Strategic CSR - Earnings guidance

Well, this isn't exactly the rationale I was hoping for, but the article in the url below notes that more companies are refusing to issue quarterly earnings guidance -- a blow to the short-term thinking (and misguided focus on shareholder value) that dominates our economic system: 

"Et tu, Walmart. Analysts covering the world's largest retailer will have to sharpen their pencils now that it has joined several other companies in scrapping quarterly earnings guidance (it kept it for the full year)."

It seems that the uncertainty injected into the economy, in recent months, is the 'excuse' CEOs are drawing on to avoid the glare of quarterly expectations:

"'Uncertainty' is practically a dirty word on Wall Street. After competitors scrapped their public forecasts, United Airlines instead took the unusual step last month of publishing two scenarios—one for a recession and another for an expansion."

As the author notes, however, the better approach might have been to scrap earnings guidance (i.e., not earnings reports) altogether:

"Unfortunately, that is a luxury mainly available to elite CEOs who are extremely secure in their jobs: Apple's Tim Cook, JPMorgan Chase's Jamie Dimon and, of course, Warren Buffett, who recently announced his impending retirement after six decades running Berkshire Hathaway."

Such a narrow focus on shareholder value, of course, is a relatively recent phenomenon, driven by neoliberal economic theory in the twentieth century (which resulted in most CEOs today being paid using stock options). But there is a strong argument to say that, not only is shareholder value a theory (rather than a legal fact), but that a singular (or even primary) focus on delivering it can be counterproductive to the long-term interests of the organization:

"Henry Singleton might be the greatest example of an executive who delivered with minimum regard for what Wall Street thought. Teledyne, the conglomerate he founded and ran for almost three decades, was a hot stock in the 1960s. … He was 'the smartest businessman I ever knew,' said the late Charlie Munger, who was vice chairman of Berkshire Hathaway."

 

Broad stakeholder support for not issuing guidance, particularly from the board and other key stakeholders, is what is required for CEOs to have the confidence to make decisions for the medium to long term, which is how the optimal level of value is created. While somewhat regular earnings reports are essential to allow for adequate oversight and governance mechanisms, quarterly earnings guidance is an unnecessary legacy of a disproportionate focus on shareholder value, which can be unhealthy, as noted in the article in the second url below:

 

"What would not be painful: a voluntary reduction in 'quarterly guidance,' or forecasts, by executives about how they expect their companies to fare. Warren Buffett of Berkshire Hathaway and Jamie Dimon of JPMorgan Chase recommended this change in a Wall Street Journal essay in 2018. Companies routinely use these forecasts to manipulate the expectations of financial analysts so that when earnings reports ultimately arrive, they constitute 'positive surprises' that set off rallies in the companies' shares."

 

While the article in the third url below suggests this development is gaining momentum and possibly being extended to earnings reports:

"The Securities and Exchange Commission is preparing a proposal to eliminate the requirement to report earnings quarterly and instead give companies the option to share results twice a year, according to people familiar with the matter. The regulator could publish the proposal as soon as next month."

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (6e)

© Sage Publications, 2023

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler6e  

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

Elite CEOs Don't Need Earnings Guidance

By Spencer Jakab

May 16, 2025

The Wall Street Journal

Late Edition – Final

B12

https://www.wsj.com/business/elite-ceos-dont-need-earnings-guidance-a0e5de93

 

Is The the Time to End Quarterly Earnings Reports?

By Jeff Sommer

October 5, 2025

The New York Times

Late Edition – Final

BU4

https://www.nytimes.com/2025/10/02/business/trump-earnings-reports-investing-stocks.html

 

SEC Prepares Proposal to Eliminate Quarterly Reporting Requirement

By Corrie Driebusch

March 16, 2025

The Wall Street Journal

https://www.wsj.com/finance/regulation/sec-prepares-proposal-to-eliminate-quarterly-reporting-requirement-1d700bbb

Strategic CSR - ESG

At a time when ESG is being attacked on all sides (the acronym, rightly so; the underlying sentiment, incorrectly), Barron's annual ranking of the "Top 100 Sustainable Companies" appeared in the article in the url below. You might be surprised at the No.1 company on the list (for the second year running):

"Clorox holds the crown for the No. 1 spot on the list for the third consecutive year. The consumer staples company, which owns household brands such as Burt's Bees, Glad, and Hidden Valley Ranch, scores high based on environmental factors, product safety and quality, and governance. While last year the company stood out for achieving gender pay equity, this year it gets kudos for linking executive compensation to how well they meet their sustainability goals."

