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← How conscious investors can turn up the heat and make companies change

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Showing Revision 6 created 10/22/2018 by Oliver Friedman.

  1. We love to engage
    on the issues of the day.

  2. We love it.
  3. We comment on the news,
  4. we post our views on social media,
  5. we march, we protest ...
  6. But who among us is working on solutions,
  7. big solutions to big issues,
  8. like gun violence,
  9. mistreatment of workers,
  10. flood, famine, drought?
  11. Who is on it?
  12. Boom!
  13. These guys.
  14. (Laughter)

  15. What? You were hoping for Peter Parker?

  16. The Avengers?
  17. You don't expect this beacon of diversity,
  18. these good-looking, nicely dressed dudes
    just oozing charisma to solve the issues?
  19. Well good, because they're actually
    not going to solve the issues.
  20. But before you dismiss them,
  21. let me say, they're not going
    to solve the issues,
  22. but they will show us how.
  23. So who are they?
  24. They're activist investors:
  25. Carl Icahn, Dan Loeb,
    Paul Singer, Barry Rosenstein.
  26. These are the modern-day
    OGs of Wall Street.
  27. (Laughter)

  28. These are scary dudes.
  29. I don't mean Green Goblin scary.

  30. I mean real scary.
  31. The fear they strike in the hearts
    of a company's CEO and board
  32. when they enter its stock
  33. is the same fear you feel
    when you hear a bear outside your tent,
  34. and it's dark,
  35. and you're sitting there
    with a mouthful of Doritos --
  36. (Laughter)

  37. that just moments ago,

  38. you had snuck out of the tent
    to pull down from the bear hang,
  39. because you had the munchies.
  40. That fear.
  41. And in that moment, you are praying,
  42. "Oh Lord, please let this bear
    be passing through."
  43. That bear is not passing through!
  44. That bear made a detour for you.
  45. Bears like Doritos!
  46. (Laughter)

  47. Activists like money.

  48. Some activists also like Doritos,
    but they definitely want money.
  49. And the way they make money,
    the way they create value,
  50. is by getting management of corporations
  51. to make changes.
  52. Now, some will argue
    that the changes they create,

  53. the value they create,
    is too short-term in nature.
  54. And others will say the tactics
    they use are egregious.
  55. I agree.
  56. Long, drawn-out lawsuits,
  57. public smear campaigns --
  58. there is no need for that.
  59. But I must say, there's
    a small handful of activists,
  60. very small,
  61. that go to great lengths
    to be constructive and collaborative.
  62. And overall, we have to give credit
    where credit is due.
  63. As a group, they have managed
    to catalyze large-scale change
  64. in large corporations,
  65. and that's no small feat.
  66. Now, imagine a world

  67. where all investors were working
    with management to make change,
  68. not just to make more money,
  69. but to improve
    the environment and society.
  70. Imagine what a greener
    and better world this would be.
  71. Now, why? Why would an investor bother?
  72. And at first, blush I'm with you:
    Why would an investor care?
  73. Because if doing well on ESG issues --
  74. environmental, social
    and governance issues --
  75. was just an act of good
    corporate citizenship,
  76. then I agree, investors would not care.
  77. But the good news,
  78. and perhaps the saving grace
    for our collective futures,
  79. is that it's so much more than
    an act of good corporate citizenship.
  80. It's good business.
  81. There's now enough evidence
    that shows a clear correlation
  82. between ESG performance
    and financial performance.
  83. Companies that do good
    for the environment and society
  84. also do well financially.
  85. And some of the best
    companies are catching on.
  86. Like Adidas:

  87. Adidas is cleaning up the ocean
    and making money in the process.
  88. Adidas teamed up with an organization
    called Parley for the Oceans.
  89. Parley goes out and collects
    plastic waste from the ocean.
  90. Adidas uses the plastic waste
    to make shoes.
  91. Shoes made with plastic from the ocean:
  92. good for the environment
    and good for business.
  93. Because if you know that rapidly growing
    consumer segment known as hipsters --
  94. and I know you know hipsters --
  95. then you know that a hipster faced with
    the choice between a no-name shoe
  96. and an Adidas made with
    plastic from the ocean
  97. will pick the Adidas every day
    of the week and twice on Sunday,
  98. and then walk around like it's no big deal
  99. but look for every opportunity
    to talk about them.
  100. Like, in an Uber Pool.
  101. (Laughter)

  102. "Hey, I noticed you looking at my feet."

