A special note: Before we jump in today, I wanted to thank all of you. I’m excited to share that The ESG Advocate has passed 1,000 subscribers in the past few issues and is quickly growing. Many of you have reached out that you share it with your colleagues.
I appreciate the support!
Two weeks ago, I wrote an open letter to CEOs, mostly themed around why ESG isn’t a dirty word and cannot be ignored.
I left out the emerging management team accountabilities growing out of new pressures. You can see what stayed here:
But, coming out of the 2020 Social crises of COVID and the tragic murder of George Floyd, and with the increasing frequency of extreme weather events, your company is also still sitting on stakeholders, specifically employees, B2B customers, shareholders, and consumers, who put pressure on you to disclose and undergo a sustainable and socially just transition.
These new accountabilities, emerging risks, and shifting social norms are certainly keeping you and your management team on your toes!
The question is, will leadership accountability ever come?
If history is any indicator, it doesn’t look promising. As Matt Moscardi of Free Float Analytics points out, the ongoing lack of accountability is nothing new. Per posts on LinkedIn, Moscardi notes:
The average FOR vote for directors is 96% globally. This despite academic research showing 57% of US companies since 1920 have underperformed treasuries. We positively REWARD the status quo, regardless of merit.
In other words, most companies have underperformed, yet most investors still vote with directors.
Meanwhile, Stuart Kirk over at the Financial Times seems unconcerned in a piece titled We are all hypocrites on corporate governance.
Investors may know bad governance when they see it, but who cares when there’s money to be made?
This line is a compelling shareholder statement that feels right.
Kirk lays out a lot of questionable Governance models, but these are just the beginning. Companies, like Governance models, may not be good or bad performers, but the people who make them up are. From here, he makes the bizarre argument that perhaps out of the three pillars of ESG, Governance has the least to do with performance. Unfortunately, he connects this statement in a false equivalency that connects ESG scores and the acronym in practice at corporates, not in financial services. This correlation places a consistency on research analysts across ESG rating agencies that simply doesn't exist.
Still, the title and that one quote underscore a big problem. Governance only matters when investors lose money, an arbitrary concept around timing the markets. But even when a crisis hits that threatens the stock price and revenues, we don’t see investors caring too much, to Moscardi’s earlier point. We very rarely see investors reconcile with any perceived regret in proxy voting.
Bad Governance is a waiting game that leverages investor traits ranging from ignorance to complacency to greed. Whether this inertia is bad or good may also be an arbitrarily temporal matter, as the status quo is what is ultimately preserved.
Lately, some interesting Governance-related stories have illustrated where pressures are building while the status quo is maintained.
Preserving the status quo
Exxon Mobil is suing activist investors who are looking to bring a non-binding shareholder vote around accelerating the pace of decarbonization. In Exxon’s filing, points 11 and 12 strike at the core of transition risk and possibly stakeholder sentiment.
The 2024 Proposal does not seek to improve ExxonMobil’s economic performance or create shareholder value. Like the previous proposals, it is designed instead to serve Arjuna’s and Follow This’s agenda to “shrink” the very company in which they are investing by constraining and micromanaging ExxonMobil’s ordinary business operations.
By calling for an acceleration in the pace of medium-term reductions across Scope 1, 2, and 3 greenhouse gas (“GHG”) emissions, Defendants are asking ExxonMobil to change its day-to-day business by altering the mix of—or even eliminating—certain of the products that it sells. Defendants’ overarching objective is to force ExxonMobil to change the nature of its ordinary business or to go out of business entirely.
The company also argues that this resolution is substantially close to those filed in 2022 and 2023, which did not pass. The opinion of Exxon Mobil assumes that an energy transition isn’t coming, which would ‘shrink’ the company unless it diversifies.
Another energy player, BP, has activist investor Bluebell Capital Partners calling for cuts to its sustainability commitments in a similar effort to protect the status quo.
Boeing is facing a different type of pressure from its customer, Alaska Airlines, for up to $150M in damages. So far, this pressure is the culmination of the past few years of safety issues for the manufacturer. After the MAX 8 crashes in 2018, the board replaced CEO Dennis A. Muilenburg with the Chairman of the Board and current CEO Dave Calhoun. Before this, Calhoun had been on the board since 2009 and was named lead independent director in 2018.
The question is what Alaska Air Group CEO Ben Minicucci means when he says, “We’re gonna hold Boeing’s feet to the fire to make sure that we get good airplanes out of that factory.” Is that limited to the damages or something else that will shake things up at the company?
Shareholders sued Boeing around the MAX 8, winning $225M in damages in 2021. Calhoun now finds himself in a very similar position, and the lingering question is if shareholders sue again, will anything change from a Governance perspective?
It is hard to miss that Twitter, which is not publicly traded, reportedly lost 72% of its value since Elon Musk took over. As of late, Tesla’s board has been dealing with a string of issues, but in January 2024, the world learned of Musk’s drug use. Yet, he remains CEO. Despite all of this disruption, the status quo remains.
Some investors are still willing to create new opportunities on Musk’s AI play to the tune of $6B (potentially).
Musk is frankly untouchable despite the continued Governance mishandling of his companies. Pressure against the status quo for Tesla specifically is manifesting through employees (Fremont factory workers), the government (NHTSA for self-driving safety concerns), and customers (upset about price drops, Cybertruck, etc.), yet the inertia remains strong.
Governance can work to protect value while driving change
On the other hand, some companies are willing to take the tricky bets they need as civil society changes and risks challenge their business.
Last week, the WSJ reported that the publishing group Penguin Random House is fighting against politically motivated book banning in the US. At a board meeting last May, Skip Dye, SVP of Library Sales and Digital Strategy, spoke up at a board meeting requesting the company take more strategic action. From here, a consistent company-wide shift mobilized around the topic. While I’d hate for you to click away at this point, the article (a ‘long read’) is well worth the time.
Penguin Random House chief Nihar Malaviya stated the following about the issue:
We have two missions: a cultural mission and a commercial mission
If that statement doesn’t say “ESG,” I’m not sure what does. Book bans are a material issue to any publisher looking to support diverse voices while capturing untapped markets.
Last November, Penguin Random House joined a lawsuit against Iowa for its policy on book banning. Ironically, the company is seeking to return to the status quo where books like ‘1984’ and 'Beloved’ and one of my favorites, ‘Slaughterhouse-Five,’ are no longer banned. Still, one could argue that they are also trying to develop new opportunities by supporting their existing authors and new marginalized ones as civil society changes.
Of course, they also recognize the potential to alienate many customers. Taking action on ESG efforts takes work and is challenging.
So it goes.
Will the status quo remain?
It boggles my mind that companies look around at our post-COVID work and think:
They can return to a pre-COVID normal.
Doing what has always worked will continue to work.
Taking our planet into account for a second shows that the table stakes of an extractive economy will no longer be sustainable.
What companies miss in preserving the status quo, assessing transition risk timing, and ignoring Governance performance is the assumption that the market is working at its maximum performance. If companies consistently had quality Governance, wouldn’t that help them perform more consistently over the long term? Certainly, they would know better than investors when to move on something and when to hold.
As companies progress, there are other keys to growth than the status quo. Think of it like this. An energy company shouldn’t drill more. They should see the market trends and diversify to where energy is going. When faced with a crisis and sinking shareholder sentiment, the company shouldn’t just put another familiar face forward from the board. It should track the problem, hold directors accountable, and course correct.
And when bullies come into your backyard and pick a fight, you defend yourself.
Overall, I see the tide turning. However, whether 2024 will be a new year for accountabilities remains to be seen.