In fact, I was quite surprised at how many manufacturing companies made the Top 10 in the table accompanying the article: 

Overall, the story was surprisingly positive:

"… while ESG critics have been cranking up the volume, the better barometer of the sustainability movement's strength comes down to a simple question: How committed are large companies to their sustainability goals? For now, most aren't backing off them, and many are making significant advancements."

As with such lists, the methodology was biased and opaque, but at least the ultimate DV seems appropriate – "operations and risk":

"The 100 companies on our list this year span market capitalizations ranging from American States Water's $2.8 billion to Nvidia's $3.4 trillion—companies that were ranked No. 73 and No. 74, respectively, on their sustainability. To evaluate all the companies, Calvert considered practices under five themes—the planet, workplace, customers, community, and shareholders—and assigned each company weightings for the categories based on what is most relevant to their business operations and risks."

It was good to see a positive narrative around a topic that has been nothing but doom-and-gloom for several months:

"The symbiosis between sustainability and efficiency at the top 100 companies often translates well for investors. In the first six years of Barron's ranking, the group outpaced the S&P 500. The 100 badly trailed the index's 25% and 26% returns including dividends in 2024 and 2023, respectively. But in those years, seven technology stocks fueled most of the S&P 500's return because the index is weighted by market capitalization."

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (6e)

© Sage Publications, 2023

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler6e  

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

Top 100 Sustainable Companies: Coping with Anti-ESG Sentiment

By Karen Hube

February 24, 2025

Barron's

Late Edition – Final

18, 20, 22

https://www.barrons.com/articles/most-sustainable-companies-energy-esg-dei-4e590fda

 

Strategic CSR - ESG

The article in the url below updates a newsletter I sent in September about how executives, in the face of growing ideological polarization around ESG-related issues, are engaging in "green-hushing" by mentioning ESG less often on quarterly calls (see Strategic CSR – Green-hushing):

"Many companies no longer utter these three letters: E-S-G. Following years of simmering investor backlash, political pressure and legal threats over environmental, social and governance efforts, a number of business leaders are now making a conscious effort to avoid the once widely used acronym for such initiatives."

Instead:

"On earnings calls, many chief executives now employ new approaches. Some companies, including Coca-Cola, are rebranding corporate reports and committees, stripping ESG from titles. Advisers are coaching executives on alternative ways to describe their efforts, proposing new terms like 'responsible business.' On Wall Street, meanwhile, some firms are closing once-popular ESG funds as interest fades."

The chart accompanying the article, illustrating the number of S&P 500 firms that refer directly to "ESG" in their quarterly earnings calls, is instructive:

This pattern is replicated within firms, also, including some of the most high-profile advocates for ESG. For example, I saw this chart recently from Bloomberg about Larry Fink's BlackRock:

 

And, even more dire, in New Hampshire (and a few other U.S. states), the Republican-led legislature has tried to criminalize ESG investing:

"Republican lawmakers in New Hampshire are seeking to make using ESG criteria in state funds a crime in the latest attack on the beleaguered investing strategy."

My own reaction to this is that the pushback against the ESG 'industry' is justified, but is being motivated by the wrong reasons. Although the partisan rhetoric can be wildly misleading, the lack of consistent definitions and measurements, let alone agreement on what even should be measured, means the ESG industry only has itself to blame (see Strategic CSR – ESG). Moreover, the focus has been almost exclusively on the "E," with little discussion around the huge (and equally essential) areas of the "S" and the "G," which few people understand and even fewer know how to measure. The emergence (and advocacy) of ESG, although no doubt due to good intentions, has been a mess and has set-back the cause as a whole. Because it was so poorly thought-through, the opening was created for those with an ideological agenda (or even for those who just care to exploit the information asymmetry to make money) to wade in, and the result has been both ugly and extremely unhelpful.

