Investors rise up: Responsible investors “representing $1 trillion dollars in assets under management urge Wendy’s to join the Fair Food Program”!

Members of New York Fair Food gathered during last week’s national Wendy’s Boycott protests outside the Manhattan offices of hedge fund giant Trian Partners, Wendy’s largest institutional shareholder, to demand that Wendys honor its claims of social responsibility and join its fast-food competitors in embracing the Fair Food Program.

Over 100 responsible investors sign letter to Wendy’s Board Chair Nelson Peltz: “In closing, given the FFP’s unparalleled success, its adoption by Wendy’s main competitors, and the seriousness of the human rights risks in U.S. agriculture – especially in light of COVID-19, and at a time of global reckoning over racial justice – we believe it is incumbent upon the company to join the FFP.”

PLUS: Six State Treasurers send their own letter to Wendy’s Peltz: “With the dire consequences of COVID-19 and of systemic racism on our minds, we the undersigned State Treasurers urge Wendy’s to join the Fair Food Program (FFP), and thus meet the standard set by all of Wendy’s major peers.”

The pressure is growing on Wendy’s to make real its claims of social responsibility… or fall dangerously behind in the race for “best in class” in growing ESG investment market.

Last month, we wrote about a shareholder resolution that, against all odds, passed SEC muster and made it onto the ballot at next month’s Wendy’s annual shareholder meeting — a resolution called one of 13 “ESG battles to watch during this year’s AGM season” in the Financial Times.  At the time, we quoted Ed Garden, the Chief Investment Officer at Trian Partners (Trian is Wendy’s largest institutional shareholder, and Trian founding partner Nelson Peltz is Chairman of the Board at Wendy’s), who addressed Trian’s pretensions to ethical investment leadership in an interview with the online business journal “Directors & Boards”.  

At Trian, we invest in what we think are fundamentally great companies where management and, by extension, the board, is struggling to make the company best-in-class: best-in-class organic revenue growth, best-in-class margins, best-in-class return on invested capital and best-in-class from an ESG perspective.

For those unfamiliar with the acronym, the Market Business News provides a helpful summary:

ESG stands for Environmental Social and Governance, and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. Most socially responsible investors check companies out using ESG criteria to screen investments.

ESG investment is a growing force in the world of Wall Street, one that, in the wake of the multiple upheavals of the past year, has taken on significant new weight in finance.  That growing media and market awareness has prompted corporations and investors alike, including Trian’s Ed Garden, to seek to position themselves as leaders in ethical business practices, including supply chain management.

But Garden’s extended response to a question about Trian’s vision of ESG demonstrates the hedge fund’s narrow view of socially responsible investment:

Charles Elson: Let’s talk a little bit about Trian and your approach to investments. What’s your opinion of ESG and whether stakeholders, in addition to shareholders, should be part of the equation in a company?

Ed Garden: At Trian, we invest in what we think are fundamentally great companies where management and, by extension, the board, is struggling to make the company best-in-class: best-in-class organic revenue growth, best-in-class margins, best-in-class return on invested capital and best-in-class from an ESG perspective.

We believe there’s a strong correlation between being best-in-class from an ESG perspective and best-in-class operationally. Our job is to work with the board and the management team to really get the company on its front foot. At Trian, we think a fundamental part of what we do is bring a strong ownership mentality into the boardroom…

… The vast majority of companies that we invest in got off track because management was trying to make short term numbers that hurt the business. When you’re truly acting like an owner, you don’t buckle under pressure from people who are looking for short-term fixes to prop up the share price. If you’re truly acting like an owner, you’re thinking long term. The management teams I’ve seen get into trouble are trying to meet unrealistic goals and they get on a treadmill of spinning rhetoric to try to explain what’s happening and doing things that hurt the business long term.

I’ll give you an example. Trian has been invested in Wendy’s since 2005. We’re the largest shareholder and it’s been an amazing turnaround story. When we became the largest shareholder of Wendy’s, it had been in a state of decline since Dave Thomas, the founder, died. Store sales and margins were down, and the business was going in the wrong direction. What had happened, in our opinion, was that management was trying to make quarterly numbers and had cut the quality of the food — cut the quality of the bun, cut the quality of the beef, cut the quality of the condiments — and hadn’t invested in the physical plant. You had stores that had the linoleum floors and looked circa 1974. Consumers are not dumb. When you’re serving bad food in an unattractive building, what do you think is going to happen? We went to shareholders and said this is going to take a number of years to fix but we’re going to invest in the food — better quality bun, better condiments, better cheese, better burger, better fries, better salad. And we’re going to spend significant money on the physical plant. Fast forward, the reason we’ve been successful at Wendy’s is we’re serving great food at a great price in a really nice building.

You can read the rest of the Ed Garden interview here.  We hope you do, it’s illuminating. 

