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| | | Multiple industries at all levels of seniority remain inaccessible to diverse employees. Demands to diversify need to be attached to an incentive structure that compel corporate change. Morality––or the market shame that results from lack of adherence to a moral position––is an unmoving, or at best slow yielding, corporate incentive. Conversely, financial stipulations that impact a corporation’s bottom-line necessarily dictate a corporation's strategy. | |
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< | Capital limits all corporations. Corporations routinely fund general corporate initiatives through debt finance, where they borrow money from a syndicate of banks. The credit agreements that set a borrower's and lender's obligations are based in private contract law, meaning the parties bargain for the terms by which they are bound. This includes important terms like at what interest rate a loan is repaid to lenders and what advisory fees a borrower owes to legal and financial advisors. Could corporate diversity materially and expediently improve if these rates and fees were attached to diversity attainment over the course of the loan? | >
> | Capital limits all corporations. Corporations routinely fund general corporate initiatives through equity and debt finance. In equity markets, corporations dilute their ownership with investors who can directly challenge a company’s strategic direction. Could corporate diversity attainment improve with the activism of prominent shareholders? In debt finance, the credit agreements that set a borrower's and lender's obligations are based in contract law, where parties bargain for the terms by which they are bound. This includes important terms like at what interest rate a loan is repaid to lenders and what advisory fees a borrower owes to legal and financial advisors. Could corporate diversity materially and expediently improve if these rates and fees were attached to diversity attainment over the course of the loan? | | | ESG and Shareholder Activism | |
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< | For public companies, the equity markets are a central funding source for corporate initiatives. But dispensing equity yields shareholders who, with enough amassed equity, also have a say in the company's priorities. This shareholder activism is an increasingly popular tactic to move corporations in a particular strategic direction. Activism that targets ESG--Environmental, Social, and Governance--concerns usually take this form. Climate-conscious operations is a highly visible, and growing, cause for shareholder activists. For example, when ExxonMobil? did not commit to a net-zero status goal like its peers BP and Shell, an ESG-activist hedge fund initiated a proxy contest against the company. After receiving institutional investor support, the successful proxy challenge led to the removal and addition of hand-picked directors on Exxon's board. The new board is now exploring avenues for climate-friendlier operations. | >
> | For public companies, the equity markets are a central funding source for corporate initiatives. But dispensing equity yields shareholders who also have a say in a company's priorities. This shareholder activism is an increasingly popular tactic to move corporations in a particular strategic direction. Activism that targets ESG--Environmental, Social, and Governance--concerns usually take this form. Climate-conscious operations is a highly visible, and growing, cause for shareholder activists. For example, when ExxonMobil? did not commit to a net-zero status goal like its peers BP and Shell, an ESG-activist hedge fund initiated a proxy contest against the company. After receiving institutional investor support, the successful proxy challenge led to the removal and addition of hand-picked directors on Exxon's board. The new board is now exploring avenues for climate-friendlier operations. | | | | |
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< | The rise in ESG attacks are expansive and not limited to climate issues or challenges by single investors with large equity stakes. Carl Ichan, famous for his serial activism, recently launched a board challenge at McDonald? ’s over animal rights abuse even though his ownership interests are only worth around $50,000. As the Financial Times noted, given the rise in ESG, companies and boards must now be prepared for investors of varying shareholder interests attacking even “squishy matters where blunt profit maximi[z]ation is not the issue.” | >
> | ESG challenges are not limited to climate issues and they are not only brought by investors with large equity stakes. Given ESG's expansiveness, the home “diversity” seemingly has under "social" in ESG, and the general corporate preference to allow the markets to dictate outcomes, shareholder activism may seem like the obvious argument for how to move the needle on corporate diversity attainment. Even the Financial Times noted companies and boards must be prepared for investors of varying shareholder interests attacking even “squishy matters where blunt profit maximi[z]ation is not the issue.” | | | | |
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< | Given ESG's expansiveness, the obvious home diversity seemingly has under the "social" umbrella, and the general preference to allow the markets to dictate outcomes, shareholder activism .
While shareholder activism and ESG-based challenges are the more obvious avenues to pressure corporations to pursue genuine workforce diversity, these strategies require continuous engagement, proxy coordination, and motivated shareholders. Further, these strategies are generally limited to public companies and do not solve the important issues of time and expediency. | >
> | Shareholder activism are the more obvious avenues to pressure corporations to pursue genuine workforce diversity, these strategies require continuous engagement, proxy coordination, and motivated shareholders. Further, these strategies are generally limited to public companies and do not solve the important issues of time and expediency. | | | The Proposal: Bank Financing
In their paper “Corporate Carbon Reduction Pledges: Beyond Greenwashing,” co-authors John Armour, Luca Enriques, and Thom Wetzer present their “green pill” solution to pressure corporations into green compliance. The solution requires corporate borrowers to meet agreed environmental goals. The interest rate on their bank credit is indirectly tied to their environmental goal attainment: the greater the attainment, the lower the interest rate. |
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