon create a transition plan so that Exxon would thrive and survive in the future. We do not see them as a viable entity. Agreed, they are making a lot of money right now. They are just pillaging all of us at the gas pumps. That's what they do, and that's what they do because also they probably want to increase inflation because they think it's going to help get more political politicians who are supportive of the extractive economy into office. So that's what they do. That's how they do it. But the overall trends are moving in a different direction. So capital allocation is about putting your money into management teams that establish trust, identify risk, and address it systematically and systemically.

Michael Young:

Andrew, thank you. This has been a fantastic survey of your work, and I am incredibly grateful for you coming on the podcast.

Andrew Behar:

Oh, my pleasure. And be well. And everyone who's listening, be well.

Michael Young:

We'll talk soon. Thank you.

Andrew Behar:



The Purpose, Inc. Podcast is a production of Actual Agency, helping innovators communicate in a changing world. More at www.Actual.Agency.