Global Finance: What’s your interpretation of ESG?

Jon Solorzano: When I think about ESG, the G is the glue because companies need to structure themselves to address the various needs of the business or stakeholder expectations, whether those are related to the environment or human capital. Those needs should be appropriately structured within an organization.

GF: We now see companies maneuvering—even suing—to block shareholder proposals. What do you think about such moves?

Solorzano: For background, under US securities rules, smaller shareholders can bring proposals, and historically the SEC has rules for excluding proposals on ballots, especially those related to ordinary business decisions. Many would-be proponents didn’t bother trying because they knew their proposals would get excluded. In 2021 though, the SEC introduced Staff Legal Bulletin 14L, which made excluding these proposals on the grounds of micromanagement harder.

Historically, a small band of investors with holdings in many Fortune 500 and Russell 3000 companies brought proposals that address esoteric governance issues, like term limits on board members. In the early 2010s, companies successfully sued these proponents to exclude these proposals from ballots rather than going through the SEC, but after a few years, the courts stopped ruling in favor of issuers and the litigation route became largely unused. 

That being said, only shareholders are eligible to make these types of proposals.In the Arjuna Capital and Follow This case, Exxon makes a novel argument that these are not real shareholders but rather extreme activist organizations that solicit donations to purchase shares solely to bring activist campaigns with the intention of shutting down oil companies. These activists label their own tactics as “Goldilocks Trojan Horse,” meaning they use the proxy mechanism to destroy from within. Exxon asserts this is misaligned with its true shareholders that seek economic return. Not surprisingly, these “shareholders” quickly showed their lack of skin in the game and responded to Exxon’s suit by rapidly retreating and pulling their proposal just days after the suit was filed against them.

GF: Many companies talk about sustainability, but their actions speak otherwise. How would you guide these companies?

Solorzano: Many companies go astray when they try to be everything to everyone; they should focus on what’s core to their business and stakeholders. Companies should prioritize and understand what matters—like the impact of decarbonization or regulations if they’re in a high-emissions sector or cybersecurity if they’re a tech company—and execute on those in a very strategic way. From the governance perspective, companies should articulate these decisions up the organization so people understand why they’re doing it and how they’re making choices.

GF: There has been pushback against ESG, yet companies that pay attention to ESG do better. Is the problem short-termism, or a rigid sense of shareholder value?

Solorzano: I think the data about ESG performance versus standard portfolios is not settled, but what has certainly shifted is the rise of “passive” index investors who are generally in it for the long haul and have demanded that corporates plan accordingly.

There is a generational divide as well. Older generations may want companies to have a singular focus on shareholder return, whereas younger generations expect the companies that they patronize or work at to align with their values. Companies also need to think about their brand’s perception if that’s core to the business. Companies don’t have the luxury of staying purely neutral anymore. Younger generations vote with their wallets, and a company can easily lose market share to a competitor that speaks in a way that resonates with certain generations. Smart companies recognize that sometimes you need to do what’s unpopular if that’s the right thing for the business—but also know when to stay out of certain issues even if a vocal group thinks you should get involved.