shareholder activist

If you or your company are interested in reducing your environmental impact, you have likely already heard the term “Net Zero”. These commitments to reducing emissions can be made by organizations, municipalities and even counties. 

Furthermore, if you are someone who is looking to invest in environmentally-responsible companies, this is likely a term that you are on the lookout for.

That being said, reading through countless corporate sustainability reports can be a very long, somewhat confusing process. Even the best intentioned investor might not have the full time or understanding to decipher real, meaningful commitments from straight up greenwashing.

Enter the world of climate shareholder activist organizations.

In this episode, our guest Kyra Bell-Pasht, Director of Policy and Research at one such organization, dives into what Net Zero means, the steps organizations like hers take to hold companies accountable for their pledges, what steps leaders can take to get started on their sustainability journey, and the fascinating overlap of law, capitalism, and climate mitigation. 

(0:00) Intro
(2:25) Kyra in her own words
(4:58) A duty to help others
(6:42) Defining Net Zero
(9:54) Greenwashing in the world of Net Zero Claims
(12:46) The role of climate shareholder activist organizations
(17:48) Private equity, Net Zero claims, and avoiding regulatory disclosures
(19:17) The Canadian economic landscape, oil sands and climate claims
(20:17) The biggest obstacle and opportunity for companies on the path to Net Zero
(23:18) Steps investors can take to navigate ESG reports
(27:54) How recent law grads or mid-career lawyers can transition to the world of sustainability
(30:30) What it will take for businesses and leaders to be resilient going forward

0:00 -- Intro.

2:21 -- Start of interview.

3:14 -- Bill's "origin story". 

6:57 -- On why he joined Vanguard in 1986, and what makes the company so special. "Intellectual rigor of Wall Street with mid-western values."

10:30 -- On Bill's board career. He first joined the Philadelphia Zoo (he stepped down this summer after 16 years) and currently serves on the boards of UnitedHealthcare Group and IBM, plus other PE and VC-backed companies and non-profit boards. The connection between public and private boards.

13:03 -- On his book Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR and what made him write it. The early governance stewardship by Vanguard (Jack Brennan's letter to 450 CEOs in 2002 laying out Vanguard's governance expectations on governance matters). The Common Sense Governance Principles (2016). His work with the Raj & Kamla Gupta Governance Institute at Drexel University, where he met his co-authors Ram Charan and Dennis Carey.

17:13 -- On shareholder engagement and why directors should understand their investor base. Traditionally, the only times there would be shareholder engagement was when an activist would get involved (and how their role has evolved), and with say-on-pay. The role of permanent capital (index funds).

21:21 -- Why some of the best-run public companies operate with a private company mindset. Some advantages of private equity boards.

26:51 -- His take on dual-class stock structures. The good and the bad. "But making them permanent is a mistake."

29:30 -- The focus on Talent, Strategy and Risk (TSR) in his book:

1. (30:06) How to think about Talent.
2. (31:58) How to think about Strategy. "Being agile around strategy is really important"
3. (35:20) How to think about Risk. Example of cybersecurity.

38:46 -- On creating a capable board: board composition and expertise. 

1. "Having a couple of former CEOs serve on a board is very valuable."
2. "You've got to push back on the over reliance of expertise, for an example, if you have a cyber expert who only knows about cyber, they will not add much more value to the board."
3. "Having some domain expertise in the particular business area of the company is very important."

45:59  -- On the work and focus of board committees: "Talent, Comp and Execution Committee" & "Strategy and Risk Committee."

48:43  -- On the rise of Chief Human Resources Officers (CHROs). Talent and culture is critical. It has become a strategic function more than just an administrative function.

52:14  -- On how to reduce the information asymmetry between management and the board. The Netflix case study by Larcker & Tayan (2018). "This is where having a couple of domain experts on your board is important because they can at least open some doors and give ideas to pursue." You need to be creative and bring in experts to present to the board (example: cybersecurity, geopolitics, activists, buy-side analysts, venture-capitalists, etc).

