As people increasingly look to align their money with their beliefs — especially amid a climate crisis and renewed movement for racial justice — more companies are increasing their focus on environmental, social, and governance (ESG) principles. A growing policy focus on corporate accountability and climate risk disclosures also is prompting companies to re-examine their practices and products to reduce negative impact in order to increase their long-term financial returns.
But Rick Alexander of The Shareholder Commons believes that such “doing well by doing good” is insufficient to address systemic issues like climate change and racial injustice. He is calling for changes to reshape capitalism so that companies no longer prioritize their financial health over systemic health. Alexander and other advocates of a systems-first economy say that companies focused on only their own bottom line — effectively prioritizing companies over people — are jeopardizing the future of the economy, our planet and their own diversified portfolios.
With a mission to preserve the environment and an economy that works for all people, Alexander established The Shareholder Commons in 2019 as a nonprofit focused on reshaping the capital markets. “Part of what we want investors to do is be more aggressive in insisting that companies stop externalizing costs, even when it increases their own financial returns over the long run. The economic reality is that companies can externalize costs, and obtain a free lunch for themselves, leaving everyone else to pick up the tab,” he says.
In the last year, The Shareholder Commons worked with investors on more than 20 shareholder proposals that would hold businesses to higher environmental and social standards by shifting their practices, policies and governance to be more accountable from a systems-first perspective. It was a learning process for both Alexander’s organization and the partners they worked with, but he says the lessons will serve them well as they move forward.
Companies and consumers are beginning to think differently about the purpose of business, he says, but many aren’t acting with enough urgency or realistic expectations — to truly be sustainable, they must broaden their thinking beyond the search for “win-win” solutions at every company.
“Everybody always defaults to the ‘doing well by doing good’ language,” because that’s what feels good, Alexander says. “People are in denial that there are conflicts between caring for society and the environment on the one hand and optimizing for long-term company financial returns on the other.”
To learn more about that challenge and how The Shareholder Commons plans to tackle it, I spoke recently with Alexander as part of my research on purpose-driven business. Below are excerpts from our conversation.
Chris Marquis: Why did you decide to start The Shareholder Commons?
Rick Alexander: I spent the first 25 years of my career as a corporate lawyer, operating under the shareholder primacy model. It isn’t an amoral model—it just posits that externalities are the concern of government, and not of industry. Where limiting pollution or protecting workers is a primary concern, then you relied on regulation, not corporate governance. As time passed, I just realized that clearly wasn’t sufficient. Companies externalized lots of social and environmental costs in order to earn profits, and the government wasn’t always able to address it—for a long list of reasons.
That understanding led me to get involved with the movement to create the public benefit corporation (PBC) law, which gives companies an option to adopt a corporate form that allows them to pursue profit, but still prioritize the effect that they have on systems. I spent four years at as Head of Legal Policy at B Lab working on the problem at the level of individual companies, but I realized that it doesn’t work to just sort of flip a switch and say, “OK companies, now you should prioritize systems over your own financial returns.” Those companies are embedded in a really big, entrenched financial system that is still based on individual company financial return as the measure of success. In our economy, the managers of individual companies make the resource allocation decisions that government would make in a command economy. And ultimately those decisions are judged by one metric, which is whether they’re returning money to shareholders. In that environment, no matter how good any one individual’s motivations are, they’re swimming against the tide if they try to prioritize systemic concerns. It’s not going to work unless we change the paradigm and allowcompanies to take a broader view.
During my time at B Lab I realized there was, in fact, a group that was well-situated to take the broader, systemic view because they had the right incentives and the necessary power over companies: the institutional shareholders. Because when the economy is harmed by cost externalization, the value of a diversified portfolio falls — that’s just math. This idea has been called “universal ownership theory.” When portfolios are highly diversified, like they are at major institutional investors, individual company externalities get internalized by other companies in the portfolio: for instance in their insurance premiums, costs of disasters, reduced demand, reduced productivity, etc. So diversified shareholders need to steward the entire system, not just individual company financial returns. The logic is pretty clear and some asset managers are starting to get it. But understanding it is different than practicing it.
Marquis: What are your organization’s primary areas of focus?
Alexander: At Shareholder Commons, we put our work into three buckets. One is beta stewardship — getting shareholders to vote their proxies to encourage companies to account for their effects on people and planet. That’s ultimately our goal, and everything else is in service of that. Another bucket is building public awareness and trying to change the investing paradigm by giving people an intellectual foundation for thinking differently, using ideas like universal ownership and beta stewardship whereby investors focus on overall, absolute market returns, which is much more important to a diversified investor than the return of their portfolio relative to the market.
The third bucket involves changing the system of corporate laws, securities laws and fiduciary laws that are based on the neoliberal consensus, and more particularly on modern portfolio theory, both of which contribute to the narrative that social value is best achieved if each company tries to maximize its own financial performance, without regard to the externalities it creates. We think these laws are pernicious, because they lead fiduciaries to measure success at the individual company level — and ignore the huge effect of externalized costs. Investors need to understand each company’s effect on the whole economy or whole portfolio. We believe there are lots of areas for legislative and regulatory change but also common law change. We want to see changes in federal law and regulation at the SEC and the DOL, but we also want to see laws change at the state level, because a lot of the fiduciary questions, especially around corporate law, are addressed at the state level.
