CSR and Corporate Governance Reform: An Opporunity for BlackRock as an Activist Shareholder

In 2019, BlackRock’s management and board publically fired two executives in the Hong Kong office for breaching company rules on dating subordinates. The firings demonstrated to employees that the company would enforce its employee policies and sent the message that employees would be “free to point out problems in the workplace.”[1] This would not be so extraordinarily significant but for the fact that BlackRock is the “world’s largest money manager with $7.4 trillion under management,” which enables the company, through the funds it runs, to be “one of the five largest shareholders in nearly every corporation in the S&P 500.”[2] So BlackRock “can cast votes and pressure boardrooms to effect change.”[3] The company would be hypocritical in using its power as a major stockholder to get managements to have and enforce good workplace policies if the company were not doing so itself. From the standpoint of self-regulatory capitalism in society, BlackRock could make a significant contribution far beyond improving workplace policies.

In January 2020, BlackRock’s management announced that it “would take a tougher stance against corporations that aren’t providing a full accounting of environmental risks.”[4] This was “part of a slew of moves by the investment giant to show it is doing more to address investment challenges posed by climate change.”[5] BlackRock CEO Laurence Fink wrote, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”[6] The long-term viability of companies is a salient variable in recalculations.

As much as issue-specific stockholder activism narrows the gap between the values and priorities held by business and society, the matter of corporate governance is also important. In particular, companies whose managements control their respective boards of directors suffer from a deficit of accountability in their governance system. Board members could be influenced on issue-specific stockholder activism and yet a CEO could ignore any pressure from members if he or she controls the board, whose functions include holding the CEO accountable. BlackRock had the power as of 2020 to pressure boards to break up the conflict of interest when a CEO is also the chair of the board of directors at a company. Because of BlackRock’s reach in overseeing so many companies, corporate governance could effectively get a remake such that greater accountability would be part of the governance systems. Because outside directors would theoretically have more sway over a company’s management, wider issue-specific stockholder activism could have greater resonance with management. The gap between corporate and societal values and norms could thus be narrowed. Indeed, the capitalist system within a society would be more self-regulated in terms of corporate governance.

In short, BlackRock could improve the business sector significantly beyond responding to particular issues. Perhaps business itself is vulnerable to missing the big picture at the scale of governance systems, and thus opportunities to improve them. Even though the focus on quarterly earnings and, moreover, on profit-seeking may play a role, I submit that even CEOs do not typically cast a wide enough eye such that governance systems (not only in business, but also government!) are entirely in view as systems. Focusing on particular stockholder issues is closer to the focus on profitability, and thus primary.

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[1] Dawn Lim, Steven Russolillo, and Jing Yang, “At BlackRock, Public Firings, Overseas Probe Send Message About Office Misbehavior,” The Wall Street Journal, February 3, 2020.

[2] Ibid.

[3] Ibid.

[4] Dawn Lim and Julie Steinberg, “BlackRock to Hold Companies and Itself to Higher Standards on Climate Risk,” The Wall Street Journal, January 14, 2020.

[5] Ibid.

[6] Ibid.

Stockholders Retain Wells Fargo’s Board: A Low Bar for Corporate Governance

Corporate governance is supposed to hold management accountable. Slack in the mechanism enables not only a lack of managerial competence or ethics, but also an ineffectual board. Unfortunately, whether by proxies or connections—or just sheer power—a board’s chair and other directors can remain in place in spite of having failed to hold a management accountable. Put another way, it is not necessarily enough that an incompetent or unethical management (and other employees) is removed; replacing the derelict board may be more crucial and yet even more difficult.

 On April 25, 2017, the stockholders of Wells Fargo voted to retain the board that had oversight-responsibility while the management created millions of fake accounts. Even though 5,300 employees and the CEO, John Stumpf, lost their jobs due to the systemic fraud, 56% of the stockholder vote went in favor of retaining Stephen Sanger, the board’s chairman. Even though press referred to that as “a stinging rebuke for his failure as lead director,” the fact that he won re-election would hardly be felt by him as a rebuke.[1] That the perception would be otherwise signals just how low the bar had dropped on corporate governance. That the entire board survived intact is more important than that five of its directors failed to clear “the 70 percent threshold that typically denotes a serious protest vote.”[2] Clearly a “protest vote” is not worth much if the entire membership of such a negligent board is retained.

