As the annual shareholder meeting season wraps up, a curious phenomenon has emerged. ESG (environmental, social, and governance) initiatives with little connection to actual shareholder value have continued to garner investor support, while one initiative with a direct link to shareholder value has not: asking companies to disclose their dependence on China.
Last month, Comcast shareholders voted on just such a “China risk report,” following similar proposals at Apple, Disney, McDonald’s, Boeing, Intel, General Motors and Walmart this year. The proposals address a critical business threat that companies have generally overlooked. But such measures registered just single-digit support — largely because asset managers like BlackRock, State Street and Vanguard are unwilling to set their own China-related conflicts of interest aside.
Operating in China is risky business. The country’s decision-making is opaque, particularly after President Xi Jinping secured his norm-breaking third term last year. China’s zero-Covid policy shuttered retailers and manufacturers, upending supply chains; its abrupt reopening caught businesses equally unprepared. Its economic coercion strategy seeks to keep America dependent on the country for raw materials, manufacturing and market access.
China’s censorship policies have proven similarly challenging: when an NBA general manager tweeted support for Hong Kong, the Chinese Communist Party (CCP) retaliated by halting game broadcasts; when tech companies refuse to censor protests, the CCP blocks them; when H&M challenged China’s use of forced labor in Xiangjiang, the CCP erased the company from China’s internet.
These policies directly impact shareholder value. China’s decision to disappear H&M led China-based sales to drop 40%. Its Shanghai factory lockdown caused Tesla to miss vehicle deliveries, plunging share prices 12%. Its private tutoring ban caused U.S.-traded New Oriental’s shares to plummet over 90%.
Shareholders are asking questions, demanding to know how enmeshed American corporations are in China and what risks such investments pose. American companies currently disclose little about China risk, often burying a generic line or two in annual filings. Walmart, for instance, mentions China just once in discussing material risk factors, stating that “our international operations subject us to legislative, judicial, accounting, legal, regulatory, tax, political and economic risks” and that “we operate our business in Africa, Argentina, Canada, Central America, Chile, China,” etc. Which particular risks affect which countries is anyone’s guess.
Such reporting should not be controversial. An overwhelming 97% of Republicans and 90% of Democrats recognize that China’s economic power threatens the United States, and equal numbers of each party support challenging China’s human rights abuses even at an economic cost. Congressionally, laws countering Chinese economic power — the CHIPS Act promoting semiconductor manufacturing on U.S. soil, the Uyghur Forced Labor Prevention Act banning imports of Chinese goods made with forced labor — have enjoyed substantial bipartisan support. In the shareholder advocacy realm, China risk reports have had the backing of both right- and left-leaning groups.
Yet support at the corporate ballot box is wanting. Recent proposals asking for China risk reports have received less than 5% of the vote. They fail for a simple reason: most investors don’t vote their own shares. Instead, they’re voted by large asset managers like BlackRock, Vanguard and State Street — the “Big Three.”
At first blush, China risk reports seem right up their alley. The Big Three have been pushing ESG reports for years, demanding detailed disclosures on climate risks, water risks, and the risks of not having at least two women on company boards.
Why won’t the Big Three ask American companies to issue China risk reports? Because they are also dependent on China.
BlackRock made headlines for lobbying Washington on the CCP’s behalf while seeking its approval to launch mutual funds in China. State Street attempted to placate the CCP by excluding American investors from a Hong Kong–listed fund that included Chinese companies. Vanguard operates a financial advisory joint venture in China and “maintains its long-term commitment to the China market.” When the House Financial Services Committee held a hearing on the risk China poses to U.S. investors, no one from Wall Street was even willing to testify.
The Big Three simply will not gamble on drawing Chinese ire, despite the risks their portfolio companies face. Disney’s Shanghai resort, for example, is majority owned by the CCP; should President Xi decide Disney displeases him, its $5.5 billion investment would disappear. General Motors similarly jointly owns “Shanghai GM” with a Chinese state-owned entity, yet discloses little about that entity’s risks as geopolitical tensions rise. McDonald’s operates over 4,500 stores in China yet is mostly silent about vulnerabilities there. These companies release hundreds of pages of sustainability reports, social responsibility reports and impact reports throughout the year; a single report on China risk isn’t too much to ask.
These companies need to manage China risk now, before a potential complete decoupling of the U.S. and China occurs, as it could if China invades Taiwan. American semiconductor companies, for example, should assess their dependence on the Taiwan Semiconductor Manufacturing Company to produce their chips and diversify their supplier base accordingly, just as Nvidia is planning to do.
Despite the benefits, diversifying away from China is simply not a message the Big Three are willing to send. Instead, they quietly vote “no,” and issue pro-forma statements that “the proposal is not in shareholders’ best interests” — or say nothing at all. But while the CCP may be able to buy certain asset managers’ silence, it cannot silence shareholders themselves. Hopefully, the proposals alone will send the message: China risk is business risk, and one for which American businesses should be prepared.
Justin Danhof is the head of corporate governance at Strive.