Unless you’ve been living under a rock, you’ve likely seen many of the celebratory headlines posted by defenders of DEI (diversity, equity, and inclusion) proclaiming that the recent Costco shareholder vote showed that 98% of Costco shareholders support DEI. That’s flat wrong.
To understand why, start by reflecting on the actual proposal submitted by the National Center for Public Policy Research (where I work). It merely asked Costco’s board to “conduct an evaluation and publish a report … on the risks of the Company maintaining its DEI roles, policies and goals.” Given all the obvious risks surrounding DEI these days, including reputational, legal, and regulatory risks, this request is squarely focused on appropriate shareholder concerns. So why vote against it?
To answer that question, we should start with the Big 5, which includes the Big 3 asset managers – BlackRock, Vanguard, and State Street – along with the Big 2 proxy advisers – Glass Lewis and ISS. While difficult to calculate precisely, the combined Costco votes attributable to this Big 5, either directly or indirectly, is likely over 50%. One thing we know about the Big 5 is that they have been under tremendous pressure for supporting ESG (environmental, social, and governance) and DEI agendas in partisan ways. Prior to this onslaught of pressure, they would routinely support left-leaning ESG and DEI proposals while voting against essentially identical proposals from the right. Their response to the recent pressure appears to be a decision to drop their support of left-leaning proposals in order to reduce or eliminate the appearance of bias. Accordingly, the related Costco “against” votes can be attributed to a broad risk-avoidance strategy rather than an embrace of DEI. In other words, either strategy – voting for more conservative proposals or voting for less leftist proposals – would work to reduce the pressure, but the message of the vote either way is “we’re getting out of the partisan voting game,” not “we love DEI.”
The situation may be analogized to proxy adviser Egan-Jones recently announcing that it would not vote in favor of merit-based hiring proposals because of challenges defining merit. Accordingly, Egan-Jones adopted the position that it would neither support merit-based nor DEI-based hiring proposals. To conclude from this that Egan-Jones supports DEI when it votes against merit-based hiring proposals is a bridge to far. I have also heard a proxy adviser announce they would never vote for a report because reports are a waste of resources. One can agree or disagree with that assessment, but clearly that adviser isn’t voting for DEI when they vote against our proposal – they’re voting against another report.
And even if one counts the votes of the Big 5 as embracing DEI, the concerns about those votes being conflicted – because all 5 make money on ESG and DEI unrelated to the performance of the individual company holding the vote – warrant discounting them. (More on that below.)
Next in the analysis comes Costco’s management, because so many shareholders simply default to following management and even those who don’t automatically do so were likely swayed by the disturbing hostility Costco expressed towards the National Center and its proposal. I have previously analyzed all the problems with Costco’s explanations for its opposition, including the bias evident in its ad hominem attacks, and you can read that here. For now, it may suffice to say that Costco likely wishes it had negotiated a withdrawal of the proposal after 19 Attorneys General followed the shareholder vote with a letter urging Costco “to end all unlawful discrimination imposed by the company through diversity, equity, and inclusion (‘DEI’) policies.”
Given that last year 20% of outstanding Costco shares apparently went unvoted, the combined influence of the Big 5 and Costco’s management likely accounts for the vast bulk of the voting. Add to that pension funds and endowments ideologically captured by the DEI mind virus and you’ve likely accounted for all the votes against.
At this point, the reader may push back and argue that to conclude shareholders shouldn’t have voted against our proposal is not the same thing as concluding they didn’t. That’s true as far as it goes, but our system of corporate governance cares about the legitimacy of votes. Accordingly, votes cast by the Big 3 on behalf of those invested in their funds (the “true owners,” according to Larry Fink), as well as votes influenced by the recommendations of the Big 2, should be discounted if those votes are conflicted or in breach of a relevant duty. On this point, the reader might want to review a letter from over 20 state financial officers sent to the Big 5 and raising the prospect of the Big 5 using their control of shareholder votes to engage in “the most severe breach of the fiduciary standard in American history.” In addition, votes cast by shareholders misinformed by Costco’s opposition statement should be similarly discounted.
In the end, one simply can’t conclude that the votes cast against our proposal can be legitimately described as votes for DEI. The combination of misinformation and bias, together with the terms of the proposal itself, simply precludes such a conclusion.