56:52  -- On the new trend of large institutional investors delegating voting power to beneficial owners. "If you delegate to sovereign wealth funds or large pension funds who have staffs that can vote in a thoughtful way I see no problem with that. But the problem is delegating to individual investors (99.9% will not vote and the proxy advisors will determine how this is all done [and I don't think they do a great job.]" "I'm glad that Vanguard does the voting with its long-term value creation approach."

01:01:28  -- His take on ESG, and the distinction between shareholder and stakeholder value. The pushback from governments failing on some large macro issues, asset managers seeking new fees, and its politization. "ESG is just a subset of the shareholder and stakeholder debate." The 'E' in ESG is the most complicated because it is so tied to these very specific climate goals. I think that this is a reaction to the fact that governments have not been able to come to any agreement on some of these issues, and I'm skeptical that companies can achieve some of these goals. It's going to be very difficult for companies to manage their businesses accordingly."

01:07:16 - What are the 1-3 books that have greatly influenced your life: 

1. The Leaves of Grass, by Walt Whitman (1855)
2. The Odyssey, by Homer (8th century BCE)
3. Mindset, by Carol Dweck (2007)

01:10:22 - Who were your mentors, and what did you learn from them?

1. His rowing coach after College. ("always demanding excellence")
2. Jim Gately (formerly with Vanguard)
3. Jack Brennan (ex CEO Vanguard)

01:13:23 - Are there any quotes you think of often or live your life by? 

Two last lines of Invictus poem: "I am the master of my fate, I am the captain of my soul."

01:14:02 - An unusual habit or an absurd thing that he loves: Analog and Asimov's Science Fiction magazines.

01:14:39 - The living person he most admires:

1. Warren Buffett, on the business side.
2. Tony Blair.
3. Condoleeza Rice (maybe his favorite interview ever)

Bill McNabb served as chairman of Vanguard from 2008 until his retirement in 2018 and served as CEO from 2008 to 2017. He is a corporate director of UnitedHealth Group and IBM. Bill also serves on the Wharton Leadership Advisory Board, the Dartmouth Athletic Advisory Board, the Advisory Board of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia University and is also a board member of CECP: The CEO Force for Good.

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 You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/ 

Substack: https://evanepstein.substack.com/

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License

You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/ 

Substack: https://evanepstein.substack.com/

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You can join as a Patron of the Boardroom Governance Podcast at:

Patreon: patreon.com/BoardroomGovernancePod

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License

0:00 -- Intro.

1:40 -- Start of interview.

2:20 -- Kris' "origin story". 

5:20 -- Jamie's "origin story". 

7:30 -- About the EY Americas Center for Board Matters. It has three mandates: 

1. To conduct primary research in corporate governance (Jamie is the research lead). They have a proprietary proxy database and benchmarking database. Insights for directors.
2. To support boards of directors. For example with board committee work, new board formation (IPO, divestitures, spin-offs, etc.)
3. To organize and participate in director convenings (events, committees, industry, etc.)

10:19 -- Deep dive into their article "Four key takeaways from the 2022 proxy season."

10:58 -- On E&S Shareholder Proposals. "While there were more proposals in these categories, support for them became more targeted."

14:34  -- Focus on climate risk/energy transition, DEI and corporate political responsibility. 

17:07 -- On boardroom diversity trends (including legal challenges to SB-826 and AB-979 in California and the Nasdaq Diversity Rules). "Today, 1/4 of the Fortune 100 directors is racially diverse and 1/3 is gender diverse; 61% of SP 1500 companies have 3 or more women on boards (up from 28% in 2018, that's a 30 point increase in three years)." "We have seen tremendous progress on all aspects of board diversity."

19:37 -- Support for directors remained stable despite signals that opposition would increase, with average votes against S&P 500 directors inching up to 4.2% compared with 3.9% over the same time period in 2021. "This year average voting opposition for nominating and governance chairs at S&P 500 companies was 8.2%, up from 4.6% in 2017. Similarly, average voting opposition for compensation committee chairs at S&P 500 companies was 7.3%, up from 3.8% over the same period. In addition, opposition to independent board leaders (i.e., independent chair, lead or presiding director) rose to 7.0% from 4.3%." 