  103. "What? Dude, no, I'm just making slides.
    I'm a consultant. I make slides.

  104. I'm making PowerPoint slides,
    I'm not looking --"
  105. "No, it's fine.

  106. I get why you'd be looking.
  107. The plastic on my shoe
    must be bothering you.
  108. Well, let me talk about it
    for the rest of this ride.
  109. You see, the plastic on my shoe
    is from the ocean,
  110. on my feet, not in your fish,
  111. being walked on, not being munched on.
  112. Happy feet. Happy fish. Happy ocean.
  113. Doing my part. I got eco-shoes.
    I got eco-shoes.
  114. You need some eco-shoes?"
  115. And so on, just cornering him.
    We've all been there.

  116. "Hey, pass me your cell phone.
    I'll give you a discount code.

  117. Let me give you a discount code."
  118. We've all been --

  119. Folks, I have jumped out
    of moving Uber Pools.
  120. (Laughter)

  121. Just, moving, highway, I'm out. I'm out.

  122. But we've got to forgive the hipsters,
    we need to love the hipsters.

  123. We need hipsters,
    and we need companies like Adidas,
  124. and what we need most is for investors
    to convince other companies
  125. to behave like Adidas.
  126. And herein lies the challenge.

  127. There's a growing group of investors,
    call them "conscious investors."
  128. Conscious investors care about ESG issues.
  129. And they talk a lot about
    engaging management on ESG issues.
  130. But they don't actually get
    management to make changes
  131. that will improve
    the environment and society.
  132. And this is where conscious investors
    can take a page from the playbook
  133. of the activist investors,
  134. because the activist investors have no
    issues getting management to make changes.
  135. They have no issues turning up the heat.
  136. Take Paul Singer.

  137. He's an old-school Wall Street OG,
  138. now in his 70s, loves Doritos,
    loves making money.
  139. Argentina owed Paul 600 million dollars
  140. and would not pay.
  141. Big mistake.
  142. You can't take money from an OG
    and not pay it back.
  143. Paul went to war with Argentina.
  144. I am not inventing.
  145. This is big. This was huge.
  146. This was bigger than Tyson vs Holyfield,
  147. Ali vs Foreman.
  148. This was man vs country.
  149. Paul Singer started going around the world
    trying to seize up Argentinian assets.
  150. At one point, he tried to seize
    an Argentinian navy vessel
  151. off the coast of Ghana.
  152. He tried to take over a 350-foot ship
  153. while big navy officers
    with big guns were on the ship.
  154. He got the police in Ghana
    to show up with a crane
  155. and threaten to board the ship,
  156. and it wasn't until
    the navy officers drew their weapons
  157. that they called off the operation.
  158. That's what I call turning up the heat.
  159. Now, you may say

  160. Paul lost the battle.
  161. And I'll say, Paul won the war,
  162. because Paul didn't get paid one time,
  163. he got paid 20 times
    his original investment.
  164. Then you have Barry Rosenstein.

  165. His fund, Jana Partners,
  166. started stealth-mode buying up
    stock in Whole Foods,
  167. at a time when Whole Foods was struggling.
  168. They got to eight percent, came out,
  169. and pushed Whole Foods
    to sell itself to Amazon,
  170. and not because Barry wanted
    same-day delivery of his organic Doritos.
  171. (Laughter)

  172. He wanted to make some money.

  173. Now, the CEO of Whole Foods,
    John Mackey, and the board
  174. did not want to sell themselves to Amazon,
  175. because that would be
    the prime example of selling out.
  176. But in the end, they caved.
  177. Why? Because Barry turned up the heat,
  178. and he made 300 million
    dollars in the process.
  179. And he did not leave
    a very nice impression on John.
  180. You're not going to see
    John and Barry just hugging it out
  181. at the Whole Foods café.
  182. Let's take a very different example now:

  183. the Chicago Teachers' Pension Fund,
  184. a $10 billion conscious investor.
  185. They recently came out hard
    against private prisons in the US,
  186. and good for them.
  187. As a new parent, I tell you,
    I am troubled by devastating images
  188. of young children being ripped
    out of the arms of their parents
  189. at the US border
  190. and being placed in private
    detention facilities that did too little
  191. to help the kids maintain
    contact with their parents.
  192. So what did the Chicago teachers do?

