Transcript: Boardroom games

This is an audio transcript of the Unhedged podcast episode: ‘Boardroom games’

[MUSIC PLAYING]

Ethan Wu
You may have heard of the unionisation 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 us from the New York studio by single-issue activist advancing a social agenda, Ortenca Aliaj.

Ortenca Aliaj
Hi. Yes, I’m here to address human capital mismanagement issues by Ethan Wu.

Ethan Wu
I’m afraid I’ve horribly mismanaged the human capital, the Unhedged podcast.

Ortenca Aliaj
I’ve had a lot of complaints from Rob.

Ethan Wu
I’m sure you have. We are not pulling this out of thin air, listeners. Both of these quotes come from Ortenca’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 labour, about corporate governance. But before we get into some of the details, we gotta start big picture, Ortenca. What’s a corporate board?

Ortenca Aliaj
A corporate board is seven or eight people who sort of are paid to turn up and think about things.

Ethan Wu
Sounds like a good job.

Ortenca Aliaj
It’s the best job in America. And they effectively should represent the interests of a company’s shareholders.

Ethan Wu
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 like co-determination where you actually have workers that sit on the board. But in the US it’s a shareholder system. So traditionally if people don’t like how the company’s being run, you have activist investors.

And Ortenca, you’ve been on the show previously to talk about Nelson Peltz’s campaign at Disney, where he doesn’t like the way that company’s being run. And, you know, they 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.

Ortenca Aliaj
That’s right. So instead of a brash, aggressive boardroom raider that we’re used to, we get a group of labour unions called the Strategic Organising Centre, and they are threatening to put three new board members on to Starbucks’ board. And the campaign is really a push for Starbucks to take more seriously the labour issues, or what they refer to as severe human capital mismanagement, with which Ethan, you are very familiar.

Ethan Wu
Yes.

Ortenca Aliaj
And this is a really, really interesting novel campaign. We have never really seen a union utilise activism or proxy battles in this way.

Ethan Wu
And it’s all being enabled, Ortenca, by a pretty wonky change to the way that voting is done in the corporate boardroom, like the type of thing that it’d be tucked away on like page 12 of the Financial Times and like, only people that are really into financial regulation or corporate governance would like, know about it. But this is a change that the Securities and Exchange Commission made in 2021, and it could have big implications for corporate governance.

Ortenca Aliaj
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, and 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 à 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. Or 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 dissident 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.

Ethan Wu
I just wanna underscore this point, because there’s a level on which it’s like, really stupid, right? Like, 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. All the SEC did was you can pick and choose your favourite from management and you can pick and choose your favourite 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.

Ortenca Aliaj
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. So 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 gonna open the floodgates. And people really started to fear that there would be all these dissident shareholders nominating various board members, and it would be absolute chaos.

Ethan Wu
And the SOC has like a really, really tiny stake in Starbucks. I think this is worth underscoring. Like, they’re doing this labour issue pressure campaign with a $16,000 stake in a $100bn company. Why can they do that? Like, 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 gonna get laughed out of the room.

Ortenca Aliaj
Yeah. Although to us, that seems like a lot of money.

Ethan Wu
Well, yeah, that’s true, but no, if it’s a $100bn company, you know, and everyone there’s a millionaire, you’d get laughed out of the room.

Ortenca Aliaj
That’s right. And think about it. You know Nelson Peltz at Disney has control over $3bn worth of shares whereas, yeah, the SOC owns $16,000 worth of Starbucks shares. It’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, OK, theoretically, don’t get too excited if anyone’s listening in and think they can nominate a distant board. But you could 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.

And we saw this with Engine No. 1 and with Exxon. They own just 0.02 per cent 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 realise, who have way more weight, right? Because Vanguard owns significantly more shares in Starbucks than the SOC does. But you wanna make it that we’re all in this together and if Starbucks doesn’t solve this labour issue, we’re all going to suffer. Your shareholders are going to suffer and we’re going to suffer, and so are the workers.

Ethan Wu
Right. 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.

Ortenca Aliaj
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 wanna make some noise and I want everyone to know that Starbucks has a labour issue or has human capital mismanagement issues. And by launching a proxy battle, you can get in the media. Obviously, you know, we wrote a Big Read about it because we thought it’s fascinating, but it creates a lot of noise and it puts the company on alert and they have to defend themselves. They 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.

Ethan Wu
Yeah, it creates an additional point of leverage. There’s also, you know, the consideration that if you are, you know, an activist pushing an issue like you want better working conditions at Starbucks, then you appeal to, you know, 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, you know, 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.

And 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, like the example of this with our dearly departed friend Ron DeSantis’s presidential campaign was centred around, you know, 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.

Ortenca Aliaj
Yes, I do have to say one thing. So when activists typically wage a campaign, they will have a website. And for Trian partners and Disney, it’s Restore The Magic, which I think is genius. For the SOC, I think they should have had Wake Up and Smell the Coffee.

Ethan Wu
That’s good. You should be, they should hire you.

Ortenca Aliaj
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’s 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.

And I remember talking to one of the investors and them saying, I don’t wanna 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 sort of still this kind of social agenda theme in there.

Ethan Wu
So is this just gonna be the reality for every company now, that everyone’s going to have like a, either a woke or an anti-woke activist proposing your 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?

Ortenca Aliaj
Well, 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 could 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 wanna be going into an annual shareholder meeting having to constantly defend your board and your company.

Ethan Wu
A test case for many pains in the butts to come. Pains in the butts. Pains in the butt.

[MUSIC PLAYING]

Ortenca Aliaj
Please stop repeating. (Laughter)

Ethan Wu
Pains, plural, in the butt, singular. All right, Ortenca, we’ll be back in just a moment with Long/Short.

[MUSIC PLAYING]

Welcome back. This is Long/Short, that part of the show we go a long a thing we love, short a thing we hate. Ortenca, I’m stepping into your beat a little bit. I’m long deals. I feel like deals are back. You know, 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, you know, the economy’s good and rates are probably gonna fall at some point soon. Feels like a good environment to be to be a dealmaker in after, you know, a year or two of pretty much no deals going on. So I’m long deals.

Ortenca Aliaj
You literally sound like the people I interview.

Ethan Wu
(Laughter) No, it’s definitely a sales pitch, but I think it’s a good and convincing sales pitch as a (inaudible).

Ortenca Aliaj
Are you applying for a job at Goldman? (Laughter)

Ethan Wu
Yes. Please hire me. I could be your investment banking salesperson. Ortenca, are you short something?

Ortenca Aliaj
So I am short the Oscars, because I’m actually just really tired of hearing about it. But this ties it into a short that Ethan had a while ago, which was — was it Barbie mania or just . . . 

Ethan Wu
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.

Ortenca Aliaj
Right? 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. Yeah. I’m just tired of the, like, Oscar snub talks. There are bigger things going on in the world.

Ethan Wu
Ryan Gosling put out a statement to People magazine like, condemning the fact that Greta Gerwig and Margot Robbie were not nominated, but he was and blah blah blah. Oh my God.

Ortenca Aliaj
Well, I mean, he also shouldn’t have been nominated. So I get his point.

Ethan Wu
No one should be nominated. Cancel the Oscars. (Ortenca laughs) No more Oscars.

Ortenca Aliaj
We should really film the Sabews. That’s so much more exciting.

Ethan Wu
(Inaudible) to say yes. Yeah. For listeners, that’s the Society for the Advancement of — what is it? — Business Editing and Writing, or something. It’s arguably more prestigious than the Oscars.

[MUSIC PLAYING]

All right, Ortenca, 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.

[MUSIC PLAYING]

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

[MUSIC PLAYING]