“Great food, at a great price, in a really nice building”…

In Ed Garden’s vision of ESG leadership, an efficient business is an ethical business, or, in his terms, “there’s a strong correlation between being best-in-class from an ESG perspective and best-in-class operationally.” 

But what about the health and safety of workers in Wendy’s supply chain during the COVID-19 pandemic, a time of unprecedented challenge and loss for the food industry?  Nowhere to be seen.  Racial and economic justice for the thousands of Black and Brown workers employed at Wendy’s restaurants — whose average annual salary of $13,566 is less than .2% of the $7.2 million earned by Wendy’s CEO Todd Penegor — in a time of rising Black Lives Matter protests?  Doesn’t merit a mention.  Human rights protections for farmworkers in Wendy’s supply chain in an agricultural industry marked by labor scandals ranging from forced labor to sexual violence?  Not a word.

Students at Ohio State University calling for the university administration to remove Wendy’s from the OSU campus until Wendy’s joins the Fair Food Program protest outside Wendy’s during last week’s national Week of Action in the Wendy’s Boycott.

But leadership in the ESG investment market is earned, not assumed, and in the post-2020 financial world, the jaundiced vision of ethical business described by Trian’s Ed Garden simply doesn’t move the needle.  And, in fact, if recent developments in shareholder and investor circles are any indication, Trian’s approach to corporate accountability has Wendy’s stumbling out the gate in the race for primacy in the ESG market.

“As long-term investors responsible for addressing the human rights risks within our portfolios, we expect companies such as Wendy’s to adopt established standards for risk management to protect workers throughout their supply chains.”

Earlier this month, over 100 investors, under the aegis of the Interfaith Center for Corporate Responsibility (ICCR), sent a letter to Trian founding partner Nelson Peltz demanding that he exert his leadership as Chairman of Wendy’s Board to meet the standard set by Wendy’s main fast-food competitors and join the Fair Food Program.  Among the signatories — who collectively represent one trillion dollars in assets under management — were some of the country’s largest, and most influential, investors, including: 

a) the New York City Comptroller, who oversees investments for the NYC public employee pension funds (with $240 billion invested, the NYC Comptroller manages one of the five largest public pension funds in USA);

b) the UAW Retiree Medical Benefits Trust, with over $60 billion invested, which oversees retiree health care for more than 800k retired autoworkers, and is the largest private purchaser of health care in the USA;

c) a number of unions, whose millions of members are covered by pension funds, both private and public, including both of the country’s two main teachers’ unions, AFT and NEA; the largest union in the AFL-CIO, AFSCME; the powerful federation of AFL-CIO building trades unions, NABTU; and other major labor unions with a history of progressive activism including the Communications Workers of America, Teamsters, UNITE HERE, and United Steelworkers; d) and dozens of faith-based and other responsible investors.

Here’s an extended excerpt from the powerfully worded letter (you can find it in its entirety here):

… As long-term investors responsible for addressing the human rights risks within our portfolios, we expect companies such as Wendy’s to adopt established standards for risk management to protect workers throughout their supply chains. This is particularly important in the midst of a global pandemic and in the wake of a global movement demanding racial justice. COVID-19 has highlighted what appears to be the inadequacy of Wendy’s approach, as its food suppliers have had widely-publicized failures to protect worker safety, including suppliers that Wendy’s recently celebrated as sustainability leaders. Furthermore, it has been reported that Wendy’s food supply chain was disrupted due to COVID-19.

During the pandemic, the human rights abuses that frequently arise in agricultural supply chains have disproportionately exposed Brown, Black, and Indigenous farmworkers to a deadly virus without adequate safety protections. These and other abuses present material risks – reputational, compliance, business continuity, human capital management, and supply chain – to the company and its shareholders. These risks are considered to be highly material by a growing number of investors. Earlier this year, 335 institutional investors representing $9.5 trillion in assets under management supported a statement calling on companies to take steps to mitigate the impacts of COVID-19 on all of their stakeholders, including the health and safety of workers. Additionally, the Securities and Exchange Commission (SEC) issued guidance indicating that companies should consider health and safety and impacts on human capital in their COVID-19 related disclosures.  This is especially pertinent as companies are facing increasing scrutiny from their own investors on the accuracy and potential misrepresentations in their disclosures. 

The above-noted failures of certain Wendy’s suppliers indicate that the company’s existing Supplier Code of Conduct, including its enforcement mechanisms, are insufficient. Our review of that Code – together with the company’s public statements on its supply chain practices as they relate to the pandemic, which do not include any COVID-19 safety protections required for the essential workers who harvest and process the company’s meat and produce6 – only heighten our concerns. In contrast, the FFP is a highly effective risk mitigation and avoidance tool, having earned widespread recognition, including a Presidential Medal from the Obama-Biden administration, for protecting the human rights of farmworkers in tomato supply chains of Wendy’s main competitors, including McDonald’s, Burger King, Subway and Yum Brands. This contrast is especially noteworthy in the face of COVID-19 risks to the company’s food supply chain, including tomatoes.

