Pressured Whole Foods Sale Exposes Conflicting Motivations under Sustainability Tent
Many investors now look to ESG (Environmental, Social, and Governance) factors for insight into more sustainable investing strategies. ESG scores are generated by internationally recognized ratings agencies to compare one company’s performance on material non-financial factors to that of its peers. However, of course, ESG means different things to different people.
When news broke that Amazon planned to purchase Whole Foods Market, many SRI (Sustainable, Responsible, Impact) investors, myself included, shared in a collective sigh with the acknowledgement that one of the shining stars of a more conscious capitalism was being swallowed up by the e-commerce giant.
It may surprise SRI investors to learn that Whole Foods’ high ESG scores actually exposed the company to pressure from activist investors, who charismatic Whole Foods CEO John Mackey compared to Ringwraiths in Lord of the Rings. About them, he said, “And their mantra is basically shareholder value. They don’t care about the stakeholders or long-term value. It’s just, ‘How do we make as much money as we can as quickly as possible?’ ”
Before the merger with Amazon, Thomson Reuters ESG research gave Whole Foods a perfect A+ score for it shareholder governance score. This impeccable score suggested that Whole Foods put very little restriction on shareholders ability to make changes to the Board of Directors and executive management. In the world of great ideals, this shareholder power would enable investors to hold the CEO and the Board accountable for poor performance and excessive pay. In reality, most asset managers simply ignore shareholder powers because they are either too small or too conflicted to get involved. It the real world, “shareholder friendly” means that you’re vulnerable to takeovers from activist investors.
And that’s exactly what happened to Whole Foods. Jana Partners, an activist hedge fund, disclosed in early July that it had quietly amassed enough stock and options to become the second-largest Whole Foods shareholder in a filing with the SEC (Securities and Exchange Commission). In partnership with Neuberger Berman, Jana Partners threatened a proxy fight and board takeover if the company didn’t put itself up for sale. Within a couple of months, John Mackey was standing before his employees to offer insights into the transition by saying, “When this deal closes, we’re all Amazon people. We’re not Whole Foods people and Amazon people. We’re all Amazon people.”
Clearly, not all companies aim for perfect shareholder governance scores. In contrast, Tesla scores a C in on shareholder governance because Elon Musk has retained an additional four anti-takeover devices to defend his company from activists including a staggered board strategy and additional limitations on replacing board members. For the sake of comparison, Google and Facebook both score a D-.
My point is not to suggest that all companies should have protective governance practices but to suggest that in every case, governance practices are distinct and sometimes opposed to the environmental and social strategies (ES) around sustainability. In LinkedIn conversation here, Mike Tyrell, Editor at SRI-CONNECT, shared, “Sustainable investing starts to get interesting when you disaggregate the E, S & G factors (or better still do away with the term altogether) and consider the investment effects of companies’ responses to specific exposures to individual factors at particular times.”
The impact of flexible shareholder governance practices on long-term sustainability initiatives is one that deserves further study. Conflating ESG into one unified score obscures some very different motivations, and this is why SRI investors need to understand these nuances. It’ll be interesting to watch the Whole Foods-Amazon merger and observe whether this union serves the long-term interests of both sets of investors. One thing is certain, though: Jana Partners struck it rich on this deal.