Let shareholders have a say on decoupling

The proxy statement is an annual rite of shareholder democracy. Votes to elect directors and, in recent years, approve executive pay routinely receive support greater than 90%. In addition to the matters put before investors by companies, investors too have the opportunity to put issues up for a vote. These proposals run the gamut of environmental, social, and governance matters. With rare exceptions, these shareholder proposals fail. One proposal that ought to be put before investors – and pass – is the extent to which companies are exposed to China.

Until recently, American corporations have been one of the most consistent advocates for engagement with China. This was driven largely by genuine enthusiasm about the potential of the country’s market. Even as corporations privately complained about theft of intellectual property or unfair competition, they justified their continued presence in China because they believed conditions would improve and also because investors expected them to be there.

But if corporations looked beyond the next quarter of their Excel spreadsheets, many might find that the net present value of their continued presence in China’s market is negative. This is not only because western corporations are confronting declining market share in a slowing Chinese economy. Indeed, the decision would be justified even if deteriorating US-China relations were not putting them at risk of being collateral damage.

China’s track record of exploiting foreign investment until state-favored champions supplant western companies not just in China, but globally, mean that companies operating in China are selling away their future existence. Moreover, China has shown that it is willing to use its economic hold over companies to coerce or induce them into actions that include lobbying on its behalf in foreign capitals, cooperating on research into dual-use technologies such as artificial intelligence, and suppressing speech not just within China’s borders, but globally.

Most stock is held by institutional money managers, who rarely oppose management or take on an activist role. (Many managers are also seeking to grow their business serving China’s investors.) But there is both precedent and recent shifts that belie the 2019 defeat of a shareholder proposal by shareholders of Alphabet that called for a review of the human rights implications of Google re-entering China with only 2% of votes in favor. For precedent, look to the 1980s, when institutional investors pressured American corporations over their presence in Apartheid South Africa. The success of the movement did not come from winning a majority of votes cast – but by changing the broader economic and political calculus of engagement with South Africa.

For trends, the 2019 declaration by the Business Roundtable articulating a concept of stakeholder over shareholder capitalism marks a significant shift. That effort was shepherded by leaders such as Larry Fink, CEO of BlackRock, which controls more than $7 trillion in assets. Fink has used his influence most actively on climate matters, pledging to divest its actively managed portfolios of shares in companies that generate more than a quarter of revenues from thermal coal production. That same type of enlightened self-interest is required with respect to geopolitics.  

At minimum, shareholders should demand of their corporations a clear affirmation of their opposition to and commitment to not support or benefit from China’s human rights abuses in Xinjiang. Other measures might call for their CEOs to step down from roles such as Tsinghua’s School of Economics and Management Advisory Board, in that particular case in protest of the firing of a law professor who dared criticize the Communist Party. The most aggressive proposals, in binding or non-binding form, might call for a cap on the percentage of procurement spend in or revenue from China. At a level of 10%, the latter cap would implicate at least 100 companies in the S&P Total Market Index.  

Do proxy votes matter even if they are bound to fail? And why not let managers make the call? As the South Africa experience shows, even resolutions that do not pass can nonetheless send a signal that prompts managers to change their behavior. (Keep in mind that Google’s leaders abandoned its China re-entry too.) Sufficiently robust support also allows executives who do minimize exposure to China to sidestep challenges that they are not exercising their fiduciary responsibilities. Finally, when investors signal their willingness to walk away from China, it robs the CCP of its power to threaten companies because investors have presumably already discounted the value of any earnings from the country.

Some companies, with large exposures to China, such as the casino operator Wynn, may reaffirm their commitment to China. In doing so, their representations before the US government should be considered tantamount to that of a foreign agent. Others, such as Boeing, may opt to stay out of confidence that they maintain some strategic leverage. But other firms, with the sanction of their shareholders, may realize that principle and profit is best served by reducing their exposure to China.

The Trump Administration has acted aggressively to advance the decoupling of the American and Chinese economies, raising tariffs, heightening scrutiny of inbound investment, and tightening export controls. Where government action is not explicitly warranted by strict national security considerations or to prevent the most egregious trade abuses, letting shareholders take the lead would require the government to catalyze a more constructive public debate about the country’s overall approach to China than what has transpired to date. A proxy vote on China, regardless of its outcome, would remind shareholders to consider their obligations as citizens too.