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Introduction

• Today's lecture focuses on investment and finance within post-growth entrepreneurship.
• The lecture explores the role of investors and venture capitalists (VCs) in post-growth entrepreneurship and bootstrapping.

Non-Extractive Finance

• Investing is a political act.
• Personal capital (salaries, bank deposits, pensions, insurance) constitutes most global capital.
• Individuals decide where to allocate their capital—influencing the world.
• George Soros (progressive fund manager) supports human rights, poverty, and freedom of speech.
• Robert Mercer (hedge fund manager) is a major Trump donor and funds alt-right media (e.g., Breitbart).
• Fund managers' political contributions influence policy.
• US and EU campaign contributions are largely unconstrained, creating a powerful lobbying force.

Money Flows in Finance

• Asset owners (e.g., pension funds, banks, insurance companies, sovereign wealth funds, high-net-worth individuals, endowments) initiate and conclude the financial system.
• Asset owners provide capital to asset managers (limited partners).
• Asset managers (e.g., hedge fund managers, venture capitalists, wealth managers) aim to maximize returns for shareholders, charging fees (often "2-and-20").
• Asset managers distribute capital to companies (startups, scale-ups, publicly listed companies).
• This cycle repeats: individuals to asset owners, to managers, to companies, and back to individuals.

History of the Stock Market

• Amsterdam stock market initially funded the Dutch East India Company's naval expeditions.
• The market evolved from financing companies to enabling speculation.

Financial Extraction

• The finance sector extracts substantial capital.
• Extraction methods include: asset manager fees, shareholder dividends, and investment returns.

Tools for Extraction

• Stock Buybacks: Companies use excess cash to buy their own shares, artificially increasing prices.
  • Reducing outstanding shares boosts per-share value.
• Mergers and Acquisitions: Significant transactions generate management fees and compensation.
• Activist Hedge Fund Managers (e.g., Bill Ackman, Carl Icahn, David Einhorn): Acquire small stakes to encourage dividends and buybacks, selling for profit.

The Consequences of Stock Buybacks

• CEOs are incentivized by equity compensation to pursue buybacks.
• Buybacks divert capital from productive uses (investment, staff, product/service improvement, quality/research, and development).
• Companies may be disassembled (layoffs, division sales, increased debt), weakening their long-term viability and impacting employees and society.
• Apple: Significant stock buyback offender. Initially, Warren Buffett unsuccessfully pressured Steve Jobs to adopt buybacks, but Tim Cook implemented them after Jobs’ death.
• Meta: Michigan pension fund sued Meta in 2020 over suspicious buyback timing before Zuckerberg, Sandberg, and Thiel sold their shares, raising insider trading and market manipulation concerns.

Case Studies

• Apple is a major participant in stock buyback programs.
• Meta faced a lawsuit over buyback timing related to insider trading accusations.

Conclusion

• Not all activist hedge fund managers harm companies; some prioritize social/environmental responsibility.
• Engine No. 1 demonstrates an ethical investment approach.

Engine Number One

• Engine No. 1 acquired a minority stake in ExxonMobil to advocate for a shift to renewable energy, assembling a coalition with California asset owners (CalPERS, CalSTRS), major investment firms (Blackrock, Vanguard, State Street), and ISS.
• Engine No. 1 successfully replaced ExxonMobil board members with renewable energy experts.

Engine Number One’s ETF

• Engine No. 1 launched an ETF tracking the S&P 500, allowing investors to participate in related activism.
• This model directly connects shareholder votes to activism unlike traditional NGOs.

Conservative Right Response

• Engine No. 1's success prompted a conservative backlash against ESG investing, labeling it "woke capitalism."
• Several US attorneys general from red states condemned ESG. Republican governors demanded divestitures from asset managers supporting ESG.
• Florida Gov. Ron DeSantis attempted to divest $13 billion from BlackRock connected to the ExxonMobil campaign. Vanguard's withdrawing from the Net Zero Alliance reflects this tension.

Political Takeovers

• Strive Asset Management, responding to ESG backlash, aims to influence corporate agendas through board takeovers of "woke" companies.
• Disney is a potential target.
• Elon Musk's Twitter leveraged buyout exemplifies a politically motivated takeover by the conservative right.
• Musk's strategy involved cost reductions, staffing cuts, reinstating accounts, and using previous leadership for political gain, despite potentially impacting profitability.

