Starbucks’s China expansion stirs up conservative shareholder trouble for Howard Schultz

An activist group has filed a shareholder resolution to remove CEO Howard Schultz from the board of Starbucks Corporation, arguing that his fixation on China has become a material and reputational risk for the coffee chain.

Schultz is handing the reins to Laxman Narasimhan—Lysol owner Reckitt’s former CEO—in April. However, the conservative advocacy group behind the proposal, the National Legal and Policy Center (NLPC), argues that even when Schultz has had “no formal title with Starbucks,” he’s “always lurked in the shadows.” The group contends that the best solution is to give the celebrity businessman the formal boot.

To address those China risks, the NLPC’s resolution—which will go to a vote on March 23 at Starbucks’s annual shareholder meeting—demands that Starbucks release an annual report explaining what, precisely, the company is up to in the Chinese market, so that shareholders can grasp the full “nature and extent to which corporate operations depend on, and are vulnerable to, Communist China.” Currently, Starbucks operates 6,000 stores in some 200 Chinese cities; it has announced plans to add another 3,000 by 2025, and for that will be increasingly reliant on goodwill with Beijing for everything from coffee crops to café real estate.

In its statement addressing the NLPC’s proposal, Starbucks’s board has formally recommended that shareholders vote against it. That’s because the U.S. Securities and Exchange Commission (SEC) already requires the chain to “inform Starbucks shareholders about operations in China,” through annual 10-K reports and other various disclosures.

However, the NLPC maintains that these filings aren’t “transparent or specific enough.” The reports are pro forma and don’t address the “potential damage from Starbucks’s reliance on China,” given concerns such as the fact that the State Department now labels China a state sponsor of human trafficking, or that U.S. intelligence warns that China is aggressively engaged in cyber warfare, or that threats of military action against Taiwan loom.

To defend its proposal, the NLPC cites among its sources a November 2022 exposé from Fast Company that first dug into Starbucks’s ties to the Chinese government and Communist Party, revealing a relationship that goes far deeper than relying on China for just raw materials and labor. In pursuit of growth, the chain has, among other things, helped the government to develop rural infrastructure in China’s Yunnan coffee province, and established a foundation that has organized so-called red-tourism trips and commended “the high fighting spirit and steel will” of the People’s Liberation Army.

What goes up?

In February, Starbucks reported a quarterly sales decline in China that was four times worse than it had previously estimated. Year-over-year sales fell by 29% that quarter, dragging international comparable sales down by 13% in the process. Executives admitted that the company has no “line of sight” into when its fastest-growing and second-largest market will recover, but contended that it will—eventually.

Starbucks faces a raft of other activist proposals at this year’s shareholder meeting. Proxy adviser Institutional Shareholder Services and Workers United, the union backing Starbucks baristas, is urging investors to support a separate independent review of the company’s labor practices. (The National Labor Relations Board has accused it of engaging in unlawful anti-union tactics at dozens of stores nationwide, including firing union workers.)

Meanwhile, another conservative shareholder activist group, the Free Enterprise Project, is pushing to impanel a special committee to study the impacts of Starbucks’s “Third Place” policy. It argues that cafés’ inclusiveness, specifically the open-door bathroom policy, has come back to bite Starbucks by creating unsafe work environments and leading to an increase in store crime.