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (6e)

© Sage Publications, 2023

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler6e 

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

Companies Avoid Mentioning ESG, The Latest No-No

By Chip Cutter and Emily Glazer

January 10, 2024

The Wall Street Journal

Late Edition – Final

A1, A6

https://www.wsj.com/business/the-latest-dirty-word-in-corporate-america-esg-9c776003

Strategic CSR - Engine No.1

Over the summer, you may have read about the environmental activist investor (Christopher James) who took on Exxon with his hedge fund (Engine No.1) and won 3 board seats, all against the strenuous protests of Exxon's CEO and senior management:

"Mr. James, 51 years old, was an unlikely catalyst for change at an energy giant. After making a name for himself during the dot-com boom and bust, he operated an Illinois coal mine and built storage facilities used by the oil-and-gas companies. Away from work, however, he supported conservationist causes. The Exxon campaign offered a chance to align his personal values with an investment thesis—that the giants of the oil industry would drop in value unless they embraced a transition to renewable energy."

What I found interesting about this story, though, was not the victory itself, but the disconnect between the media portrayal of Engine No.1's three director nominees and the arguments James used to secure their election. The media coverage appeared to suggest that these three directors would convert Exxon's board into a bunch of tree huggers. As the article in the url below makes clear, however, in reality the directors were only successfully elected because they made it clear their goal was to create value for Exxon's shareholders. Rather than a bunch of environmental radicals that wants to turn Exxon upside down, Engine No.1 advanced a goal that was centered purely on the firm's business interests:

"In its December note to Exxon's board, Mr. James's fund called on the company to slash expenses on projects that might lose money when oil and gas prices are low, realign management incentives and develop a plan to invest in renewable energy. 'If we're right on getting Exxon to mitigate these impacts, the stock should go up,' Mr. James said in an interview. 'And maybe Exxon does have a future.'"

It was only Exxon's poor economic performance in recent years (in particular, its inefficient allocation of capital) that made it vulnerable even to these benign arguments; not the fact that it is a fossil fuel company that bases its worth almost completely on assets that will have to remain unexploited if we are to have any hope of preserving the integrity of our environment:

"They chose Exxon as their first big target because it had already drawn the ire of a number of other large shareholders for its lackluster performance and refusal to engage. The Engine team also knew that Exxon was a familiar name to investors of all sizes, assuring the campaign would resonate with many of the company's individual shareholders. Some Exxon investors had also questioned why Exxon hadn't added more directors with industry expertise."

In short, the Exxon campaign was not at all about sustainability and all about shareholder value:

"[On] calls with shareholders, [the] pitch was to steer clear of ideological arguments about climate change. Instead, [Engine No.1] said investors should focus on how much value had been lost. The proposed directors on these calls said the company needed to perform better and had allocated capital poorly over a decade."

As the article notes, the performance of Exxon's stock price in the months following the announcement of Engine No.1's campaign reveals the success of the campaign, and the extent to which shareholders have already benefitted:

 

 

Time will tell as to whether the environment will do nearly as well.

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

© Sage Publications, 2020

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e 

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

The Man Who Battled Exxon – and Won

By Justin Baer and Dawn Lim

June 12-13, 2021

The Wall Street Journal

Late Edition – Final

B1-B2

https://www.wsj.com/articles/the-hedge-fund-manager-who-did-battle-with-exxonand-won-11623470420

 

Strategic CSR - Revlon

The article in the url below dives pretty deep into the weeds of U.S. corporate law, but it is potentially an important step in the direction of tighter corporate governance (increasing the burdens placed on a firm's board of directors) and against one of the few remaining 'rights' that shareholders possess. Specifically, the article covers a recent decision in U.S. federal court:

"In a little-noticed December ruling in a case involving a failed 2014 leveraged buyout, Jed S. Rakoff, a federal judge in the Southern District of New York, threw some sand into the otherwise well-lubricated gears of what has been a 40-year financial bonanza. It's about time we started asking tough questions about the ramifications of loading up companies with huge amounts of debt they will surely have difficulty repaying."

Specifically, because the board's decision to sell the company knowingly placed the firm with a debt load that was likely to force it into bankruptcy, the judge held that the board had been "reckless" in its decision and are therefore liable:

"In other words, Judge Rakoff said in his ruling, officers and directors had better think twice before agreeing to sell a company to a buyout firm. What had for decades been considered a virtue — selling a company for a market-clearing price to the benefit of existing shareholders — might have become a vice. Judge Rakoff's decision 'has the potential of really blowing up,' said Brian Quinn, a law professor at Boston College."

