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E-MailPaul Rissman is Co-Founder of Rights CoLab. This post is based on his Rights CoLab memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).
On 13 February 2020, in the little town of Laurel, Mississippi, poultry processing company Sanderson Farms held its annual general meeting. On the proxy statement that day was a shareholder resolution requesting that the company publicly report on climate-related water risks to its business according to Sustainability Accounting Standards Board (SASB) standards. Sanderson’s Board stood against the resolution, urging shareholders to reject it.
The shareholders set to vote included behemoth institutional investor BlackRock, Sanderson’s largest shareholder, holding 10% of the company’s stock. BlackRock has been well known to vote against shareholder resolutions. But this time observers had reason to expect something different. One month before this AGM, BlackRock CEO Larry Fink had released his annual letter to CEOs of virtually all public companies around the world, announcing that BlackRock would elevate climate-related and social investment risk as priorities.
Much of the letter centered on a request that companies report on financially material sustainability issues, as defined by SASB and the Task Force on Climate-Related Financial Disclosures. BlackRock “will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” according to the letter.
The Sanderson Farms SASB resolution made the perfect test case. Would BlackRock risk hypocrisy by rejecting a resolution based on the very disclosure it had just championed? It remains unclear.
The resolution failed, receiving only 11% support. Although BlackRock typically doesn’t disclose its voting until late summer, simple math seems to show that the asset manager did not support it. Since BlackRock holds 10% of the shares, that would leave only 1% of all remaining shareholders supporting the resolution, which is unlikely. Despite its change in emphasis, BlackRock apparently violated its own public commitment.
Or had it? Typically, an 11% vote is the end of the story, at least until the next annual meeting when the shareholder may try again. Yet, in this case something unusual happened. Later that same day, a Sanderson press release informed the public that it was going beyond the request of the resolution to issue a report fully compliant with all applicable environmental and social standards set by SASB. Notably, the press release explained that, after “recent extensive engagement with many of its largest stockholders, and in recognition of evolving investor expectations in regard to sustainability reporting,” Sanderson had reversed course.
This speaks volumes about the new roles large investment advisors have assumed in monitoring and improving the environmental, social, and governance (ESG) responsibilities of the corporate sector. This position responds to a customer base that is increasingly interested in sustainable investment products, as well as to pressure from academia, their own investors, grassroots activists, and even Congress to be better stewards of corporate holdings. As a result, mainstream investors advertise their aspirations to be sustainability champions, including by joining the UN Principles for Responsible Investment (UN PRI).
Corporate responsibility advocates have had high hopes that mainstream investors would begin to discipline unethical corporations. The “big three”—BlackRock, Vanguard, and State Street Global Advisors—have the heft to change corporate behavior for the better. Together they control at least 20% of U.S. stocks, as well as vast amounts in companies around the world. This gives them disproportionate influence over corporate management—including by exercising the “nuclear option” of corporate governance: voting against directors when they are displeased with management.
These aspirations for investor-driven behavior change are often disappointed, however. For their part, giant money managers have found themselves in a bind. Following U.S. securities law, mainstream investors construe their fiduciary duties to mean that supporting ESG issues must result in monetary benefits for their customers, otherwise they are impermissible. This focus on “financial materiality” forces shareholders away from corporate behavior that affects people and planet, unless it also affects the bottom line. The big three have had difficulty aligning stewardship with fiduciary duty… until SASB.
As I have written in other posts, SASB sets itself apart from other sustainability standards by being solely concerned with financially material topics. SASB disclosure standards, finalized in November 2018, allow U.S. fiduciaries to promote good ESG practices within the bounds of the law.
Following BlackRock’s announcement in January 2020, the rest of the big three publicly stated that SASB was their preferred monitoring tool. The CEO of State Street Global Advisors put out his own letter to directors of public companies around the world, promising to “take appropriate voting action against board members” of companies whose ESG performance scores, based on SASB financially material topics, were lagging. Vanguard didn’t follow suit, but did reaffirm their engagement strategy focuses on financially material (SASB) disclosures.
When the shareholder proposal requesting nothing more than SASB-compliant disclosure came to the floor at the Sanderson AGM, these public statements took on even greater significance. Sanderson not only acceded to the proponent’s demands, it acceded to BlackRock’s as well by publicly committing to producing a complete SASB-compliant report anyway. BlackRock won its disclosure, and Sanderson dodged a governance bullet.
It is hard to know exactly what happened behind the scenes to produce this result. One theory concerns the pattern of votes for Sanderson directors. While all were re-elected with large majorities, lead independent director Phil Livingston received more “no” votes than the others, nearly 8% of the total. Lead directors are common targets when investors wish to deliver a symbolic rebuke to management. Shareholders vote against directors for a variety of reasons, but in any case, Sanderson got the message.
In the first test of the year, it appears that the wishes of advocates that the big three investors exercise their influence to force companies to be responsible may come true. We’ll see this spring—when three more SASB-based resolutions will come to a vote—whether large mainstream money managers have in fact assumed the role of “shadow ESG regulators.” It will be an exciting proxy season for anyone interested in corporate ESG governance!