"The stakes for directors are really going up, and that's including around ESG matters." "Overall trends we think are pointing to director votes as a lever of change that investors may be more inclined to use going forward to express their views and accelerate their stewardship goals." 

23:28 -- On investor pressure and pending SEC regulations (on climate change). "All of this is a wake-up call for directors."

27:00 -- On adding ESG expertise in the board. "I think it's critical for companies with board oversight to think about materiality." "Materiality assessments and matrices have been a good outcome of the ESG dialogue." 

29:34 -- On institutional investors, stakeholders and the "disconnect" with the Anti-ESG political push-back. 

36:03 -- On the new Universal Proxy Rules for Director Elections. 

38:51 -- On shareholder engagement. "We really see investor engagement as a vital tool for companies to understand their key shareholders' perspectives on the company's governance and its strategy and also an opportunity to enhance the company's communication and deepen those relationships." 

42:57 -- On shareholder activism. "We counsel boards to run different programs to think like an activist." "Companies need to be smart about what drives their own TSR." "Activists will often look at the board, to bring different dissidents and/or target individual directors." "There is a deep scrutiny around the E&S agenda areas."

45:51 -- On recommendations for directors in these volatile times, and how to increase the board’s impact in volatile times. "It's important to have a framework in place grounded in the company's purpose and its values so that it's ready in terms of how they are going to make decisions, what issues they are going to weigh-on, what stakeholders they need to think about, and what constituencies they are hearing from."

49:28 -- On boards adding value (strategy and innovation).

51:53 - What are the 1-3 books that have greatly influenced your life: 

Kris:

1. Start with Why, by Simon Sinek (2009)
2. Gone with the Wind, by Margaret Mitchell (1936)
3. Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR, by Bill McNabb, Ram Charan and Dennis Carey (2021)

Jamie:

1. Doughnut Economics, by Kate Raworth (2017)
2. This is Water, by David Foster Wallace (2009)

53:30 - Who were your mentors, and what did you learn from them?

1. Kris: Peggy Vaughan (former partner and board member PwC)
2. Jamie: Allie Rutherford (partner PJT Camberview)

55:16 - Are there any quotes you think of often or live your life by? 

1. Kris: "Just say yes"
2. Jamie: "We are the ones we've been waiting for"

56:28 - An unusual habit or an absurd thing that they love: 

1. Kris: She's a flutist, and has passed that skill over to her daughter so they play flute duets together.
2. Jamie: Having her hair and make-up done by her 5-year old daughter.

57:41 - The living person they most admire:

1. Kris: Greta Thunberg
2. Jamie: "Working mothers (and especially those of the pandemic) that are working  to make the future more sustainable and equitable for future generations."

Kris Pederson is the EY Americas Center for Board Matters Leader. Jamie Smith is the EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist.

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 You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/ 

Substack: https://evanepstein.substack.com/

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License

You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/ 

Substack: https://evanepstein.substack.com/

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You can join as a Patron of the Boardroom Governance Podcast at:

Patreon: patreon.com/BoardroomGovernancePod

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License

0:00 Intro.

1:37 Start of interview.

3:03 Francine's "origin story". She grew up in Chicago and graduated from Purdue in accounting but "she hated it." She began in internal audit at Chicago’s Continental Illinois National Bank and Trust. She later worked with KPMG/BearingPoint in the early 1990s. She also worked at JP Morgan where she focused on Y2K risk. Post Sarbanes Oxley she worked at PricewaterhouseCoopers LLP until 2006. She then pivoted as an investigative reporter and feature writer. At MarketWatch, and for The Wall Street Journal and Barron’s, McKenna reported on public company accounting, fraud and financial investigations, and the potentially dubious financial reporting practices of pre-IPO companies. She also started teaching at different universities. She has now joined full-time as a Lecturer at University of Pennsylvania Wharton Business School.

17:53 On Ernst & Young’s $100 million penalty by the SEC for employees cheating on CPA ethics exams and misleading investigation. To put this case into context, it's important to understand KPMG's case from 2019 ($50 million penalty by the SEC). Note this teaching case study on the KPMG/PCAOB scandal.