The facts of the case, in the opinion of the judge, mean that the directors are not protected by the business judgment rule:

"Judge Rakoff … said [the board] could not take cover behind the business judgment rule, which usually protects directors from being held accountable for past business decisions so long as they were made in 'good faith.'"

The author of the article, who was a former investment banker (specializing in M&A), argues that this case has implications beyond the specific facts (in spite of idiosyncrasies that suggest it might have limited influence) because it challenges the long-held 1986 decision by the Delaware Supreme Court known as 'Revlon.' Revlon applies as precedent during the sale of a firm and is important because it establishes the burden on directors during the sale to seek the highest price possible for shareholders, irrespective of the wishes of other stakeholders in the firm. This recent decision suggests this may no longer be the case:

"The ruling has the potential to hold accountable those responsible for allowing otherwise solvent companies to be sold into circumstances that would soon enough cause their bankruptcy. … In the wake of Judge Rakoff's ruling, Big Law quickly sought to warn clients that officers and directors of companies needed to be more vigilant about who they agree to sell a company to and what the buyer plans to do with it. The days of just selling a company to the highest bidder regardless of the consequences — the legal standard on Wall Street since the Delaware Supreme Court decided the so-called Revlon case in 1986 — might just be over."

If so, then this case would be another nail in the coffin of the idea that 'shareholder democracy' has any substantive meaning in the U.S.

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

© Sage Publications, 2020

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e 

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

The End of Private Equity

By William D. Cohan

March 1, 2021

The New York Times

Late Edition – Final

A19

https://www.nytimes.com/2021/02/28/opinion/business-economics/private-equity-reckoning.html

Strategic CSR - CEO pay

I regularly see articles on this topic, but the article in the url below does a good job of undermining the myth that the market for CEOs (and the debate around how much they earn) is driven primarily by performance:

"'Pay for performance' has been the mantra of America Inc over the past few decades. A small circle of influential pay consultants, compensation analysts and academics has argued that American firms must pay top dollar for top candidates because they compete in a global market for talent. They argue that firms have grown more complex and bosses must know how to manage new technologies and the vagaries of globalisation. The controversial corollary is that pay should be allowed to rise ever higher because superior CEO performance is maximising shareholder returns."

This argument has certainly fared CEOs well as their salaries have risen rapidly, especially when compared to leaders in other countries:

"… the median CEO compensation at big American firms in the S&P 500 share index reached $14m last year. America's top earners made far more. Alphabet's Sundar Pichai received a cool $281m. The sums are considerably smaller across the Atlantic, where pay practices have historically been more restrained. The ten best-paid British bosses together did not make as much as Mr Pichai in 2019."

As a result, these expanding pay packets are increasingly coming under scrutiny as the concept of 'performance' is expanding:

"Such numbers were setting off alarm bells before the covid-19 crisis. Now the mass lay-offs and bleeding balance-sheets resulting from the recession have brought it into stark relief."

The cause for concern centers around the construction of executive compensation:

"The favoured measure of performance is a company's total returns, which combine share-price moves with any dividend payouts. As a consequence of a record bull market in equities after the global financial crisis of 2007-09, only brought to a halt by the covid-19 pandemic, executive pay in America shot up into the stratosphere."

Of course, the intellectual underpinnings of this compensation structure is principal/agency theory—the idea that shareholders are the owners of firms (not true, but anyway …) and that stock options effectively align their interests with those of the executives. The extension of this argument is that, if executives are able to create value for the 'owners,' they should also be rewarded. In other words, 'good' CEOs create value for shareholders, which justifies the compensation they receive. In fact, as the article does a good job of pointing out, the relationship between CEO pay and firm performance is weak, at best:

"In 2017 MSCI, a research firm, published its analysis of realised chief-executive pay between 2007 and 2016 at more than 400 big public American firms. At more than three-fifths of the firms, it showed no correlation with ten-year total returns."

