Our CEO’s Q2 2022 Letter to Clients

                                                                                                         Second Quarter 2022

Looking Ahead and Back

One of the hardest—and most important—things we do each quarter is compose this quarterly letter. Our goal here is to be realistic and authentic and to share with you some of our thoughts on our work over the last three months. We try to find some sort of silver lining. We are struggling to do so…

There is a large, framed photograph in our office that NorthStar acquired shortly after we won equal marriage rights in Massachusetts. The photograph is of a sign that was held high during the June gay pride parade in 2004 that says, “Brown, Roe, Goodridge.” As I sat in the office with a beloved client last Tuesday, the realization that the Supreme Court will likely work to tick off the other two “rights” on this list was not lost on me. Though Brown v. Board of Education was legislated with the Civil Rights Act of 1964, this act was preceded by the 1875 Civil Rights Act and the Civil Rights act of 1957, both of which had been overruled by the Supreme Court based on the exact same language that was used to overturn Roe v. Wade.

Supreme Court decisions, while seemingly the period at the end of the sentence, can be overturned again and again, depending on who is interpreting statements like, “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person within its jurisdictions the equal protection of the laws.” This clause of the 14th Amendment was the basis for the Supreme Court decisions in Brown, Roe, and Obergefell (the equal marriage case at the federal level), and the court’s recent interpretation may bring them all down. This court majority will likely take us back to the world of the founding fathers – a sea of white men swimming in a narrow interpretation of privilege, immunity, equality, and personhood.

Why didn’t we, when we had the chance, require our legislators to enact federal laws protecting all the decisions that relied upon the 14th Amendment? It is clear that one branch of government acting alone in its capacity as a part but not the entirety of our vaunted system of checks and balances is not enough. Watching a lifetime of hard work and growth be stripped away, let alone centuries of work which led to the victories at the Supreme Court, leaves us shocked and saddened. We must persevere, we must teach our children to stand up for human rights, and we must vote.

The roller coaster volatility of the financial markets almost pales in comparison with the overturning of Roe combined with the violence and vitriol that plagues many communities. Yes, the stock market is down, interest rates are up, bond prices have fallen, and inflation is here. Yet, in general, we remain wealthy. This does not mean that we are being even remotely cavalier about our approach to managing your assets. In fact, we have spent hours reviewing asset allocation (stocks, bonds, cash), working to reduce risk in the equity portion of the portfolios as much as possible, managing capital gains, and urging each of you to be very careful in making major personal financial decisions. Please know that, as we plan our attack on corporate behavior that works at cross purposes with your values, we are working to stabilize the value of your portfolios as we maneuver through this unnerving period in our history.

Market volatility continues to be a concern as the U.S. and world economies wobble between continued economic recovery from the ongoing pandemic (especially in service-related jobs) and spiking inflation caused by supply chain disruptions and exacerbated by Russia’s unprovoked war on Ukraine.

The pandemic continues to be a strong force hindering economic productivity, with governments and health organizations around the world working to contain the spread of new COVID variants. The Biden administration is working to get second booster shots administered across the US, while European health officials are bracing for another wave of infections this fall. Meanwhile, residents in Shanghai are just emerging from two months of home confinement.

The war in Ukraine has led to higher energy and food prices that are outpacing wage increases and negatively impacting the budget of the average consumer. The June inflation (CPI) report showed that inflation rose 9.1%, up 8.6% in May, with a 7.5% jump in energy prices led by motor fuel. While fuel prices have decreased most recently, some economists believe that we have yet to see a peak in core inflation. The rise in inflation while the economy continues to add jobs motivates the Fed to continue implementing its dual mandate of price stability and maximum sustainable employment. There is potential for a large downturn in the economy if the Fed overreacts and raises interest rates too much in its inflation fighting zeal, and there is also the possibility of a market recovery later this year if the Fed lays off the brakes.

Outside Investments[1]

Recent momentous events continue to remind us that there is no shortage of social, political, and ecological challenges worthy and in need of our immediate attention and support. In the face of tragedies so heartbreaking and overwhelming, understandably we often feel we must act immediately and directly. However, in doing so, we may inadvertently fall into what we might call “The Boom and Bust Funding Trap.” As local and global issues fill our headlines, volunteers commit their time and investors and philanthropists pledge their dollars, responding with a surge of support that may have unintended consequences elsewhere. A spike in support in reaction to the urgency of the moment often diverts support from other issues that are equally critical but less prominent in the headlines.

Unfortunately, the cycle continues as the next crisis diverts attention in the same way, creating potential “boom and bust” conditions at nonprofits, community organizations, and civil action groups. We have heard recently from several of our Outside Investments organizations that they have been the beneficiaries of unexpectedly large inflows of funds, some of them from well-known billionaires who are apparently “doing things differently.” Of course, the funds are welcome, but along with them comes a set of challenges, including recognizing the Boom and Bust Funding Trap and planning accordingly. One of the CDFI (community development financial institution) CEOs we know has confirmed that they welcome the new money with appreciation and also caution as they have no reason to believe this largesse will continue.