24:50 Criminal convictions in KPMG case.

26:01 EY's role in misleading the investigation of the SEC.

31:38 On KPMG receiving its largest UK fine (£14.4M) for providing false information about its audits of Carillion and Regenersis. On why the "Big 4 Audit Firms" are "Too Big to Fail."

33:16 What's really going on with the Big 4  audit firms? Audit services vs consulting services. "When there is tension between professionalism and commercialism, [the latter] will always win out." "You cannot restrain the heartless except via enforcement."

37:50 On lessons for directors in frauds of private companies. "I use Theranos as a warning case for students in accounting: it's the canary in the coalmine in case the audit profession doesn't evolve." There were three audit firms involved in the Theranos case: EY at the beginning but then walked away, then KPMG until they had a dispute about stock option valuations (staying only to do consulting), and PwC did forensic work winding down the company. None of them audited the firm, they only provided services. "They [the audit firms] made more money, with less liability, by providing other services [actively choosing not to provide auditing services.]" "Private companies avoiding going public [the deeper scrutiny] is the shape of things to come." How the JOBS Act stripped away some of the scrutiny over emerging growth companies [EGCs]. Some, like SEC Commissioner Hester Peirce, are in favor of this lighter regulatory approach.

47:22 On whether unicorns require a stricter regulatory framework. "We are seeing this [laissez-faire] attitude to the max in the crypto industry."

50:00 On whether Sarbanes Oxley had a negative effect on the US IPO market. "We should not have marginal/shady companies in the public markets." On the negative effect of relaxing the rules in the JOBS Act. "We should be talking about the quality of companies, not the quantity of listings."

55:26 On the difference between valuations (in private companies) and marketcap (in public companies). "I'm a big believer in the power of short sellers and activist investors to highlight [price inefficiencies and fraud] because they put their money where their mouth is." "The SEC has been very disappointing in both Republican and Democratic administrations in terms of actually calling accounting fraud by its name." On the role of whistleblowers.

01:04:02 On the rise (and increasing political polarization) of ESG. "I'm cynical towards it, firms are looking to get a piece of clients' wallets." "The trend first emerged in Europe with firms providing side audits like carbon emissions." "My head is tainted with the idea that it's all a big marketing ploy." The audit mandate in the proposed SEC's climate change disclosure rules. On the proxy proposals (like Exxon's) and greenwashing.

01:10:28 - Three books that have greatly influenced her life: 

1. Siddartha, by Hermann Hesse (1922)
2. The Road Less Traveled, by M. Scott Peck (1978)
3. The Origins of Totalitarianism, by Hannah Arendt (1951)

01:13:18 - Who were your mentors, and what did you learn from them? 

From her time at Continental Illinois:

1. Peggy Jackson Turner
2. Judy Port

01:15:03 - Are there any quotes you think of often or live your life by? 

1. "Der Mensch Tracht, un Gott Lacht (Man Plans, and God Laughs)" (Yiddish)
2. "Morallity cannot be legislated, but behavior can be regulated. Judicial decrees may not change the heart, but they can restrain the heartless." Martin Luther King Jr.

01:16:12 -  An unusual habit or an absurd thing that he loves: collecting metal objects.

01:17:47 -  The living person she most admires: Judge Jed S. Rakoff, Jordan Peele.

Francine McKenna is a full-time Lecturer at University of Pennsylvania Wharton Business School. She teaches ACCT 611 and 613, Introduction to Financial Accounting for MBAs. She is also an independent writer and commentator and authors the newsletter The Dig, where she scrutinizes accounting, audit and corporate governance issues at public and pre-IPO companies.

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You can follow Francine on social media at:

Twitter: @retheauditors

LinkedIn: https://www.linkedin.com/in/francinemckenna/

Substack: https://thedig.substack.com/

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 You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/ 

Substack: https://evanepstein.substack.com/

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License

You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/ 

Substack: https://evanepstein.substack.com/

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You can join as a Patron of the Boardroom Governance Podcast at:

Patreon: patreon.com/BoardroomGovernancePod

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License