This chart in the article demonstrates as well as anything that the relationship between CEO pay and firm performance is virtually nonexistent:

https://www.economist.com/sites/default/files/images/print-edition/20200711_WBC388.png

A common phenomenon seems to be that, when the firm performs well the CEO is more than happy to take the credit, but when the firm does badly then the weak performance was due to exogenous factors. The reverse of this can work in the CEO's favor when they benefit from stock market gains that are driven primarily by exogenous factors. For example:

"A recent paper … finds 'strong evidence' that bosses of energy firms see clear pay gains when stock valuations rise as a result of an oil-price spike which they have no way to influence."

In some cases, the discrepancy between pay and performance can be stark:

"The bosses in the top pay quartile made twelve times what those in the bottom quartile did, but produced financial returns only twice as good. The bosses in the second-lowest pay quartile made nearly three times as much as those in the bottom quartile, even though their firms' total returns were actually worse."

There is clear evidence that the practices boards of directors currently use to set CEO pay create perverse incentives and do not achieve what they are designed to achieve:

"Compensation committees often rely on advice—and political cover—from pay consultants. A recent study of 2,347 firms … finds that companies using consultants pay more. Independently, those with higher pay and more complex pay plans are also likelier to hire advisers. Most problematic is their use of pay benchmarking, which has led to the ratcheting-up of pay for all bosses."

Hopefully, boards will come to their senses and develop alternative metrics that capture the performance they aim to reward. Alternatively, why do CEOs need bonuses and incentive structures? Why not just pay them a straight salary and fire them if they do not do their job?

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

© Sage Publications, 2020

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e 

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

Pay guaranteed, performance optional

July 11, 2020

The Economist

Late Edition – Final

65

https://www.economist.com/business/2020/07/11/how-ceo-pay-in-america-got-out-of-whack

Strategic CSR - BRT

The article in the first url below reviews progress by signatory companies to last year's statement on stakeholder capitalism by the Business Roundtable, BRT (see Strategic CSR – Business Roundtable and Strategic CSR – Business Roundtable (II) and Strategic CSR – Business Roundtable (III)). In the original statement, "the CEOs of more than 180 major companies" pledged to broaden their purpose to focus on all stakeholders, rather than merely shareholders. The media responded very positively to this and influential voices in academia have heralded the statement as an important turning point in the evolution of the stakeholder perspective (e.g., see here). The article below, in contrast, sets out to collect data to see whether this optimism has necessarily turned out to be warranted:

"Although the Roundtable described the statement as a radical departure from shareholder primacy, observers have been debating whether it signaled a significant shift in how business operates or was a mere public-relations move."

This attempt to quantify whether each company was genuine in its intent focuses on the extent to which the decision was treated as important, internally:

"Major decisions are typically made by boards of directors. If the commitment expressed in the statement was supposed to produce major changes in how companies treat stakeholders, the boards of the companies should have been expected to approve or at least ratify it."

Specifically, they operationalized this in terms of who was the highest authority who signed-off on the decision:

"We contacted the companies whose CEOs signed the Business Roundtable statement. … Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors."

The researchers then reflect on the possible interpretation of these findings:

"What can explain a CEO's decision to join the Business Roundtable statement without board approval? Even 'imperial' CEOs tend to push major decisions through the board rather than disregard it. … The most plausible explanation for the lack of board approval is that CEOs didn't regard the statement as a commitment to make a major change in how their companies treat stakeholders. That may be because they believe their companies are already meeting the standard for taking care of stakeholders. But it still implies that they believed signing the statement wasn't a major step for their businesses."

To reinforce the idea that any major change in focus by the statement's signatories should have been approved by the Board, the researchers checked the governance documents for each company. They found these documents are essentially unchanged and "mostly reflect a clear 'shareholder primacy' approach":

"Take the corporate governance guidelines of JPMorgan Chase, whose CEO, Jamie Dimon, chaired the Business Roundtable at the time the statement was issued. These guidelines state that 'the Board as a whole is responsible for the oversight of management on behalf of the Firm's shareholders.'"

Johnson & Johnson is another example cited:

"The corporate governance guidelines of Johnson & Johnson —whose CEO, Alex Gorsky, served as chairman of the Business Roundtable Corporate Governance Committee—indicate in clear terms that 'the business judgment of the Board must be exercised . . . in the long-term interests of our shareholders.'"

The article concludes:

"The evidence is clear: Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value."