On account of the collusion that can occur between a management and the board tasked with overseeing that management, combined with the existing low bar in corporate governance generally, the system can ill-afford the proxy mechanism; the system is too tilted in favor of even sordid managements and board directors. Additionally, corporate social responsibility could be widened to include stockholder voting. At the Wells Fargo vote, Warren Buffett’s Berkshire Hathaway voted its 10 percent stake in favor of retaining the entire board. Even if retaining it was in Buffett’s company’s best financial interest going forward, there would be value societally and even in terms of fortifying corporate governance, which I submit would be good for business, were investors such as Warren Buffett willing to vote in favor of cleaning a sordid or ineffectual slate even if its members promise to do better. In other words, stockholders would strengthen corporate governance itself, as well as the particular companies even financially—and thus the stockholders themselves!—were they to vote to hold derelict boards accountable for bad oversight even if said boards convince stockholders of better financials ahead. Resisting such a narrow impetus can be said to be within the realm of corporate social responsibility because it is in the public interest and in line with societal norms that corporate boards actively hold their respective managements accountable even for past behavior or performance. Giving boards a pass is just as bad as a board giving its management a pass. If a narrow pursuit of financial gain comes at the expense of fortifying governance systems, then such gain is likely to be short-lived anyway because defective systems enable bad management with ineffective oversight. Fiduciary duty suffers. So, ironically, it is a matter of social responsibility that managements are held accountable, as are their respective boards themselves. Hence public policy toward reducing the power of board-management collusion is in the public interest, and corporate social responsibility should be expanded to include stockholder activism with an eye toward reforming corporate governance itself.   

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[1] Antony Currie, “Wells Fargo Should Listen to Investors and Step Down,” The New York Times, April 26, 2017.

[2] Ibid.

A Religious Stockholder-Test for Wells Fargo: Confronting Mediocre Accountability

Orienting executive compensation to accountability is easier said than done. For example, it might be supposed that the cause of accountability was aptly served by John Stumpf’s forfeit of $41 million in unvested stock when he resigned under pressure as Wells Fargo’s CEO because of the bank’s systemic overzealousness in signing customers up for unwanted services. Unfortunately, he “realized pretax earnings of more than $83 million by exercising vested stock options, amassed over his 34 years at the bank, and receiving payouts on certain stock awards.”[1] In other words, the man who presided over unethical business practices at the expense of customers received double that which he was forfeiting. How can accountability have any meaning against $83 million? This figure connotes reward rather than punishment. Tim Sloan, who succeeded Stumpf as the bank’s CEO, received compensation in 2016 of $13, up from the $11 million in 2015. Interestingly, it may have been religion to the rescue.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Presbyterian Church (USA): Divestment from Companies Helping Israel

By a narrow vote of 310 to 303, the General Assembly of the Presbyterian Church (USA) voted in June 2014 to divest about $21 million in stock from Motorola, Caterpillar, and Hewlett Packard because their respective products were being used by the Israeli Government in violent occupation of the Palestinian territories. The Friends Fiduciary Corp, which manages investments for 250 Quaker groups, had divested from Catepillar, Motorola, and Veolia Environment two years earlier, and in 2013 the Mennonite Central Committee decided not to “knowingly invest in companies that benefit from products or services used to perpetrate acts of violence against Palestinians [and] Israelis.”[1] This point brings up the ethical point of what to do about companies that sell products used in violence by the Palestinians. To occupy is not like being occupied, though violence is violence. Moreover, using divestment from holding equity in a company may not be a very effective strategy, other than perhaps serving as a symbol, though even in this respect the effort can fad without having brought about the desired policy change.

The Caterpillar bulldozers used by the Israelis to topple Palestinian neighborhoods in shows of “collective justice” had actually been sold to the U.S. Government, which in turn either sold or gave the trucks to Israel. Even if Caterpillar’s management could possibly have predicted the eventual transfer from the buyer to a third party, holding the company ethically responsible for the actions of the U.S. Government would be unfair. To be sure, were the product inherently dangerous, such as a grenade, the eventual use could be anticipated even by the manufacturer, but a bulldozer truck’s use is not inherently violent. Nor would it be fair to draw attention to the company simply out of frustration with the U.S. Government, given the power of the main Israeli lobby, the American Israel Public Affairs Committee (AIPAC). If the U.S. Government is looking the other way as it hands over billions of dollars in aid to Israel even as it continues to occupy Palestinian territory and build still more settlements, taking frustration out on the companies that sell to Israel’s government violates the ethical principle of fairness. Even if divestment pressures the companies not to sell to Israel, the products can wind up there in ways that are beyond the ability of companies to control.

Furthermore, how much financial damage to the three companies is exacted from selling $21 million in stock? Presumably buyers exist—the Dow at the time heading close to 17,000 and the S&P above 1960. The principle impact, I submit, is symbolic; a religious group of 1.76 million members essentially says “No” to Israel’s violence-ridden occupation of a people. The ethical dimension is salient owing to the fact that the group is religious in nature. Yet even in this respect, like the years of divestment from South Africa to free Nelson Mandela and put an end to apartheid, the creation of a symbol does not portend quick results. Indeed, the condition of divestment can itself become part of the status quo, rather than an event.

