How shareholders are learning to say "Yes, but"

The Sustainable Shareholder

How shareholders are learning to say "Yes, but"

 Socially responsible investors have long practiced the art of saying no. Now, many are learning that saying "Yes, but" can be just as effective -- and sometimes even more so.           

A growing number of investors are using the power of share ownership to engage management in dialogue about corporate practices. Their reasoning: environmental, social, and governance (ESG) issues can pose material financial risks to companies, and therefore shareholder value may be affected.

Several hundred institutional investors totaling over $1.5 trillion in assets have filed nearly 2000 resolutions in the past few years, and through this work have persuaded numerous companies to make changes from better disclosing climate risk to allowing employees to unionize.

Such moves take socially responsible investing (SRI) beyond the standard strategy of steering clear of certain sectors (like tobacco, military contractors, nuclear power) and corporate practices SRI investors find ethically objectionable (like emissions or poor governance).

While SRI investors are generally comfortable not owning companies in industries such as fossil fuels and gambling, or that engage in objectionable practices in the areas of environmental impact, workplace diversity, and human rights, non-ownership doesn’t facilitate changes within those companies.

Shareholders want to know which companies are leading the way towards responsibility and accountability, and which ones are resistant. More and more investors want to invest in companies that can turn a profit without comprising the health and welfare of people or degrading the environment that supports our communities and economy. And those investors are becoming increasingly willing to encourage the laggards to embrace corporate responsibility.

Corporate performance, investment performance, and ESG issues are inter-connected and inseparable, as research by academics, the United Nations, and investment houses such as UBS, Goldman Sachs, and Deutsche Bank has shown.

Consensus is forming that companies that minimize their liabilities, adopt sustainable and responsible operational policies and practices, and are responsive to shareholder concerns are more attractive investments because addressing ESG issues reflects better management and appears to result in higher profitability.

Many investors, particularly large pension funds and other institutional investors, view stock ownership as a right not only to participate in the growth and success of the corporation, but also to vote on important policies and practices by which it operates. Such investors are using two direct engagement strategies:

  1. Dialogue. Conversations with management are being used to encourage agreement with responsible management practices; and
  2. Filing or co-filing shareholder resolutions. If dialogue fails, shareholder votes, though advisory in nature, can send management a powerful signal of the views of shareholders; mutual funds can engage in proxy voting on behalf of fund owners and are required to publish their votes.

Dialogue is generally the preferred approach, as it is non-adversarial, solution-focused, and out of the public eye.

Resolutions requiring a shareholder vote are usually the result of failed negotiations, and while about half the resolutions filed annually are withdrawn after management agrees to address the issues at hand, sometimes there is staunch opposition to such resolutions and “no” vote recommendations from management to shareholders.

While shareholders have traditionally voted with management on such resolutions, “yes” vote percentages continue to climb to an average of 35 percent, more than double the share just five years ago, as investors have stepped up pressure to hold companies accountable for their policies regarding employees, communities, and the environment. It is now common practice for shareholders to re-file resolutions in subsequent years in an effort to generate greater shareholder support.

Shareholder resolutions filed by several hundred institutional investors over the past few years have persuaded numerous companies to:

  • Better disclose climate risk (Chevron)
  • Adopt sustainable forestry practices (Home Depot)
  • Adopt sustainable seafood practices (Costco)
  • Address poor human rights and labor conditions in their global supply chains (Gap)
  • Pledge not to discriminate against employees on the basis of their sexual orientation (Cracker Barrel)
  • Disclose health, safety, and environmental risks associated with hydraulic fracturing (Noble Energy)
  • Make their executive pay practices more accountable to shareholders (PepsiCo)
  • Allow employee unionization (Marriott)
  • Allow shareholders to nominate directors (Hewlett-Packard)
  • Promote gender and racial diversity on their boards of directors (Netflix)
  • Issue detailed reports on sustainability (Dell)

Though initially shareholder advocacy focused on apartheid and nuclear power, today it addresses a wide variety of ESG issues: disclosure of political contributions; say on executive pay; climate change and other environment-related resolutions surrounding pollution prevention, hydraulic fracturing, and sustainability reporting; equal employment; animal welfare; human rights; health care reform; global labor standards; and shareholder approval of individual board members.

After the SEC allowed shareholders greater access to the proxy last year, many companies have asked the SEC to intervene in order to exclude shareholder proposals from the ballot, claiming they may violate SEC rules regarding personal grievances, minor operations, or matters pertaining to “ordinary business.”

While the burden of proof rests with shareholders to demonstrate how ESG issues are material, the SEC continues to wrestle with what constitutes “ordinary business” under the law. Although executive compensation obviously addresses internal protocols, the SEC has yet to issue clear guidance on whether or not many advocacy issues pertaining to communities and ecosystems are considered ordinary.

In the meantime, shareholders continue to advocate for responsible business practices to improve share value.