Have responsible investors been too quiet for too long on Big Tech?

Shareholders rely increasingly on stewardship to demonstrate sustainability credentials. But they are failing to steward the biggest industry of them all.

The press has been pulling no punches with Sheryl Sandberg since she announced her resignation last week.

The chief operating officer of Meta – formerly Facebook – was accused of leaving behind a “troubling legacy” by The Guardian, while American venture capitalist Roger McNamee used a comment piece in Time magazine to observe: “For shareholders, Sandberg was a superstar. She made shareholders rich. Unfortunately, that wealth came at great cost to our society.”

The criticism centres on what the Financial Times describes as Sandberg’s “delay, deny, deflect” approach to the relentless string of controversies Facebook has faced over the years, from content moderation and data privacy to discrimination and election interference.

But what about all those shareholders McNamee says she made rich? Surely they share responsibility for this legacy of sweeping the impacts of big tech under the rug?

For an industry that currently accounts for around 30 percent of the S&P 500, efforts to address the risks that large technology companies pose to society and people have been scarce, unsophisticated and largely ineffective.

There have been a few successes. The Global Network Initiative (GNI), whose members include BNP Paribas, Folksam, Federated Hermes and BMO Global Asset Management, has developed guidelines on when and how phone and internet companies should provide governments with information about users’ activities. Set up in 2008 in response to concerns over requests from the Chinese state about dissidents, the network’s members now include giants such as Microsoft, Verizon and Google. Their progress is independently assessed on a regular basis to ensure they adhere to the guidelines.

A decade later, the California State Teachers’ Retirement System (CalSTRS) and hedge fund Jana Partners wrote to Apple urging it to deal with iPhone addiction in young people. Later in 2018, the firm introduced an app to give parents control over their children’s device usage.

More recently, New Zealand Super led an engagement initiative with Facebook, Alphabet and Twitter, asking them to strengthen their approach to tackling objectionable content on their platforms. Writing for Responsible Investor last year, Katie Beith, who spearheaded the project, said it had made “some good inroads”, pointing to Facebook’s decision to revise its Audit and Risk Oversight Committee charter to include a commitment to help prevent such content. But that was the only concrete change the initiative took credit for, and it was wound down after only two years as investors complained companies were refusing to meet with them.

“All large companies are difficult to steward because of their size and the diversification of their ownership, but on top of that a number of tech companies have massive governance problems,” says Adam Kanzer, head of US stewardship at BNP Paribas Asset Management and co-founder of GNI. He points to the industry’s well-known “love” of dual class share structures, which strip many investors of voting rights, as well as the tendency for large technology companies to remain heavily influenced by their founders long after they’ve become systemically important.

These factors arguably make shareholder voting, usually a favourite tool for responsible investors, a futile form of influence over listed tech companies. And that looks set to get worse. Figures show that 32 percent of all US initial public offerings in 2021 were from firms with a dual class share structure – the highest since records began in the 1980s. And, despite their grumbling, investors continue to hoover up such stock.

So is it time to give up on the tech giants? Should investors look instead at the leverage they have over the newer parts of the industry through their private equity and venture capital portfolios?

“Not only do private equity players invest in the next generation of companies, they are also becoming outsized influencers due to the level of capital being allocated to the asset class,” says Di Rifai, founder of Creating Future Us, a think-tank that hosts engagement network Investors for a Sustainable Digital Economy. “So asset owners need to be urging them to get more involved in this conversation.

“Private equity and venture capital have traditionally followed behind public markets on sustainability trends, but when it comes to tech, they have an obvious leadership role. They need to be driving these companies to be good citizens while they’re small and thinking about their place in the world. Because, as we’ve seen, catching them once they’re Facebook is a bit too late.”

Fostering clarity

The Principles for Responsible Investment (PRI) created a due diligence questionnaire for private equity investors last year, with another due to follow for venture capital. A big focus of the latter will be on fostering clearer discussions between investors and managers on ESG and sustainability issues for tech.

But as BNP’s Kanzer notes: “While the idea of private markets fostering a better generation of tech companies is really interesting, in reality these companies will be bought by the incumbents the moment they look set to become big, so then what?”

It is a big stumbling block. Analysis by the Financial Times last year showed that tech companies spent more than $264 billion buying smaller “potential rivals” in the first nine months of 2021 – double the record previously set in the dot com boom. The trend is being scrutinised by regulators, but for now it is almost inevitable that, rather than smaller companies becoming the next generation of tech giants, they will simply be absorbed into the existing generation.

Brian Christiansen is director of stewardship and a senior portfolio manager at $67 billion asset manager Sands Capital, which invests in tech firms throughout their lifecycle, from start-ups to large listed companies. He says the key to effecting permanent change in smaller tech companies is to raise awareness about future risks with management teams.

“Culture is far more powerful than rules if you want to create a lasting positive impact,” he says, noting that this starts with investors guiding venture-level management teams on sustainability and ethical issues as they develop the business. “If Mark Zuckerberg had been compelled to think about potential future externalities early on, maybe he would have put some safeguards in place to deal with some of the issues we’re now seeing in the headlines. So it’s about encouraging companies to define those risks before they get into the public markets, regardless of whether that ends up being as a standalone company or part of an existing listed company.”

Whichever part of the portfolio investors choose to target, there are two main challenges, says Kanzer.

“The key problems when it comes to tech are the speed at which these companies and business models grow, and the need to have highly specialised knowledge to understand what’s actually going on,” he says. “Every industry has its complexities that investors have to spend time learning about, but with tech it’s different because of the pace at which that knowledge becomes outdated.”

He recalls a time he was speaking with experts about Apple’s refusal to de-encrypt iPhones to assist US law enforcement. “Within five minutes of the conversation I had basically no idea what they were talking about. It was so technical it was like they were no longer speaking English. That really highlighted to me that this is a completely different world and we’re currently not very capable of communicating with each other effectively about some critically important issues.”

Overcoming these challenges will take time and money, neither of which has so far been forthcoming. Stewardship efforts around the oil and gas industry have coalesced around Climate Action 100+, through which the world’s investment heavyweights jointly pressure companies in the sector – among others – to commit to decarbonisation, disclosure and the just transition.

There have been no attempts to create a similar network to take on the risks posed by technology. Investors for a Sustainable Digital Economy has just six members – although Rifai is hoping to confirm two more signatories in coming weeks. Kanzer says certain key topics, such as the commercial use of data, remain off the table for GNI because the participation of competing companies raises commercial and antitrust concerns.

“These are complex issues,” says Rifai, who has just published a guide to investor engagement on tech addiction. “And if I’m an asset manager, the pressure I’m facing when it comes to resourcing sustainability is primarily on climate change. That’s a major contributor to the current silence on tech.”

Sands’ Christiansen says he sympathises with asset managers’ focus on their big emitters at the expense of other stewardship topics. “But at some point the world is going to wake up and realise that everything is digital. And it’s our responsibility to think about how we ensure the companies that are getting us to that point are doing it right. Now, before it’s too late.”