Boardroom games

0:06Pushkin. You may have heard of the unionization push going on at Starbucks across the country, but there's a fight that you might not know about in Starbucks' boardroom. And it's being caused by a really wonky change to corporate governance rules that could have huge implications for corporate America. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in New York, joined from the New York studio by single issue activist advancing a social agenda, Wirtensa Aliyei. Hi, yes, I'm here to address human capital mismanagement issues by Ethan Wu.

0:47I'm afraid I've horribly mismanaged the human capital in the Unhedge podcast. I've had enough complaints from Rob. I'm sure you have. We are not pulling this out of thin air, listeners. Both of these quotes come from Hortensa's recent big read in the Financial Times, which you should absolutely read and we'll have in the show notes, about the fight in the Starbucks boardroom. It's super interesting. Gets at big issues about labor, about corporate governance. But before we get into some of the details, we got to start big picture Hortensa. What's a corporate board? Corporate board is seven or eight people who sort of are paid to turn up and think about things.

1:24Sounds like a good job. It's the best job in America. And they effectively should represent the interests of a company's shareholders. Yes. In America, the board is supposed to be the way by which shareholder interests are represented in corporate management. They're kind of the liaison. And it's not every country that has that system. Some countries like Germany have co-determination where you actually have workers that sit on the board, but in the US, it's a shareholder system. Traditionally, if people don't like how the company's being run, you have activist investors. Ortenso, you've been on the show previously to talk about Nelson Peltz's campaign at Disney where he doesn't like the way that that company's being run.

2:04They buy a certain economic stake and they lobby for changes and they get shareholders to vote on changes and blah, blah, blah. But in your story recently, you talk about a traditional campaign waged by a very non-traditional activist. That's right. So instead of a brash, aggressive boardroom raider that we're used to, we get a group of labor unions called the Strategic Organizing Center. And they are threatening to put three new board members onto Starbucks's board. And the campaign is really a push for Starbucks to take more seriously the labor issues, or what they refer to as severe human capital mismanagement, with which, Ethan, you are very familiar.

2:54And this is a really, really interesting novel campaign. We have never really seen a union utilize activism or proxy battles in this way. And it's all being enabled, Hortensa, by a pretty wonky change to the way that voting is done in the corporate boardroom. The type of thing that it'd be tucked away on page 12 of the Financial Times and only people that are really into financial regulation and corporate governance would know about it. But this is a change that the Securities and Exchange Commission made in 2021 and that could have big implications for corporate governance. Yes, this all sort of started in the dingy SEC offices in 2015, where there was this big discussion about how shareholders could have more representation at companies.

3:41And this had really been pushed by big pension funds like CalPERS. They felt that it was too difficult for shareholders to nominate company directors or to vote for company directors. So there was a discussion about a new rule change that would effectively allow companies to have all of the candidates on one sheet of paper so that any of the shareholders would have a so-called a la carte option where they could pick and choose which candidates they wanted to nominate to the board. and prior to this, what you would have to do is you would have to get on this greyhound bus and you'd have to like traipse around America and vote for the candidates that you wanted.

4:22Or you could send in your proxy card, but you'd only be able to use the proxy card by the company, which had the company's directors and nominees, or the proxy card by the distant shareholder, which had its own, again, its own nominees. And that made it really difficult for shareholders to get new board members elected. Now that's no longer the case, right? So when Starbucks issues its proxy card, it will have the names of all the nominees, including those by the SOC. I just want to underscore this point because there's a level on which it's really stupid, right? Before the system was, if you wanted to vote from home, you had to vote for either all of management's candidates for the board or all of the activists' candidates for the board.

5:05All the SEC did was you can pick and choose your favorite from management and you can pick and choose your favorite from the activists from the comfort of your own home without literally driving into the office. That's it. And that tiny little voting procedure change, which in theory, it's just kind of like slightly lowering like the transportation barrier to getting there could have potentially huge implications. I agree with you. It seems like a minor change, but it's an important change because it makes it, by certain measures, a fairer system in that you don't have to sort of traipse around the country to wherever these shareholder meetings are held.

5:39So I guess the importance of it was lost in the weeds because when this was all happening, it was right before the 2016 election and then Donald Trump came into power, everything got moved back. And so we're talking, you know, six years later is when the rules actually come into force in 2021. and there's this panic. Everyone is like, oh no, this is going to open the floodgates. And people really start to fear that there would be all these dissident shareholders nominating various board members and it would be absolute chaos. And the SOC has a really, really tiny stake in Starbucks. I think this is worth underscoring.

6:18They're doing this labor issue pressure campaign with a$16 ,000 stake in a$100 billion company. Why can they do that? I think just commonsensically, you would think if you have$16 ,000 and you show up and you say, I have an agenda for this meeting, you're going to get laughed out of the room. Yeah. Although to us, that seems like a lot of money. Well, yeah, that's true. But no, if it's a$100 billion company, and everyone there is a millionaire, you get laughed out of the room. That's right. And think about it. Nelson Peltz at Disney has control over$3 billion worth of shares. Whereas the SEC owns$16 ,000 worth of Starbucks shares.

6:55It's worth mentioning that they are affiliated with pension funds who also own stakes in Starbucks. But it is a very, very minor stake. And this is what the rule changes did. It made it possible for shareholders with honestly, even one share. You can buy one share in Starbucks and say, okay, theoretically, don't get too excited if anyone's listening in and thinking they can nominate a distant board. But you can theoretically buy one share, become a shareholder and nominate the candidates that you want. Having a small stake in a company doesn't necessarily negate the point that you're trying to make.

