Board confidence
One board calls out the bias of anti-ESG proxy resolutions
Since 2022, the anti-ESG pressure has been fairly relentless. There have been state-level legislation outlawing ESG considerations in state pensions, blacklists against banks that boycott fossil fuels, and individual activists with deep research abilities shaming companies.
In parallel, we saw one more tactic. In the wake of ESG proxy resolutions, anti-ESG proxy resolutions were filed, primarily focused on anti-DEI.
The strategy was captured in the title of a Bloomberg article in August 2024: For Anti-DEI Groups Swarming Annual Meetings, Even a Loss Is a Win. Even with only 4% investor support on these resolutions, these filings bring attention to an opposing view and, when combined with other tactics, can put the board and company off their game.
Typically, when a shareholder launches a resolution, the board recommends not supporting it regardless of the topic. In response, the proxy statement will include a rebuttal using the company’s existing efforts. Again, this is true of most shareholder resolutions, not just the anti-ESG ones.
Still, for those, an apathetic response only emboldens the filers of these proxy resolutions at company after company.
But then Costco delivered a lesson for boards on how to deal with anti-DEI filings. Admittedly, Costco is not the first company to log a dissent against an anti-ESG proposal, but I like how they went about it. To follow along, check page 35 of Costco’s proxy statement and Proposal 4: Shareholder Proposal Requesting Report on the risks of maintaining DEI efforts.
Proposal 4: The assumption that a focus on DEI is a pecuniary risk
At the crux of the shareholder proposal is this:
It's clear that DEI holds litigation, reputational and financial risks to the Company, and therefore financial risks to shareholders.
The filer, conservative think-tank National Center for Public Policy Research, asks “that the Board conduct an evaluation and publish a report, omitting proprietary and privileged information, on the risks of the Company maintaining its current DEI (including "People & Communities") roles, policies and goals.”
Response Part 1: The code of ethics
If you stop at the first paragraph of the board’s response, you might think you are in for boilerplate content. Yet, there is much more here.
They quickly move into the first section of their response, which they state is their code of ethics.
Costco understands three key stakeholder groups and wonderfully outlines the way DEI intersects materially with each.
Employees: Inclusion boosts talent attraction and retention.
Members (if you aren’t familiar, this means their customers): Costco connects its diverse employee base to original and creative ideas that members enjoy, providing a quick example. In addition, they say that many members appreciate seeing themselves reflected in their employees.
Suppliers: The same originality and creativity listed for Members is also cited here.
I was curious to see if Costco had published a materiality matrix and found a statement that they produce one internally and that perhaps one may be available in late 2025. I would be curious to see how material they rate these stakeholder opportunities, as this information could be supplemental.
Next, Costco addresses a common citation of the filer, the litigation risk, stating that they regularly evaluate their compliance with the law.
They summarize this first section as follows:
Our focus on diversity, equity and inclusion is not, however, only for the sake of improved financial performance but to enhance our culture and the well-being of people whose lives we influence.
This statement encapsulates an informed understanding of the balance between the financials and the stakeholder opportunities. This legal claim seems to be the most aligned of responses from other companies addressing similar proxy resolutions.
Response Part 2: Targeted pushback
For uninitiated board members looking for inspiration and a strong defense, Costco’s board shows how to research and respond. In a beefy single paragraph, they address the ideologies driving these proxy resolutions.
The proponent (filer) professes concern about legal and financial risks to the Company and its shareholders associated with the diversity initiatives.
That one word ‘professes’ drips off the page with contempt, and rightfully so. They build the defense by calling out that the filer, among others, is the litigious risk.
The supporting statement demonstrates that it is the proponent and others that are responsible for inflicting burdens on companies with their challenges to longstanding diversity programs.
From here, the Costco board calls out the real goal of the filer, which is to abolish diversity initiatives, and they bring the evidence. First, they called out a case involving Starbucks, which was filed by the proponent and included politically charged language. Not noted in the proxy statement is that the case was dismissed by the judge with this statement:
This Complaint has no business being before this Court and resembles nothing more than a political platform,” and “[w]hether DEI and ESG initiatives are good for addressing long simmering inequalities in American society is up for the political branches to decide. If Plaintiff remains so concerned with Starbucks’ DEI and ESG initiatives and programs, the American version of capitalism allows them to freely reallocate their capital elsewhere.”
