Company-linked votes ‘likely prevented’ 19 ESG proposals from passing, Morningstar analysis finds

Share structures at Facebook, Berkshire Hathaway and Tyson Foods drown out investors votes on environmental and social issues

Analysis by Morningstar has suggested that an additional 19 ESG-focused shareholder proposals would have “likely” achieved majority support at US firms this year had it not been for opposition from corporate “insiders and controlling parent companies” with significant ownership stakes and often outsized voting rights. 

This year’s proxy season was a record breaker for ESG proposals, with 36 shareholder proposals on environmental and social issues drawing majority support, including 14 on climate alone. But this figure doesn’t capture the true level of investor support for ESG resolutions this year, according to recent analysis on the 2021 proxy season by Morningstar.

The US financial services giant highlighted that there was similarly high levels of independent investor support for an additional 19 proposals this year, but that this wasn’t reflected in the final tallies due to the diluting effect of votes with ties to the companies, such as those cast by management.

“Morningstar analysis shows large ownership stakes held by insiders and controlling parent companies at companies like Amazon.com, Facebook, and Berkshire Hathaway likely prevented 19 additional resolutions from passing.”Two of the identified proposals were at Facebook, whose founder Mark Zuckerberg holds more than half of the firm’s voting rights, despite owning less than 13% of the stock, according to recent calculations by US non-profit Open Mic.

Andrew Behar, CEO of US shareholder advocacy group As You Sow, which filed one of the would-be majority supported proposals at the social media giant, told RI companies like Facebook are “actually ‘private companies’ that are publicly traded”, because of the level of control management wields through dual share structures. Behar said the same applied to Berkshire Hathaway (As You Sow’s diversity proposal at Warren Buffet’s conglomerate was also on Morningstar’s list). 

“Each has played the system to ensure that their authoritarian regime stays in control. Even if every share voted for a resolution and their CEO was against it, the 10:1 voting preference by Zuckerberg and the overwhelming share structure of Berkshire a/b class simply dominate,” he told RI. 

Facebook and Berkshire Hathaway did not immediately respond to request for comment. 

Behar’s point was proven this year when, ironically, a proposal calling on Facebook to ditch its controversial share structure was supported by more than 90% of independent shareholders, according to Open Mic; but that amounts to just 27% when all votes are considered.

In its analysis, published last week, Morningstar adjusted tallies to get a sense of the “general shareholder sentiment”, minus votes linked to the companies. For instance, overall just 18% of votes supported proposals on lobbying and human rights at US food giant Tyson Foods, but when the ten-to-one voting power of the founding family was removed, support among independent shareholders for the proposals was 79% and 78%, respectively. 

Similarly, a proposal on child exploitation at Facebook would have received 56% support, if only non-management votes were counted. The proposal actually received 17% support. 

The impact of such ownership structures like dual class shares on proposal tallies could become increasingly significant in the coming years, following the introduction of Trump-era rules which significantly raise the level of support resolutions need to be refiled year-on-year. As of 2022, shareholder proposals will need to get 5%, 15% and 25% support in their first, second and third outings. 

Proposals like those at Facebook and Tyson this year, under the new rules, would not be permitted to be refiled beyond the second attempt without an increase in support – which would be harder to achieve given the dual share class at the companies.

In its analysis Morningstar states its view that “resolutions addressing social issues like DEI [Diversity, Equity, and Inclusion] and human and civil rights are most likely to be affected by insider control and the new filing thresholds”. 

These issues, however, are among those of most concern to investors in tech firms, like Facebook. Natasha Lamb, Director of Equity Research & Shareholder Engagement at US activist investor Arjuna Capital, told RI recently that, “human and civil rights abuses at the social media companies represent the same kind of existential crisis the big oil companies face on climate change – their social license to operate is at risk, and you see that materialising now through much of the anti-trust action they are undergoing”.

Arjuna filed proposals this year at Facebook, Alphabet and Twitter calling on the California firms to nominate a human rights expert for election to their boards – none received more than 14% support.