ESG in Focus

• ESG historically focused divestment from "sin stocks" (weapons, tobacco, alcohol, fossil fuels).
• Divestment merely transfers ownership, not necessarily values. The transfer of proxy votes to opposing entities is a core issue.

ESG and Fiduciary Duty

• ESG's compatibility with fiduciary duty is debated.
• ESG proponents argue systemic risks (climate change) impact portfolios. Critics dispute this, seeing ESG as hindering financial gains.
• Recent research shows positive correlations between ESG and financial performance.

ESG Returns & Greenwashing

• ESG investments have generally outperformed non-ESG portfolios, due to fewer scandals and reduced extractive practices.
• Growing ESG investments are sometimes driven by profit motives rather than genuine ethical commitment. Greenwashing occurs through misleading corporate portrayals of environmentally and socially responsible practices.

Reforming ESG: Focusing on Governance

• Effective ESG reform focuses on governance issues (executive/board compensation, fee structures, proxy voting).
• Such reforms incentivize genuine corporate social and environmental responsibility and reduce financial extraction.

Non-Extractive Finance

• Non-extractive finance removes financial extraction from investment vehicles; instead, it drives positive company impact.
• Tactics include alternative entity forms (non-profit), steward ownership, and fee structure reform.
• Key examples are John Bogle's index fund model, Snowball Impact Management, and Impact Shares.

Small Funds and Institutional Investors

• Smaller, unique funds struggle with funding from diversifying institutional investors prioritizing modern portfolio theory.
• This impedes the development of a comprehensive sustainable investment landscape.

Solutions for Institutional Investors

• Pension funds should diversify beyond modern portfolio theory to support a wider range of sustainable funds.
• Incubation programs can assist smaller funds grow to attract institutional investors.
• Encourage a systemic shift toward non-extractive financing, benefiting both returns and social impact.

Action for the Public

• Individuals can advocate for transparent and responsible pension investments.
• Challenge fiduciary duty definitions to encompass broader societal issues (sustainability).
• Public engagement, shareholder activism, and legal action can influence market direction.

NGOs and Shareholder Engagement

• NGOs like the Interfaith Center for Corporate Responsibility (ICCR) and As You Sow engage in shareholder activism, often originating from religious groups.
• These organizations demonstrably impact corporate behavior and promote positive changes.

As You Sow

• As You Sow champions shareholder advocacy through resolutions, actively challenging corporate practices. This organization worked with 156 companies across 11 program areas exceeding 196 engagements. They escalated 99 engagements to shareholders; 56 resolutions were withdrawn after companies agreed to take action; 32 proposals went to vote, with 10 passing. An average 41.4% support was recorded; 2.18 million shares supported their resolutions; 14 SEC resolutions were successfully challenged.

Key Issue Areas

• As You Sow addresses various issues (climate change, DEI, racial justice) through shareholder resolutions regarding issues such as corporate misalignment with investments, governance, water usage, and political spending.

Other Notable Shareholder Activists

• John Chevetta, James McRitchie, and Myra Young are active in shareholder proposal filings.

Impact of Shareholder Proposals

• Shareholder proposals often receive strong support (average 47.8%).
• They successfully challenge large corporations and shape corporate practices.

Accessibility of Shareholder Proposals

• Filing shareholder proposals is often low-cost, especially in the UK (100 shareholders owning £100 worth of shares).
• US requires $2,000 in shares held for at least three years.
• Some countries (e.g., Norway) have no share ownership requirement; others have more stringent criteria.

Proxy Advisory Services

• Proxy advisory firms (e.g., ISS & Glass Lewis) provide voting recommendations to asset managers. These firms have significant sway, with 95% of asset owners relying on their advice; 20% of shareholder votes are cast within three days of their recommendations.

Pass-Through Voting

• Pass-through voting gives ultimate beneficiaries control over how their assets are voted. This empowers investors in passively managed funds.
• Engine No. 1 and BlackRock have facilitated pass-through voting. The Index Act in the US promotes mandatory pass-through voting for major investors.

The Universal Proxy Card

• Universal proxy cards empower investors by allowing individual candidate voting instead of blanket approval/rejection of director slates.

Role of Legislators and Regulators

• Legislators and regulators can shape sustainable/socially responsible investing.
• They can streamline processes for ESG funds, encourage less extractive business entities, and deter harmful corporate behavior.

The New Normal

• Societal shift toward sustainable/responsible business/finance is underway, with shareholder activism as a primary catalyst; individuals can significantly influence corporate decisions.