While I am not sure these data are quite as definitive as the authors suggest, they are certainly not an indication that things have changed. It is still early, but these studies are beginning to emerge and I have not seen one that paints the BRT signatories in a positive light. For another, more recent example, see the article in the second url below:

"The coronavirus, its attendant economic devastation and the ongoing movement against racial injustice have collectively posed the first test of the lofty words proclaiming a kinder form of capitalism. The results have fallen short of the promise, according to a study released Tuesday and obtained in advance by The New York Times. The Business Roundtable's statement of a purpose of a corporation, released last year, was touted by prominent executives as a landmark in the evolution of corporate governance. But its signatories have done no better than other companies in protecting jobs, labor rights and workplace safety during the pandemic, while failing to distinguish themselves in pursuit of racial and gender equality, according to the study."

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

© Sage Publications, 2020

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e 

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

'Stakeholder' Capitalism Seems Mostly for Show

By Lucian Bebchuk and Roberto Tallarita

August 7, 2020

The Wall Street Journal

Late Edition – Final

A15

https://www.wsj.com/articles/stakeholder-capitalism-seems-mostly-for-show-11596755220

Stakeholder Capitalism Falters in Study

By Peter S. Goodman

September 22, 2020

The New York Times

Late Edition – Final

B1, B4

https://www.nytimes.com/2020/09/22/business/business-roudtable-stakeholder-capitalism.html

Strategic CSR - SRI/ESG

I find the debate around SRI/ESG (socially responsible investing/environmental, social, and governance) to be largely artificial and somewhat distracting. It seems to me that, given the difficulties we face measuring CSR (even defining CSR), identifying correlations between some set of compromise variables and firm performance is spurious (to put it generously). In other words, the filters that structure these investments (such as low pollution levels, or director diversity, or employee pay ratios, or whatever measure you like) miss the point. Primarily this is because, in my mind, CSR is everything the firm does (not easily identifiable parts), but also because this research suffers from omitted variable bias. That is, it is the progressive executive team that adopts good environmental practices (or diverse directors or equitable pay practices), so it is the progressive executive team that predicts performance (not the various practices they adopt). With this in mind, the article in the url below adds another important (and rational) explanation for why much of the discourse around SRI/ESG is misleading. In particular, it identifies a flaw in the argument intended to legitimize this industry—that investing in social responsibility need not compromise performance:

 

"The trouble is, even badly run companies, big polluters or terrible employers have some price at which they will be profitable investments. A recent example is the rebound in the sector environmentalists love to hate: Coal miners globally have returned almost 20% in the past 12 months in dollar terms, double the world market, according to Datastream indexes."

 

Beyond the challenges associated with measuring social responsibility, whenever you constrain choice there is a good chance you will affect outcomes. Similarly, if a lack of demand pushes the price of one stock down, that only makes it a more attractive investment (presuming it is an ongoing, profitable business). It is this same logic that undermines much of the oil and gas divestment activism:

 

"Lower stock prices mean a higher cost of capital for the company, which should hurt. But cheaper shares in the same business mean buyers should expect higher returns in future than they did before. If the do-gooders are successful in driving down stocks, the new shareholders in the badly behaved business should outperform, and the do-gooders underperform."

 

The Figure in the article that shows total returns of the coal sector relative to all stocks is enlightening. The article also has another Figure showing how much individual firms have varied in ESG ratings—reinforcing the idea that we really have no idea of how to measure CSR. But, none of this means that SRI/ESG products are not viable. It just means that, if the industry is to be successful, it has to be more honest with potential customers/investors. Just like there is a cost to purchasing a higher quality product (expressed in terms of a price premium), there is a cost to investing using one or more SRI/ESG filters. Given that reality, customers can choose. The added value comes from knowing that certain firms and industries are being avoided—that investments are aligned with values. But the cost, over the medium to long term, almost by definition, is likely to be lower returns.

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

 

If You Want to Do Good, Expect to Do Badly

By James Mackintosh

June 29, 2018

The Wall Street Journal

Late Edition – Final

B1

https://www.wsj.com/articles/if-you-want-to-do-good-expect-to-do-badly-1530185698

 

Strategic CSR - Elizabeth Warren

The article in the url below is by Senator Elizabeth Warren (Democrat, Massachusetts), who announces the legislation she recently introduced aiming to broaden the accountability and transparency of corporations. The reason, she states, is largely reciprocal:

"American corporations exist only because the American people grant them charters. … What do Americans get in return? What are the obligations of corporate citizenship in the U.S.?"