Effectively, the judge aligned with the ‘business judgment rule,’ which protects directors from a review unless the complaint provides sufficient evidence that the board has breached its fiduciary duties. The board should remember this rule before caving on working DEI efforts.
Next, the board addresses cited business cases from the filer where companies have shut down DEI efforts. The focus is on Microsoft, where I work. A report circulating during 2024 claimed that Microsoft had laid off an entire DEI team when only two people from the team had been let go. Costco notes this correction.
For other companies cited in this proposal, now is a good time to articulate your position on DEI clearly. In case you missed it, your pullback is being used as evidence to compound the rollback of these programs. If you need a reminder of their importance, check Part 1 above and remember the business rule.
When you lead with politics, you die by politics
Costco’s board succinctly expresses its disapproval by pointing out the proposal's bias for what it is.
We believe that the proponent's request for a study reflects a policy bias with which we disagree and that further study and reporting would not be an efficient use of Company resources.
Here’s the flaw in this anti-DEI and anti-ESG proposals. Proponents of these filings believe that ESG is values or politically driven. Admittedly, not every ESG-related proxy resolution is material. Still, when you lead with the premise that they all are and attempt to file an opposing proxy resolution, you end up being the one who is laid as a political agent.
Cost shows one approach to defend against these activist anti-DEI proxy resolutions: Do your homework. If you want to see how other companies have responded to similar anti-DEI proposals, I recommend reading the following from Mr. CorpGov. His callouts are an additional helpful resource in supplementing considerations around Costco’s response as you look to construct your own.
Now, I could speculate the reason for this thoughtful response versus others is Costco’s board diversity (four female directors, just over the average at 36%) or that the board influence is relatively evenly distributed (per Free Float Analytics). Certainly, not every board matches Costco, but that doesn’t mean other boards can’t be as well organized or functional in their response. If you’re worried about being a first mover between Costco and others, you don’t have to be.
Of course, it could also be that Costco’s stock has gone up 266% over the past year and 625% over the past five years. They are certainly in a position to lead, which is exactly what they are doing.
An investor should also consider how a company, like Costco, responds and leads in these situations and what it reveals about how well the company is managed. This isn’t the sole reason the board is effective per se, but it speaks volumes about its confidence in its business strategy.
I’d be remiss if I didn’t state that this approach differs significantly from Exxon Mobil’s litigious approach from last year. Suing your shareholders and litigating against their ownership rights is one thing. Calling out the motivations with sufficient evidence is quite the other.
Whether you are a board director, investor, or spectator, I encourage you to look for the proxy results from Costco’s upcoming Annual General Meeting (AGM) in late January. Again, most anti-ESG proposals get under 4% support. If they reach 5% support, the proposal can be brought up again over the coming years.
But as the judge in the Starbucks case stated:
If the plaintiff doesn’t want to be invested in ‘woke’ corporate America, perhaps it should seek other investment opportunities rather than wasting this court’s time.
I couldn’t have said it better!
One last thought
We are already seeing some noisy consumers rallying for a boycott against Costco, so just how confident the board is to hold its position has yet to be seen. In perhaps the last takeaway, we must remember that ESG risks and opportunities will manifest or be maintained in the long term, including those around material DEI issues. Boycotts have effects in the near term and cause damage, but a swing too far away from materiality will be more harmful in the long term.
I’d leave with a last note about the hypocrisy of anti-ESG proposals and the ensuing reputational risks. Anti-ESG proponents who file these proxy resolutions always have a well-organized backup plan to boycott. The boycotts end up doing what Costco is stating: being the risk itself by leading with a particular set of values that erodes value. This is why the proxy resolutions are successful despite receiving little support.
The anti-ESG movement is about forcing values on companies and dictating how they operate. It subverts the proxy resolution process and inserts politics into business, which boards should consider. If boards are to protect value and their fiduciary responsibility, they must shift their responses to the material approach, call out these efforts for what they are, and focus on materiality, as we’ve seen here.