The FFP is unmatched in its ability to address and prevent risks of modern slavery9 and sexual assault, as well as a host of other human rights abuses, and since the early days of the pandemic, it has worked to enforce worker health and safety protections on participating farms, thereby protecting both the operational continuity and reputation of its participating companies. These efforts have further cemented its status as the “gold standard” of social responsibility programs, as confirmed by a recent independent study of 40 leading initiatives which found the FFP represents “the only existing model with the proven potential to afford protection for the most vulnerable and lowest-wage workers in global supply chains.” Even as COVID-19 has ravaged farmworkers and their communities throughout the United States, we believe the FFP is the only social certification to have established mandatory, enforceable COVID-19 protections for farmworkers…

At the same time, a coalition of six State Treasurers — including Connecticut, Illinois, Massachusetts, Nevada, Oregon and Wisconsin —  sent their own letter to Trian in support of the ICCR-led investor message.  The Treasurers, elected officials tasked with overseeing the financial health of their states and their states’ large public pension funds, referred to an earlier investor letter from March of 2020, written on the cusp of the pandemic, and closes by requesting a meeting with Mr. Peltz to discuss their concerns:

… Today’s letter reiterates a request that investors sent to you in March 2020, just as the U.S. was locking down due to the COVID-19 pandemic. Receipt of that letter was never acknowledged by the company, and the situation since then has become more dire. Farmworkers are essential workers, ensuring that Americans are fed, and yet the very nature of farm labor puts them at increased risk for infection.

This risk is compounded by the fact that most of these low-wage workers are Brown, Black, and Indigenous people of color, statistically proven to suffer higher rates of severe outcomes from COVID-19, including death rates that are 2.3 times higher for Hispanic Americans than white Americans.

In that March 2020 letter, investors urged Wendy’s to join the FFP because it is uniquely effective for risk mitigation and compliance in the agricultural industry. This effectiveness is due to the fact that it makes farmworkers the frontline monitors of their own human rights, able to report abuses to an independent monitor without fear of retaliation, and backed by enforceable market consequences agreed to by major corporate purchasers of the produce the workers picked. The ability to report health and safety violations without fear of retaliation has become even more crucial during the pandemic, when reliable in-person audits have become more challenging yet the ability to avoid contracting COVID-19 remains a life and death issue for farmworkers and the families they come home to.

In closing, given the FFP’s unparalleled success, its adoption by Wendy’s main competitors, and the seriousness of the human rights risks in U.S. agriculture – especially in light of COVID-19, and at a time of global reckoning over racial justice – we believe it is incumbent upon the company to join the FFP. Your response to this letter will be an important signal of intent in meaningfully addressing the human rights risks in your food supply chain that have only worsened during the pandemic.

We add our support to the ongoing investor engagement coordinated by the Interfaith Center on Corporate Responsibility (ICCR), including ICCR’s requested meeting with you in your capacity as chair of the Wendy’s Board and its committee on Corporate Social Responsibility.

You can read the State Treasurers’ letter in its entirety here.

Momentum is building…

The investors’ letter closes with a crucial comment on the consequences of Wendy’s response, noting:

… Your response to this letter will be an important signal of intent in meaningfully addressing the human rights risks in your food supply chain that have only worsened during the pandemic. Your response will also inform our approach to complementary efforts, such as the shareholder resolution submitted for your 2021 annual shareholder meeting, which asks for Wendy’s to disclose concrete evidence on the effectiveness of its Supplier Code of Conduct in protecting the human rights of workers throughout its food supply chain and with respect to COVID-19 in particular.

The time when Wendy’s could turn its back on the Fair Food Program and the financial world would turn a blind eye is coming to a close.  The past year has changed us all, including those who make their living investing trillions of dollars of capital in billion-dollar companies like Wendy’s.  Business as usual is being re-defined in real time.  As the Acting Chair of the Securities and Exchange Commission, Allison Herren Lee, said in a speech at the Center for American Progress in Washington, DC, last month:

… This last year has helped to clarify why the perceived barrier between social value and market value is breaking down. COVID has driven focus on worker safety. Protests in the wake of the senseless killings of George Floyd and others have driven focus on racial justice. In both of these narratives we can also see connections to climate risk. With COVID, we saw supply chain disruptions similar to that which climate events can cause. We know climate presents heightened risks for marginalized communities, linking it to racial justice concerns. We saw in real time that the issues dominating our national conversation were the same as those dominating decision-making in the boardroom.

Human capital, human rights, climate change – these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever.

Today, all eyes are on Wendy’s.  Responsible investors are watching, and if Wendy’s wants to claim leadership in the ESG market, its response to calls to join the Fair Food Program — the undisputed gold standard in social responsibility today — will determine whether its claims are treated seriously, or laughed off as the wishful thinking of a company left behind by quickly changing times.