 

The answer to that question, according to Warren, has clearly evolved:

 

"As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations 'have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.' … [However] By 1997 the Business Roundtable declared that the 'principal objective of a business enterprise is to generate economic returns to its owners.'"

 

The result has been a shift in the allocation of resources, toward shareholders and away from other stakeholders:

 

"In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders."

 

Correcting this, Warren suggests, will help address the more fundamental issue of income inequality in the U.S. Her legislation ("The Accountable Capitalism Act") is designed to do that:

 

"Corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter. The new charter requires corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions."

 

She claims that this proposal is inspired by the spread of benefit corporations. Some interesting additional aspects of the proposed law:

• "Employees would elect at least 40% of directors."
• "At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures."
• "… directors and officers would not be allowed to sell company shares within five years of receiving them—or within three years of a company stock buyback."
• Also, shareholders (meaning anyone who has a single share in the company) "could sue if they believed directors weren't fulfilling those obligations."

So far, so populist. By claiming that "companies shouldn't be accountable only to shareholders," however, Warren perpetuates two key misunderstandings in the CSR debate: First, is a misunderstanding of U.S. corporate law. Firms are, in essence, already not legally required to act in the interests of their shareholders. As Bower & Paine state in their Harvard Business Review article last year, such a claim of shareholder primacy "is flawed in its assumptions, confused as a matter of law, and damaging in practice" (see also the detailed discussion on this issue in Chapter 6 of the 4e).

 

Second, and more important, however, is that, in reality, firms are already accountable to all stakeholders. The issue in western capitalism is not that firms are not accountable to these stakeholders, but that stakeholders do not enforce the leverage they have over firms. Or, perhaps, they engage in some kind of willful shirking, where they make micro decisions that satisfy their self-interest, but complain at the macro effects of these decisions when they are aggregated. To illustrate – I might shop at Walmart because they have the best quality at the cheapest prices (which is something I might value), but then I might complain when all the Mom & Pop stores close down in my town, without recognizing that the reason they are shutting down is because people like me prefer to shop at Walmart than the Mom & Pop stores.

 

For capitalism to work as effectively as possible, stakeholders need to hold firms accountable for the behavior they truly want. If we all want to shop at Walmart (or Amazon, or wherever), then that company will quickly dominate the retail landscape. If we want something else, however, then we have to be willing to enforce that, and accept any sacrifice (i.e., higher prices) that might come with that decision. If we do not want to pay the higher prices, then we should stop complaining about the outcomes that are generated from the decisions we make (the value we truly seek).

 

For further commentary on this proposed legislation, see: https://www.aspeninstitute.org/blog-posts/is-america-ready-to-make-capitalism-accountable/

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

 

Companies Shouldn't Be Accountable Only to Shareholders

By Elizabeth Warren

August 15, 2018

The Wall Street Journal

Late Edition – Final

A15

https://www.wsj.com/articles/companies-shouldnt-be-accountable-only-to-shareholders-1534287687

 

Strategic CSR - Shareholder democracy

If the fiction of shareholder democracy needed any more exposure, the article in the url below highlights the weak powers that shareholders have to influence directly the running of corporations. In particular, the article focuses on what it terms "zombie directors":

 

"They're board members who've failed to get a majority of shareholder votes in elections but continue to serve. From 2012 to 2016 there were a total of 225 instances where directors of public companies got less than half the votes cast, but only 44 directors, or 20 percent, left within the next election cycle, according to a Bloomberg analysis of data from ISS Corporate Solutions Inc. The directors who stayed included 30 who were snubbed by shareholders more than once."

 

In contrast to many shareholder votes, where the results are nonbinding on management, director elections are binding. Rather than a majority needed to be elected, however, most firms allow directors to be elected with a plurality of votes. This means merely that they need more votes than any other candidate and, since most directors run unopposed, 1 vote is all they need to be duly elected:

 

"In response to investor and activist complaints, companies have been agreeing to new standards under which directors who don't receive a majority of votes have to submit a letter of resignation. Currently, 54 percent of companies require a director to do so. The hitch: The board usually isn't required to accept those resignations and can reinstate the unelected director."