So, what is the appropriate balance here? Emerging issues inform and ignite us, drawing us in to support new causes, but many of us have longstanding relationships with various organizations championing causes closest to us. From a time, energy, and financial perspective, we recognize that, despite the temptation, we cannot do it all. Nurturing long term, enduring commitments to organizations that are on the frontlines day in and day out, no matter the latest headline, is critical. Importantly, this also includes communicating intentions to provide reliable support so that these organizations can carry out their missions with confidence and security.

Shareholder Activism Update

This spring, seven of NorthStar’s shareholder proposals went to a vote at company annual meetings. Usually in the quarterly letter, we give you a rundown of our shareholder activism along with thoughts on why our proposals fared as they did; however, given the current tumult in society we would like to take this space to remind you of our approach to public equities and how we think through our work as it relates to the recent challenges in government. Next quarter, we’ll devote this section to a review of our spring and summer activism activities.

Right now, regressive rhetoric is rampant among conservative organizations, political campaigns, and even in the news – making claims that progressives aim to recast American culture by forcing companies into political conversations. Yet, corporations have long thrust themselves – and their many billions of dollars – into the political realm in pursuit of their own gains.

Since the Supreme Court decision in Citizens United v. Federal Election Commission twelve years ago, corporations have been free to flood our political system with cash in pursuit of currying favor of the candidates they supported. Companies, for the most part, chose not to vet political candidates beyond their stances on economic and financial issues. This meant that companies donated to white supremacists, climate change deniers, and misogynists while also financially supporting progressive candidates because of their mutually attractive stances on patent reform, free market economies, foreign competition, etc., without considering how those political candidates could impact the issues the company and its employees care about. As a result, over the past decade and through billions of dollars of corporate political contributions, conservative political engines are now rife with cash, have installed loyalists in innumerable key political positions, and have amassed a majority on the Supreme Court at a time when fundamental rights are being debated.

Companies try to claim that they are “apolitical,” but in fact they use politics to their own economic gain while ignoring the reality that supporting someone with pro-business economic policies can have the effect of funding someone who is anti-LGBTQ equality, anti-women’s rights, or anti-environment. However, we believe there can be no middle ground. Corporations – with their generous coffers, expensive lobbyists, and significant sway – cannot pretend that any choice they make related to local, state, or federal government is apolitical. As a society, we face challenges that are not siloed issues – they are governmental failures to prioritize creating change where it’s most needed and failure in the form of pandering to corporations and wealthy influencers who promise financial support if government regulation pleases them.

When the Citizens United ruling came down in 2010, NorthStar immediately got to work by crafting the first-ever shareholder proposal asking companies to consider the incongruence between the company’s political contributions and the issues for which it claims to stand. After dozens of engagements with portfolio companies on their political giving, we found this issue – aligning contributions with company values – to be a perpetually difficult boulder to push uphill. We heard excuses that ranged from companies’ inability to figure out how to do a congruency analysis (if we can do it, surely, they can too) to relatively honest comments that they were unwilling to prioritize it. But key to our work is the continual commitment to use our position as investors to voice our concerns and point out what we believe to be true and right. In the years since NorthStar started filing shareholder proposals on this issue, many companies have continued to ignore these misalignments; however, we have seen the seed of the idea of “congruence with values” flourish throughout progressive circles and even in popular media. Despite the challenges of making direct change with companies on this issue, a greater societal awareness of this issue has emerged and the light is now being shone from many directions.

While we are outraged that misaligned corporate political contributions have aided the conservative minority in its pursuit of overturning critical rights and protections that activists like NorthStar and so many others have been working towards for decades, we continue to use your investments to try to hold companies accountable and make change. We at NorthStar persist with our work: continually researching with a goal of uncovering hypocrisy, controversy, misalignment, and areas of bad corporate and political behavior – and shining a light on it.

 

Sincerely,

Julie N.W. Goodridge

 

The forecasts, opinions, and estimates expressed in this report constitute our judgement as of the date of this letter and are subject to change without notice based on market, economic, and other conditions.  The assumptions underlying these forecasts concern future events over which we have no control, and may turn out to be materially different from actual experience.  All data contained in this letter is from sources deemed to be reliable, but cannot be guaranteed as to accuracy or completeness.  All investments are subject to risk, including loss of principal.  Past performance is no guarantee of future results.  It is not possible to invest directly in an index.

FOR INFORMATION PURPOSES ONLY

This information includes a discussion of a number of companies and other financial market and social events. These opinions are current as of the date of this publication but are subject to change. The information provided herein does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.

[1] Outside Investments are privately placed with various types of entities, as described above. In addition to the risks of equity, (which include, but are not limited to, changes in revenue, margins, earnings, dividends, cash flow, balance sheet, leverage, liquidity, solvency, legal matters, negative publicity, brand image, and general market volatility) and the risks of fixed income investing (such as credit risk, interest rate changes and the yield curve, inflation, default, monetary policy changes, government instability, and other risks), Outside Investments are typically illiquid.

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