We worked with B Lab to write a White Paper on this and are also working with them, the U.S. Impact Investing Alliance, and a coalition of 50 impact-oriented organizations to call for the creation of a White House Initiative on Inclusive Economic Growth and for a change in fiduciary duties at the corporate level. We continue to work with B Lab on Capitol Hill — having lots of conversations with Congressional staff members, people at the SEC and other agencies. The administration does have an interest in what we’re doing.
Marquis: That’s exciting progress. Tell me more about the shareholder proposals — the process and how you decided which companies to target.
Alexander: The SEC has rules that say if a shareholder’s proposal meets certain requirements, then the company has to include the proposal in their proxy statement and on their proxy card. It doesn’t cost the shareholder anything other than a stamp and however much work they want to put into advocating for it. You can file campaign material with the SEC, and that’s where a lot of the work is. The other challenge is addressing attempts by the company to convince the SEC the proposal does not meet various regulatory requirements.
One of the challenges of shareholder proposals is that you can use them to ask for change, but they don’t force the company to do anything. Our end goal is to have shareholders hold directors accountable by voting them out of office if companies do not stay within prescribed social and environmental guardrails. For example, the recent IEA report on climate said one thing very clearly: We shouldn’t be drilling in new oil fields. There are many proposals asking companies to make certain climate pledges and disclosures, and while these are very important, none of that necessarily brings them closer to alignment with the Paris Agreement. Companies need to be told “no new oilfields, or shareholders will vote against current directors.” That would be a guardrail. You could imagine a series of guardrails evolving — starting with low-hanging fruit like that example and getting more complicated as time goes on, with a growing number ofshareholders reach consensus on more issues each year.
We held a series of workshops at the beginning of the fall, and we realized that investors weren’t ready for guardrails and that we needed to first do some education around the idea of systems-first investing and beta stewardship. The purpose of our proposal initiative is to help investors think as diversified shareholders and understand why their first priority ought to be stewarding the systems that all of their investments are embedded in.
We selected two forms of proposals to achieve these goals: one asked companies to become PBCs, which would allow them to prioritize systemic impacts over internal financial returns when they conflict. The second form of proposal asked companies to do a gap analysis of some of their sustainability claims. I’ll give you an example of the latter. YUM Brands owns Pizza Hut, KFC, and Taco Bell. Their sustainability report says they care about antimicrobial resistance, and are trying to use fewer antibiotics in their supply chain. But we look at what they’re doing, and we challenge that: What could they do if they were optimizing not for return on investment but for where we need to be to protect ourselves from the growing threat of antimicrobial resistance, which will kill 10 million annually by 2050? Understanding that delta is the essence of beta stewardship. To their credit, YUM agreed to undertake an analysis, so we withdrew our proposal and we are going to work with them this year.
After helping file these two types of proposals, what we found was when companies challenged us at the SEC, the PBC proposal had no problem getting through so that about 15 PBC proposals went to a vote. But when companies challenged the gap analysis proposals, we ran into problems. Only one, at PepsiCo, went through. A gap analysis proposal at McDonald’s wasn’t challenged, so we had a vote on that. Both proposals received 12%, which is excellent for first time proposals.
Our strategy for the next year is to work with the SEC on their analysis of the gap analysis proposals. We think the analysis of these proposals misses the importance of external costs these companies are creating. We also intend to refine our PBC proposals to increase the votes they receive.
Marquis: How did you choose the companies that you targeted for proposals, and how has that list grown over time?
Alexander: First, we found shareholders who are interested in these issues. We chose companies that seem to present a variety of cost externalization issues — some that might impose social costs; others environmental costs. In light of last year’s learnings, this year we will have more of an opportunity to be a service provider to investors who want to use the lens of universal ownership to highlight an issue. This morning we did a lunch-and-learn for a shareholder activist organization, highlighting the tools we offer for addressing critical social and environmental risks created by company behavior. It’s part of our work to get people to understand these issues in a new way.
As part of this effort, we are refining the PBC proposals so they focus on a discrete issue, rather than offering a broad theory of value creation. We want people to realize that a business must be accountable for all the costs it creates.
Fox is a good example. Under last year’s form of PBC proposal, we would have gone to Fox and said, “we want you to convert to a PBC, because from the perspective of most of its diversified shareholders, it’s good to balance your financial interests against costs being externalized to their portfolios.
But this year, at Fox, where we recently helped a shareholder file a PBC proposal, they were more specific and named a specific benefit for the company to pursue in the proposal: providing accurate information to viewers. They are being asked to change their governance, so that their duties run to all stakeholders and, in particular, to address the problem that loose treatment of the facts at Fox may have contributed to social instability and anti-vaccine hesitancy, both of which create significant risks for the entire economy.
There are a lot of investors who own Fox stock because it is in the index that they track, but yet wish Fox would focus more on accuracy. This will be an opportunity for them to insist that asset managers support a proposal that focuses on systemic value, because our materials show that voting for this proposal can help them maximize the return on their overall portfolio, regardless of the effect it might have on the financial returns of Fox itself.