7:34And we saw this with Engine No. 1 and with Exxon. They owned a 0.02 % stake, I think, in Exxon. And their point was that, hey, if Exxon doesn't solve its climate change issues, if it's not moving towards green energy, then everyone is going to suffer. So you make it a us problem, not a me problem. You basically want the other shareholders to realize who have way more weight, right? Because Vanguard owns significantly more shares in Starbucks than the SOC does. but you want to make it that we're all in this together. And if Starbucks doesn't solve this labor issue, we're all going to suffer. Your shareholders are going to suffer and we're going to suffer and so are the workers.

8:18Right. So it's not that you were always able to do activism with a small shareholding, but what you can do now is much more easily rally people kind of around your cause. Am I getting that right? Because the barrier for voting is so much lower. Yes. And it's also like a strong arming tool. So you might not think that you're getting on the board, but you're like, hey, I want to make some noise. And I want everyone to know that Starbucks has a labor issue or it has human capital mismanagement issues. And by launching a proxy battle, you can get in the media. Obviously, we wrote a big read about it because we thought is fascinating, but it creates a lot of noise and it puts the company on alert and they have to defend themselves.

9:06They have to say that either this isn't an issue for us or it's an issue that we're dealing with, but it's a really good tactic to being heard. Yeah, it creates an additional point of leverage. There's also the consideration that if you are an activist pushing an issue like you want better working conditions at Starbucks, then you appeal to maybe a pension fund in a blue state and you say, so how about your progressive values? You should be voting for this proposal. And the pension fund may decide to vote or may decide against, but there's now this ability to rally people to a cause and exert that type of leverage over management.

9:42And you get into the piece, how it sort of fits into a broader picture of social and political issues increasingly being central in the boardroom. I mean, Disney's, I think, the example of this with our dearly departed friend, Ron DeSantis' presidential campaign was centered around his conflict with Disney in Florida. And that became very much part of Disney's share price story back then. And now the activist campaign. Yes. I do have to say one thing. So when activists typically wage a campaign, they will have a website. And for Tryon partners and Disney, it's Restore the Magic, which I think is genius.

10:21For the SOC, I think they should have had wake up and smell the coffee. That's good. They should hire you. Right. I should have been doing this campaign. No, the Disney example is actually a great example of how we're seeing these two proxy battles play out in tandem under the new universal proxy rules. And they actually, under the surface, are about similar things. I think within Disney, there is this perception that the reason these activists are coming after us is because of the sort of the resurgence of this anti-woke ideology and the fact that some of these investors believe Disney has gone, for want of a better expression, too far on the left.

11:04And I remember talking to one of the investors and them saying, I don't want to watch a Disney movie and be hit over the head repeatedly with social justice issues. I just want to be entertained. And so I think even though the activism there is being done by much more traditional actors, there's still this kind of social agenda theme in there. So is this just going to be the reality for every company now, that everyone's going to have either a woke or an anti-woke activist proposing board members who are going to shake up the governance or whatever? Is this just going to be the new state of play in corporate boardrooms?

11:42Well, this is the prediction, right? The fear really here is for companies how much money are we going to have to spend on fighting proxy campaigns if everyone can start nominating board members? Because it is a really costly exercise and can go up into the tens of millions, if not hundreds of millions of dollars if it's a long, hard-fought battle. The real concern is that if the SOC does win a board seat or get a good settlement, other groups will consider doing the same thing. And it just is a pain in the butt for companies. There's no other way to say it. It's just frustrating. And you don't want to be going into an annual shareholder meeting having to constantly defend your board and your company.

12:26A test case for many pains in the butts to come. Pains in the butts? Pains in the butt. Please don't repeat it. Pains plural in the butt singular. All right, Hortensa, we'll be back in just a moment with Long Short.

12:46Welcome back. This is Long Short, that part of the show where we go, long a thing we love, short a thing we hate. Hortensa, I'm stepping into your beat a little bit. I'm long deals. I feel like deals are back. We saw an uptick in M &A, mergers and acquisitions in the fourth quarter. Goldman Sachs and KKR and all these guys are talking to the press about 2024 is our year. It's really coming back. And the economy is good and rates are probably going to fall at some point soon. It feels like a good environment to be a dealmaker in after a year or two of pretty much no deals going on. So I'm long deals.

13:20You literally sound like the people I interview. No, it's definitely a sales pitch, but I know I think it's a good and convincing sales pitch. Are you fine for a job of Goldman? Yes, please hire me. I could be your investment banking salesperson. Ortenza, are you short something? So I am short the Oscars. because I'm actually just really tired of hearing about it. But this ties in into a short that Ethan had a while ago, which was, what was it, Barbie Mania? It was like Barbie discourse. I was like sick of talking about it. It was a fine movie. Let's all move on. We don't need to talk about it in circles forever.

13:59Right, and we pointed out how you would have just lost a ton of money if this was like a real short that you could put on because Barbie Mania is back. Like, yeah, I'm just tired of the Oscar snub talks. There are bigger things going on in the world. Ryan Gosling put out a statement to People magazine, condemning the fact that Greta Gerwig and Margot Robbie were not nominated, but he was and blah, blah, blah. Oh, my God. Well, I mean, he also shouldn't have been nominated. So I get his point. No one should be nominated. Cancel the Oscars. Yes. No more Oscars. We should really film the sub views.

14:37That's a much more exciting. Yes. Yeah. For listeners, that's the society for the advancement of what is it? Business editing and writing or something. Yeah. Yeah. It's arguably more prestigious than the Oscars. All right, Artensa, thanks for being here. We'll have you back very soon. And listeners, we're back in your feed next week with another episode of Unhedged. Catch you then.

15:05Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.