Additionally, the symbol may backfire. At the Presbyterian assembly meeting, Rabbi Steve Gutow of the Jewish Council for Public Affairs, described the vote as coming out of a “deep animus” against “both the Jewish people and the State of Israel.”[2] To be sure, as depicted in the Oscar-winning 1947 film, Gentleman’s Agreement, anti-Semitism can be as subtle as simply saying nothing after a joke at a dinner table. Following the defeat of the Nazi Germany, many Americans were doubtless able to conclude that anti-Semitism and racism had been squashed “over there”—meaning there’s none of that here. The film demonstrates just how pervasive denial can be. Nevertheless, anti-Semitism (and racism) can also be used as a weapon that obfuscates the real point of a decision such as that of the Presbyterians. The violence of an occupier is sufficiently galvanizing for observers that the alternative charge of anti-Semitism has the air of phoniness. In other words, a person can be against such violence without hating Jews.

Therefore, both the divestment strategy and the charge of anti-Semitism can be viewed as weak responses. To the extent that political mobilization would be futile too, given the political power of the pro-Israel lobby in Washington, D.C., we might just be left with a “no good alternative” situation in which the quagmire goes on and on. With regard to the natural frustration at the status quo protected by long-entrenched, powerful interests, perhaps the sad reality is that most people simply tune out.

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[1] Jaweed Kaleem, “Presbyterian Church (USA) Makes Controversial Divestment Move Against Israel,” The Huffington Post, June 20, 2014.

[2] Ibid.

On the Toxicity of Ineptitude and Denial: The Case of Wal-mart's Pharmacy

On June 6, 2014, Walmart conducted its annual stockholder meeting under “scrutiny on all fronts.”[1] Revenue at the company’s stores in the U.S. had declined for five consecutive quarters. Walmart was also facing ethical questions over how the company’s executives handled bribery allegations at the Mexican division, as well as on the low wages going to non-supervisory workers (esp. part-timers). In short, the question facing the management was whether the company was being managed by cutting corners, as manifest both in terms on incompetence and unethical conduct. That the shareholder proposal to split off the chair of the board from the CEO did not meet even a preliminary tally of votes suggests that the company would sooner go under than that its management would be held to account.

On the day of the meeting, I happened to be at a Walmart store for what must have been two hours. I had stopped in to pick up medicine only to find that the pharmacy employees had lost my prescription. “You cancelled it and it was handed back to you,” an employee informed me. The system says you have it. Well, I didn’t, and after waiting over an hour for a manager to look at the camera footage, I was coming to the conclusion that someone had lied to cover up the mistake. For the prescription was cancelled and returned to me forty-five minutes after camera footage showed me leaving the store for the day. “You could have phoned in the cancellation,” the store manager suggested. Unfortunately for him, that would not explain how the paper prescription got into my hands.

Turning to his assistant, the shift manager, I asked if it is likely that the prescription had been inadvertently thrown way. “Oh, no, that doesn’t happen here,” she assured me. “Well,” I concluded, “then if no one handed it to me, and your employees don’t throw things out in there, then the prescription should still be in there, right?” Even as she nodded affirmatively—meaning the paper had been misplaced—the store manager interjected his view that the chances are minimal that it is still there. “The system indicates that it was given to you,” he said. I was stunned. Had he not been listening? I began to understand how it could be that the front managers and cashiers could have been getting away with treating customers so rudely right under the nose of the store’s manager. He went on to add that he and his assistant had done “excellent due diligence” and unfortunately the camera angle did not give him a clear view of me talking with the pharmacist after I had dropped off the prescription so he couldn’t be sure—in spite of having “an excellent camera system.” I was stunned at the sheer disjunction in what the guy was saying.

Clearly, someone had lied, as no one had handed back my prescription to me (and I had not cancelled the prescription). In this case, the lie had staying power, for the medical provider who had written the prescription refused to reissue or revalidate it even when the pharmacist called to explain the situation. Even though Walmart had erroneously cancelled and lost my prescription, it was “my responsibility.” I was between a rock and a hard place, neither one being willing or even perhaps even capable of deviating from a rigid script. Not having a primary-care physician locally, I would have to go without until the end of my visit.

Speaking the next day with a pharmacist at a Walgreens after I tried again in vain by stopping by the offending hospital’s emergency room, I learned that it was indeed unusual for a prescription provider to refuse to revalidate a prescription that had been erroneously cancelled. I also gathered from that pharmacist that I had erred in supposing that the pharmacy at a Walmart would somehow be immune from the sort of incompetence that plagues the company at the store level.

That very evening, a Walmart truck-driver killed one comic and seriously injured Tracy Morgan and two other passengers on the New Jersey Turnpike after going without sleep for than 24 hours.[2] In response, a Walmart statement claimed that the employee had not violated any federal regulations. Nevertheless, police charged him with manslaughter and assault. Interestingly, Congress was at the time bowing to industry pressure by backing off proposed regulations that would have required companies like Walmart to see to it that their truck drivers are getting enough sleep. One might say that Walmart’s management is asleep behind the wheel, even amid claims of being fully alert.

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[1] Anne D’Innocenzio, “Walmart Faces Shareholder Scrutiny at Annual Meeting,” The Associated Press, June 6, 2014.

[2] David Jones, “Truck Driver in Tracy Morgan Crash Had Not Slept in 24 Hours: Complaint,” The Huffington Post, June 9, 2014.