 

The article lists a number of such examples, with some directors failing to receive a majority of votes multiple times:

 

"In each case, the directors reviewed the voting results and chose not to accept the resignations, citing their colleagues' value to the company, according to regulatory filings."

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

 

With 'Zombie' Directors, It's the Board of the Living Dead

By Jeff Green and Alicia Ritcey

August 10, 2017

Bloomberg Businessweek

https://www.bloomberg.com/news/articles/2017-08-10/with-zombie-directors-it-s-the-board-of-the-living-dead

 

Strategic CSR - Pro-forma earnings

The article in the url below is interesting because it demonstrates the extent to which corporations are increasingly seeking to manipulate investor perceptions by massaging their accounting:

 

"Over the past year there has been a large, and growing, divergence between the pro forma earnings—those excluding items such as restructuring charges accounting rules require them to include—that companies emphasize and their results under generally accepted accounting practices, or GAAP. In the fourth quarter, pro forma earnings for companies in the S&P 500 were 59% above GAAP, according to figures from FactSet and S&P Dow Jones Indices."

 

The chart accompanying the article illustrates the recent divergence between what companies have to report to the SEC and the picture they would like investors to see:

 

https://si.wsj.net/public/resources/images/BN-NI172_forma_M_20160330134128.jpg

 

Whether a charge or other cost is directly related to a company's underlying performance, of course, does not change the fact that the firm has to pay it. As such, it diminishes profits. And while investors can ignore it if it truly is a one-off event, the problem comes when these charges that firms would like investors to ignore are happening frequently:

 

"In the fourth quarter, pro forma earnings were 29% higher than the S&P operating figures, the biggest absolute difference since the fourth quarter of 2008. And while the ailing energy sector was a big contributor to that, it wasn't the only place where pro forma was being used more aggressively. Indeed, excluding energy, the gap between the pro forma and operating figures was 14%, which also represented a post-financial crisis high. The bad stuff is getting harder to ignore."

 

If there is a 'one-off' charge in most earnings statements, then those charges are no longer properly thought of as 'one-off.'

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Investors Should Pay Attention to What Companies Ask Them to Ignore

By Justin Lahart

April 1, 2016

The Wall Street Journal

Late Edition – Final

C12

http://www.wsj.com/articles/investors-should-pay-attention-to-what-companies-ask-them-to-ignore-1459441004

 

Strategic CSR - Whistleblowers

The article in the url below reveals an interesting trend in who is whistleblowing within companies and what are the consequences of these actions:

 

"'One of the trends that that raises some very delicate issues is the rising tide of in-house counsel as the whistleblower,' said Gregory Keating, a partner at Choate Hall & Stewart who leads the firm's whistleblower practice. 'In my own practice, which is 90% whistleblower defense, I'm seeing a disproportionate number of whistleblowers who are either counsel or compliance officers. ... The trend has only accelerated.'"

 

This trend of an increasing numbers of whistleblowers who are general counsel or compliance officers is important for two reasons. First, it raises challenging issues around attorney-client privilege:

 

"Mr. Keating co-authored a report on the ethical and legal issues raised by having corporate lawyers turn government informant, pointing to court restrictions on the situations where general counsel can bring retaliation claims. … 'It raises some dicey ethical issues because the in-house counsel is responsible for knowing the good the bad and the ugly…but is also able to access and use that information, which is often privileged, as part of a whistleblower proceeding,' Mr. Keating said."

 

Second, as part of the expanded protection for whistleblowers that is gradually becoming established in the U.S., courts are allowing whistleblowers to sue individual members of the board, which raises the stakes for Directors. The case highlighted in the article demonstrates this possibility:

 

"… in California revolves around a general counsel alleging he was wrongfully terminated for pursing a Foreign Corrupt Practices Act investigation in China. … [In the case] a judge allowed him to sue individual board members in his quest for compensation for being fired."

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

More Company Lawyers Turn Whistleblower

By Stephen Dockery

October 29, 2015

The Wall Street Journal

http://blogs.wsj.com/riskandcompliance/2015/10/29/the-morning-risk-report-more-company-lawyers-turn-whistleblower/