Investors Need to Act on Institutionalized Discrimination

For each of the past three years, Santander Consumer USA Holdings’ SC shareholders have been prompted at their annual meeting to vote on a resolution that asks the company to report on racial discrimination in vehicle lending. The resolution is based on research showing that borrowers of color are more likely to face dealership interest-rate markups than white borrowers with comparable credit scores.

This isn’t the only race-related resolution shareholders have voted on this proxy season--nearly 30 have appeared on various U.S. company ballots.

This week, the resolution on the ballot at Santander, a consumer finance provider that offers vehicle loans through dealerships, earned 12% support from shareholders. That’s approximately the same level of support it received in each of the previous two years it was voted on.

This is one example of how racial bias contributes to the uneven distribution of opportunities, protections, and wealth across society--institutionalized discrimination. This issue lurks in investment portfolios and explains much of the observed inequality between white and black households.

While shareholder resolutions are a key way for investors to move the needle within companies on issues of social justice, they often don't garner much support. If the system through which we invest perpetuates racial discrimination, we investors have a responsibility to be part of the change.

Shareholder Resolutions Have Long Been Used to Drive Change Investor mobilization has been instrumental in driving democratic changes and tackling injustices for years. Take shareholders' opposition to chemical weapons during the Vietnam War, or the founding of the Coalition of Environmentally Responsible Economies in the face of the Exxon Valdez oil spill.

In the first-ever social resolution on a corporate ballot, shareholders asked chemical company Dow DOW to halt production of napalm that the U.S. government used in the Vietnam War. Shareholder resolutions also had an important role to play in the anti-apartheid movement, as investors advocated for divestment from South Africa.

This tradition continues today.

A Look at This Year's Shareholder Resolutions Against Institutionalized Discrimination This year, there are at least 28 shareholder resolutions on various ballots that, in one way or another, address racial diversity, inclusivity, and discrimination.

We’re most familiar with resolutions that address race and gender as an internal diversity issue. Resolutions asking for workforce, executive management, and board diversity disclosures continue to receive relatively strong support in 2020--about 43% on average so far this proxy season. Most resolutions ask for a workforce breakdown by race and gender across job categories, and for an explanation of efforts to promote inclusivity.

Other resolutions extend last year’s call for gender pay equity disclosures, to ask companies to report on pay differentials by race. These haven’t fared as well, averaging 10% support for those voted so far this season.

In 2020, resolutions address racial discrimination and racial bias in companies’ dealings with external stakeholders in a variety of ways, targeting issues such as:

• Racial bias in vehicle and mortgage lending practices.
• Hate speech and content enforcement policies on social media and online shopping platforms.
• Application of facial recognition technologies.
• The disproportionate concentration of pollution in communities of color.
• Racial discrimination against farmers in food supply chains.

Amazon.com AMZN has a few of these resolutions on the ballot in the 2020 proxy season. The company’s second-highest supported shareholder resolution of the year (35%) asked the company to “report on its efforts to address hate speech and the sale or promotion of offensive products throughout its businesses.” It argued that failure to adequately enforce its own policies that are intended to prohibit “products that promote, incite or glorify hatred, violence, racial, sexual or religious intolerance or promote organizations with such views” could “…expose Amazon to reputational damage and impair relationships with key stakeholders.”

Another proposed resolution at Amazon--which received far lower shareholder support, a paltry 6%--asked the company to report on efforts to “…identify and reduce disproportionate environmental and health harms to communities of color, associated with past, present and future pollution from its delivery logistics and other operations.” The disproportionate accumulation of pollution in communities of color across the United States and known health consequences of exposure to pollutants, especially pollutants from heavy vehicle traffic, links environmental impacts to social justice.

At Chevron CVX, a similar resolution called attention to the health burden on low income and predominantly minority communities located near Chevron’s operations, which are disproportionately at risk from discharge or leaks. The resolution cites evidence of increased cardiovascular, cancer, and asthma risk in communities situated near Chevron’s Richmond, CA, refinery, where 80% of residents are people of color, and asked for a report on how it assesses and mitigates these harms. The resolution earned 17% support.

At Northrop Grumman NOC, a coalition of religious groups brought a resolution to vote asking the company to assess and report on “…the actual and potential human rights impacts associated with high-risk products and services...” One of the concerns the resolution raised is algorithmic racial bias in surveillance technologies the company has developed for the U.S. government, which would result in potential harm to immigrant communities. This May, 24% of shareholders supported this resolution, down from 31% support for a similar resolution brought by the same investors in 2019.

In addition, Facebook FB was asked to report on the civil and human rights implications of racial targeting in advertising algorithms, noting that a Russian influence campaign was able to use this feature to target black Americans in the 2016 election. This resolution earned 7% support.

Social Movements Can Drive Investor Tipping Points In an increasingly connected world, reputation is becoming more and more important for businesses, both as a potential asset and a potential liability. At the company level, businesses that contribute to institutionalized discrimination by failing to tackle racial discrimination and bias in their products, workplaces, supply chains, and marketing practices risk losing their social license to operate.

Consider GEO Group GEO. Last year, the company's treatment of immigrant detainees led to employee walkouts in their supply chain and reduced access to lending capital as banks like J.P. Morgan committed to stop lending to prison contractors. Being a government contractor did not insulate the company and its investors from loss of reputational capital, which translated to a higher cost of financial capital. As stakeholder pressure mounted, shareholders threw their weight behind a resolution that had been filed jointly by a religious group and a labor pension fund to investigate and report on how GEO Group had been applying its human rights policy and how it could prevent further abuses. Ultimately, this resolution earned 88% support from investors--but only after management made the unprecedented move of changing its voting recommendation two weeks before the company's shareholder meeting.

In the same vein, the wave of protests calling for racial equality will likely lead to stronger investor action beyond the 2020 proxy season, addressing the investment and reputational risks of racism in its many forms.

Asset Managers Should Be Part of the Movement Against Institutionalized Discrimination On a bigger scale, social unrest and a general erosion of trust could have significant consequences for the economy. That's why it's progressive shareholders with a social mandate who have often been the voice for long-term thinking about what's best for the economy--they are the filers of these shareholder resolutions.

But without much support from large asset managers, vote outcomes on shareholder resolutions remain relatively low. Apart from those resolutions dealing with workplace and board diversity, racial discrimination has not been a focus of large asset manager engagement efforts or an issue guiding their proxy voting.

Fund investors need to take a close look at their funds' voting records around discrimination and inequality and call for stronger alignment between recent statements and proxy votes. The institutions representing individual investors in the proxy process are stewards of capital markets--markets that are inherently racially biased. These institutions could be using their voting power and advocacy to reduce the appalling differentials that taint investors' portfolios.