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Paul Hodgson: The complex but quietly optimistic 'big picture' of shareholder engagement

How investors and companies get through to the ‘win/win’ stage

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The picture of shareholder engagement that emerged from a conversation with Tim Smith, Senior Vice President of Walden Asset Management was complex and quietly optimistic. In its latest update, Walden states that effective engagement results in: better corporate policies, more sustainable business practices, and increased transparency. But within this there is a complex set of issues: continuum of progress, attribution, multiple issues at single companies, multiple shareholders engaging on the same issue, monitoring implementation, and simple negotiation. Last year Walden engaged with 127 companies, with engagement consisting of everything from letters to phone calls and conversations to shareholder resolutions. “Sometimes it just takes a letter,” said Smith. “And the response you get is: ‘That’s a good idea, thanks very much, we’ll do it.’” Disclosure of LGBT (no discrimination based on sexual orientation) policies often gets such a response, noted Smith. Other issues, such as board diversity or steps to address climate change, typically take longer with more concentrated engagement.
Sometimes progress is “incremental and can span a number of years from engagement to completion”. A good example is medical device maker C.R. Bard which, after five consecutive years of receiving a shareholder resolution led by Walden, produced its inaugural sustainability report in October last year. And C.R. Bard is a good example of the issue of attribution or ‘who gets credit’. Often engagement involves not just Walden, other shareholders and stakeholders, but also company insiders working on the issue. “The resolutions at Bard five years ago were a ‘new ask’; sustainability reports were not a mainstream request at the time,” said Smith. “Although dismissive, the company was not rude,” he added, “it just didn’t think other shareholders cared.” But then other investors began to write to the company and vote in favor of the resolution. Finally, as Walden was about to refile, the company called and explained it had reviewed its position and decided to produce a report. “At that point management contacted us and said: ‘We’ll send it to you in a week and would like your comments.’” said Smith.
“We are at a tipping point with sustainability reporting,” believes Smith. The vast majority of S&P 500 companies produce such reports annually and many mainstream investors find them essential in analysing a company. “There is a lot less push back, but that was not always the case.”He gives the example of Gentex, an auto parts supplier. Initially its corporate secretary was very hostile. Then a new corporate secretary who was a member of the board was appointed. He contacted Walden to tell them he felt the company had misunderstood the request for disclosure. Subsequently, the company produced an award winning report. “It just needed a new contact to realise that the company actually had a good story to tell and it was in their best interests to tell it,” said Smith.
In other instances, resolutions are more specific, such as setting concrete GHG emission goals. Often companies respond by saying ‘can we tell you what we are doing at the moment without setting future goals?’

Companies want their own work to be recognized, so credit should not be given just to the shareholders raising the issue.

At the discount grocery chain Costco, engagement surrounding sustainability and climate was conducted by a cooperative team of investors and management. A resolution was withdrawn and Walden, with other investors, was invited to a meeting with the CEO to discuss the company’s policies and commitments.

“The process of working with other shareholders to reach an end varies widely,” said Smith. For example, on climate Walden works closely with CERES and ICCR members; there are sometimes up to 25 clients co-filing one resolution. On one issue there may be a total of 100 shareholders involved. For example in 2015, around 70 investors were involved in engagements with 50 companies on lobbying disclosure. Walden is often the lead shareholder on this issue while union fund AFSCME helps coordinate.

“The vast majority of companies consider it poor form for an investor group to announce a ‘victory,’” said Smith. But in most cases there is no investor triumphalism, just appreciation of leadership and public commendation. Clearly after five years of resolutions, change hasn’t happened in a vacuum.
In other cases, companies are happy for shareholders to publicise their actions, for example, a withdrawal from lobbyist ALEC. Most often, explained Smith, companies, say, announce their new sustainability report, noting their appreciation of shareholder and NGO input.
I asked if Walden monitors companies’ compliance with their new-found ESG standards; after all policy change does not necessarily translate into practice change. Sometimes monitoring progress – on leaving ALEC or diversifying a board – is simple.

With GHG emission goals, a reporting structure must be introduced and compliance disclosed over a number of years. “We are long-term investors and it is part of our responsibility to monitor companies with whom we have engaged,” said Smith. “For example if a company says it is going to announce new climate related information or disclose payments to a trade association and a year and a half later there are no disclosures then you go back and re-engage.” This article originally came about because I noticed what looked like some horse trading disclosed in a series of letters challenging shareholder resolutions filed with the SEC.Essentially, Pfizer challenged the inclusion of a resolution on lobbying disclosure and Walden, working in conjunction with the sponsor, the Reynolds Foundation, negotiated with Pfizer to allow the lobbying resolution – an important concession given Pfizer’s heavy involvement with ALEC and the US Chamber of Commerce – and agreed to withdraw a separation of chair/CEO resolution, with the proviso that the board review its position, particularly when a new CEO was appointed. “Although such situations are rare, it’s a sign of the reasonableness of many proponents that they are willing compromise so there is a win/win,” said Smith.

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