  193. Did they get management to make changes?
  194. Did they turn up the heat?
  195. Did they look management
    in the eye and say,
  196. "This is no way to run a business.
  197. There's a different way
    to do things. Let me show you"?
  198. No. They just sold their stock.
  199. Selling did nothing.
  200. It's not like management
    woke up the next day
  201. and had an epiphany and said,
  202. "Gosh, the teachers sold their stock.
    We'd better be nice to the kids."
  203. No. That didn't happen.
  204. And despite a decade
    of several high-profile divestitures
  205. in private prison stock in the US,
  206. the stock has continued to climb.
  207. The stock over that same period
    has outperformed the market.
  208. And the biggest issue is,
  209. we went from a set of conscious
    investors owning the stock
  210. to it potentially being owned by investors
    who don't care about these issues
  211. and don't care what you think
    about these issues.
  212. And this is my issue
    with conscious investors.

  213. Their MO is to divest
  214. or divert money into ESG-focused funds.
  215. You can't divest your way
    to a greener world.
  216. You can divest your way
    to a greener portfolio,
  217. not to a greener world.
  218. So what's it going to take?

  219. What's it going to take
    to flip the script,
  220. to get conscious investors to go
    from divesting to engaging,
  221. to go from talking about engaging
    to actually working with management
  222. to make changes that will improve
    their ESG performance?
  223. Because there's a lot suggesting
    they should and they could.
  224. They should, given the clear correlation
    between ESG performance
  225. and financial performance.
  226. They could because the activists
    have shown us they could.
  227. A shareholder can drive
    change in a company.
  228. The difference is, Paul and Barry
    do what they do to make money.
  229. The conscious investors would do it
    to improve society and the environment
  230. and make money in the process
  231. and do it a little more
    collaboratively and constructively.
  232. And they have the backing
    of the some of the largest investors.
  233. Vanguard and BlackRock --
    together, they manage trillions.
  234. They've been increasingly vocal
    about the importance of ESG.
  235. The CEO of BlackRock has been
    increasingly vocal in his annual letters
  236. about this issue.
  237. Even Jana Partners, the same OGs
    that John called "greedy bastards,"
  238. recently co-wrote an open letter
    to the board of Apple,
  239. saying, "Hey, your smartphones
    are addictive for children.
  240. Fix it."
  241. Apple is working on it.
  242. So what it's going to take
    is some pressure.

  243. It's going to take some pressure
    on conscious investors
  244. to, in turn, put some pressure
    on management
  245. to make changes that will improve
    the environment and society.
  246. And where do they start?
  247. They start by picking an issue
    that matters to them
  248. and taking a stand on it.
  249. Take a stand on an issue
    that lines up with your purpose:
  250. water preservation,
    labor rights, diversity.
  251. As long as it lines up
    with your purpose, you are golden.
  252. And the biggest unlock?
  253. Get the senior-most investment
    professionals focused on this.
  254. Today, when an activist
    shows up to a campaign,
  255. it's the senior investment professional
    talking to the CEO and the board
  256. and everyone hears about it.
  257. When a conscious investor shows up
    to talk about an ESG issue,
  258. it's some junior person
    in the risk department
  259. talking to some junior person
    in the investor relations department,
  260. and nobody hears about it,
    and that needs to change.
  261. And it's not some massive leap.
  262. Today, when a company
    underperforms financially,
  263. who is on the hook?
  264. The senior investment professional.
  265. So what do they do?
  266. They drop everything
    and work with management,
  267. collaboratively and constructively,
  268. to make changes to improve
    the company's financial performance.
  269. The same should be true when the company
    underperforms on ESG issues.
  270. And yes, that requires standardization
    on how we measure ESG,
  271. but we're on it.
  272. So folks, here's my call to action:

  273. it's your money.
  274. It's your pension fund,
  275. it's your sovereign wealth fund.
  276. it's your university's endowment.
  277. It's your money.
  278. And it's your right to have your money
    managed in line with your values.
  279. So use your voice
  280. and trust that it matters.
  281. It was your voice that got the investors
    more conscious in the first place.
  282. You protested for years,
  283. because you didn't feel right
    about your money being invested
  284. in companies whose values
    don't line up with yours.
  285. It's time to use that voice again.
  286. But this time, instead of
    pushing them to divest,
  287. push them to engage, truly engage,
    truly work with management
  288. to make changes that will improve
    their ESG performance.
  289. You made them aware of the issues.

  290. You can now focus them on fixing them.
  291. Thank you.

  292. (Applause)