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The Inside View

10 minutes with Tim Smith, Walden Asset Management

Activist shareholders, it turns out, are only human.

This column is about the people of sustainability. What makes them tick? What’s their unique way to create impact? What have they learned that works? This time, it’s Tim Smith, director of ESG Shareowner Engagement at Walden Asset Management. Tim previously served for 24 years as Executive Director of the Interfaith Center on Corporate Responsibility.

Bob Langert: You are in your fifth decade of shareholder advocacy on ESG issues. What has changed for the good?

Tim Smith: There has been an enormous shift in the last 40 years. In the early years, you had a small group of values-driven investors leading this work. These investors were members of the Interfaith Center on Corporate Responsibility and were petitioning companies to make changes on issues such as strip mining, diversity, South Africa and human rights

In these early days, we had more than a few companies tell us, "We really respect what you're asking for but we have to make a profit for our shareholders. We can't change a policy or practice just because it's considered the right thing to do."

In these early days, we had more than a few companies tell us, 'We really respect what you're asking for but we have to make a profit for our shareholders.'
If you jump forward 40-plus years, we're in a very different zone. For example, we have investors globally that are part of the Principles for Responsible Investment, with over $70 trillion of assets under management, who declare they must take ESG issues into account in their investment decisions and company engagements because they affect the "bottom line." ESG or socially responsible investing is now very much part of the investment mainstream.

Langert: What has changed for the worse?

Smith: Ironically, these positive developments are occurring while there's a concerted attack by the U.S. Chamber of Commerce and Business Roundtable to make it much harder to file resolutions.

Langert: How and why?

Smith: The Business Roundtable came out with a proposal last year proposing an investor would need to own .15 percent of a company's shares before filing a resolution. I have no idea where they got that particular number. The .15 percent for Apple, for example, would be over a billion dollars of shares. We argued this was using the "nuclear option" against the right to file resolutions.

The U.S. Chamber has likewise weighed in, pressing the SEC to change the rules regarding the filing of resolutions. So, in a year when a climate resolution receives a 62 percent vote at Exxon, there is concerted pushback against the very right to pursue such shareholder petitions.

Legislatively, the Choice Act, which included tremendous restrictions on filing resolutions, passed the House by 50 votes and was sent to the Senate. While the Senate has no appetite for it at present, it heightened the debate in a frightening way.

Meanwhile, many companies believe this is really overkill and have opposed the "nuclear option."

Finally, you've got investors with literally tens of trillions of dollars in assets fighting against these new proposed restrictions. We believe that over the past four decades shareholder resolutions have had a positive impact on company practices and policies and this tool should be protected, not dismantled.

Langert: What are some of the best corporate engagement practices used by companies?

Smith: Let me highlight some examples. Intel and Campbell's have an annual roadshow where their management team goes to various cities to talk to investors who have a specific ESG investing focus. Intel has done this for years. They come in with quality input and are willing both to take questions and have discussions about issues and look for win/win agreements outside of the proxy process. It's always a productive meeting.

There are other companies who use a different approach. Exxon, for example, has a commitment to engage with concerned shareowners and every year hosts a major summit where 25 investors and a number of top managers of ExxonMobil meet to discuss specific aspects of climate change. This is a serious exchange. Investors and management take it very seriously and use it as an opportunity to have a candid discussion.

And scores of companies have established advisory councils where they convene investors and stakeholders to discuss the key ESG issues they are facing.

There are hundreds of companies that are open to meet and talk. Some of them do it very thoughtfully and conscientiously.
There are hundreds of companies that are open to meet and talk. Some of them do it very thoughtfully and conscientiously. We've been involved in a whole wave of discussions in the last month with companies about board diversity and a lack of women on boards, and also diversity disclosure. We're getting a lot of very sincere responses from companies who are willing to either do the disclosure requested or propose they start at a more modest level. But they agree the issue is important for the company and its bottom line.

Langert: So, it’s a mixed bag? There are many more companies engaging, being open and providing subject matter experts. Yet there are still some companies out there that fight it tooth and nail, right?

Smith: The trend is the way you’ve described it. This growing trend of meaningful engagement is partly stimulated by the State Streets, BlackRocks and Vanguards seeking discussions on some of these topics, too. A company is not going to say no to a conversation with an investor that owns 5 percent of your shares and wants to talk about your lack of board diversity or your climate policy.

When BlackRock and Vanguard are talking to a company about these issues, when a group of proponents presents a specific suggestion, the request is not dismissed out of hand. Maybe the company says, "I don't quite see it that way." Or counters that they can't take the steps requested yet. But it's not seen as an irrelevant or meaningless request.

Finally, you do have companies that are still very hostile to shareholder engagement and resolutions. They would vigorously support the campaign to try to challenge shareholder resolutions.

Langert: What is your evaluation of the various corporate departments that handle ESG engagement? 

Smith: There are many people working really hard to move the ball down the field in their company. They actually value friendly, constructive pressure from outside because that gives their work in-house credibility. CSR work is always important but it’s even more credible when there’s lot of investors, consumers or stakeholders raising the same issue.

What we dislike, of course, is an investor relations or legal person who tries to silo the discussion and prevent it from being a discussion that relevant top management gets involved in.

Langert: You get the stiff-armed sometimes?

Smith: That's right. It can be polite. But it's sometimes very much a stiff arm.

Langert: Do the better companies get picked on too much because they are better?

Smith: A good question. I've heard that from some leading companies, "We only get picked on because we've got a brand name."

On occasion that may be one of the factors for a proponent. But as I went down the list of issues Walden works on, we do not start with the leaders but go to the companies that could use some expanded transparency or a specific change in behavior. In short, a need for improvement.

For example, we file with companies on board diversity if the companies have a poor diversity record. And companies that are major greenhouse emitters are likely to be a prominent choice for advocacy, as would companies with no or little sustainability reporting.

Langert: What do you think sustainability professionals can do that would make the process of this shareholder engagement more fruitful?

Smith: One of the first things is to remind folks that just because investors are raising questions or pushing a point of view, they aren't your enemy. We are investors who are often significant holders of the company's stock and wish to make a business case for an issue.

From the company side, it's always good to say, "Let's look for common ground. What do we both agree on?"

If we can establish some common ground, then we can move toward common goals even if we disagree on tactics. For example, a company recently was not comfortable disclosing diversity information the way Walden proposed. But they hadn't been telling their diversity story at all and admitted as such. We suggested, "Would you be willing to present your diversity story — which was a positive story, by the way — with some specific metrics that allows evaluation?" We found common ground even though it wasn't a perfect match.

Another thing: It's fair to challenge the proponent. Being respectful of them doesn't mean you can’t say, "That's a zany idea" or "I don't think you thought about the unintentional consequences of this." Good dialogue provides for challenging points to be shared back and forth.

Langert: So, when a proponent comes in, there's room to negotiate?

Smith: Absolutely. Again, proponents are just like companies, representing thinking across the spectrum. Clearly, there are some proponents who are stubborn or never became schooled on how to engage and negotiate. But the vast majority of pension funds, religious investors, investment firms, foundations and unions who file resolutions welcome the opportunity to talk and seek win-win solutions. This should and can be a positive engagement experience.

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