M2 - U2 - Class 20 - CSG and ESG

Question 1

How can shareholders influence corporations?

Answer 1

1. Buy/sell stocks (“Wall Street Walk”)
   > Don’t have to buy stocks… you can walk away and influence the company
2. Vote their representatives onto the board
   > Voting power based on how much you own
   > Most people don’t own stocks but intermediaries do and they vote for you
3. Introduce and vote for proposals (resolutions)
   > Official guidelines to submit shareholder proposal - they can submit this resolutions
4. Engage in activist campaigns
   > Our article! Blackrock

Question 2

how do corporate board elections work

Answer 2

1. election of directors
   > Annual elections at the shareholder meeting
   > Announced in proxy statements - legal statement
   –> Proxy voting.. Proxy..someone else does it
   –> Early spring
2. One vote per share (but there are exceptions)
   > Different kind of stocks (class or preferred) can change your vote power
   > Extra voting power, special kind of stocks, based on last name or status - Zuckerberg example
3. One-year term (each director serves one year and is up for reelection the next year); except for staggered boards (classified boards)
   > Class a, class b etc. one class runs for reelection at a time

Question 3

classified boards - staggered board

Answer 3

xyz inc = 12 members in BOD
class 1 = 3 members (may 2020)
class 2 = 6 members (may 2021)
class 3 = 3 members (may 2022)

Reelection one at a time - Classified boards
Class is artificial distinction (A =/= better than B)
Board has committee that oversees election

Question 4

what is shareholder activism

Answer 4

Actions taken by shareholders with the explicit intention of influencing corporations’ policies and practices
More direct and drastic

Question 5

who are the activists?

Answer 5

Wealthy people, investors, asset management companies
Very Active: pension funds
> Cumulate huge amounts of money and puts it into stocks and corporations
> California pension funds for public employees are very active

Question 6

what are the goals of activists?

Answer 6

1. They want to maximize returns to their investors/investments
   > Corporate raiders (?)
   >Maximize investment by agitating stocks so they can sell when price high
2. Interested in Environmental social issues ESG

Question 7

what are their tactics?

Answer 7

1. public campaigns and announcements
   > Issue letters, statements
2. Negotiations with companies managers directly
   > Phone calls, emails
3. Public stunts - annual shareholder meeting

Question 8

how has shareholder activism grown

Answer 8

less early movers, more aggressive opportunities and refined strategies

Question 9

what do shareholder activists want?

Answer 9

human capital and wok force
climate change and emissions
social opportunities and community
humans rights
product liability and responsibility

Question 10

exxonmobil vs. engine no.1

Answer 10

More needs to be done for climate change

Fossil fuels needed for long term

Net Zero is Engine No. 1’s goal
Impact through capital
Link company makes on climate in long term financial value of company

Making sure board can manage company for the future

ESG

Economic and _ initiative
Vote ETF
Stay invested in companies for a long time and they’ll vote in their elections

Question 11

1. What is Engine No. 1? What kind of company is it?

Answer 11

Investor/Hedge fund
Activist investor

Question 12

2. What did Engine No. 1 want?

Answer 12

Have companies like ExxonMobil to commit to taking climate change serious and aim for zero fossil fuel used

Question 13

3. How did Engine No. 1 win board seats at Exxon? What was their tactic?

Answer 13

The strategy of Engine No. 1 hinged on getting votes from Exxon’s three largest shareholders, BlackRock, Vanguard and State Street, on its side, an uphill climb since such firms often side with management.

Engine No. 1 held only 0.02 percent of Exxon’s shares, giving it a similar portion of proxy votes, while those three institutional investors together accounted for nearly 20 percent of the voting shares

Question 14

4. Can big oil companies like Exxon change its strategy on its own?

Answer 14

They can if they want to but they dont which is why activist investors exist. Sometimes they focus on maximizing profits too much so others will make them care more about stakeholders

Question 15

Not all stakeholders are the same - Barnet - primary vs seconday

Answer 15

Primary stakeholders:
Direct influence
>Actually purchase your stuff etc.
Power
Legitimacy
Urgency

Secondary stakeholders:
Indirect influence
No exchange relationship
Unable to reciprocate

Question 16

Stakeholder management vs CSR (ESG) image and core ideas

Answer 16

society (on top)
firms - primary stakeholder relations - financial returns

Core ideas:
- If company does well to generate profits and you get returns for shareholders = shareholder principle = red dotted line
- If you take care of your primary stakeholders and focus on them specifically, they give back to you through financial success. Small segment of consumers = instructional stakeholder theory= purple line
- **When thinking about societal issues it does not affect just wealthy people or employees but all of us if you do firm actions that will lead to financial returns = CSR and ESG = green line
> Just cuz you do something good for society doesn’t mean you’ll help your primary stakeholders and sometimes its a negative impact for final returns
> ESG/CSR is good for business because……

Question 17

when can CSR benefit the firm? Barnett…

CSR can benefit the firm only through the primary stakeholders (who are appreciative) when:

Answer 17

1. The CSR entails self-sacrifice
   Something you spent money to do and was not easy to do
   EX: wildfire and empty resort (shouldn’t be an opportunity to make money and you shouldn’t sell rooms for premium price)
2. The CSR is costly to the firm
   Shouldn’t be free
3. The CSR is not belated
   You are proactive even before people criticize you
4. The CSR is a sustained effort
   Not just one time has to be consistent and continuous
5. The CSR is not self-promoted
   Paradox because how do shareholders know you do this if its anonymously??
   Publicize this in a smart way without looking like you’re bragging

Green dotted line becomes solid because of these 5 condition

Question 18

What are the ways in which shareholders can influence the company?

Answer 18

Through voting power
Through buying/selling stocks
Submitting resolutions
Activism

Question 19

What is shareholder activism?

Answer 19

Not picketing and chanting but through investing and actions taken by the shareholders and their intentions
Change company strategy and actions through investing

Question 20

What is ESG?

Answer 20

Environmental Social Governance
Guidance for corporations and investors

Question 21

How did Engine No. 1 win Exxon board seats?

Answer 21

Through buying and parenting with big investors (3)
Vanguard, BlackRock and State Street

Question 22

Why does BlackRock advocate for ESG investing?

Answer 22

• Biggest investor in the world specifically coming from the top the CEO
• More people will trust them if BlackRock cares
  Well you never really know his true intentions
• Has impact on other investors - some believe they’re window dressing (pretending) AND state governments were mad because they handle pensions but they were mad cuz they’re supposed to be politically neutral because voters will claim they’re using their money to be “”“woke””” especially in states like Texas

Question 23

Who can save the world: shareholders or stakeholders?

Answer 23

both imo