Commenting on claims in T. Rowe Price’s (TROW) ESG 2019 report, individual shareholder proponent James McRitchie said: “The fact that T. Rowe Price finds that ‘direct, one-on-one engagement with companies produces better outcomes than shareholder resolutions,’ should be no surprise. If I had over $1trn assets under management, that might be a more effective route for me too, rather than spending all the time it takes to file what is essentially a public begging petition.”
The firm’s ESG report frequently plays down the importance of shareholder resolutions: “Shareholder proposals are non-binding votes that are nearly always opposed by the company’s management and typically find little support,” it says. Shareholder resolutions are a small subset of its voting, it says. Environmental and social proposals “represented just one-half of 1% of all proposals we voted on,” it says. This special pleading could have something to do with the filing of a shareholder resolution at the company itself, which noted that, despite its support of ESG issues, it supported only 24% of climate-related resolutions. The ESG report records support for only 12% of environmental resolutions, 23% of social proposals and 3% of political resolutions. “It’s a blotch on their record,” says Tim Smith, Director of ESG Shareowner Engagement at Boston Trust Walden.
The ESG report does give a reasoned argument as to why TROW does not support many of the shareholder resolutions it encounters – poorly targeted, asking for disclosures that are already made – but that is a different story from claiming they are ineffective. TROW declined to comment beyond its statements in the ESG report.
"Management may not like it, but if they ignore the wind, they’ll get blown off the cliff" – Heidi Welsh, Sustainable Investments Institute
Besides special pleading, it is difficult to understand why TROW has taken this stance. Many proponents would claim, with justification, that every single meaningful ESG improvement and innovation in the last 20 years is as a result of non-binding shareholder resolutions. This is the reason why the Business Roundtable, the US Chamber of Commerce and the National Association of Manufacturers are so intent on shutting them down.
Their power is why companies engage, agree and ask for them to be withdrawn.
Proposal supporters’ only concession on them is that it takes companies, and shareholders, time – sometimes a long time – to understand what benefits might accrue from the policies being proposed in the resolution. That’s why they keep re-filing the proposals, even though initial support can be very low. That’s why re-filing, and the ability to re-file, is so important. And that’s why the SEC, currently in thrall to corporations, wants to make the ability to re-file so difficult. “Five or six years ago, plastics pollution resolutions were a little ‘meh’ for most companies, but now the majority recognise the importance of the issue and for many it is material,” says Smith.
And, yes, even with majority support, most proposals are non-binding. But even proposals receiving low levels of support are often implemented. For example, Heidi Welsh, Executive Director at the Sustainable Investments Institute (Si2) says: “I think it’s helpful to think about shareholder resolutions as a signal of investor sentiment. A far greater number are getting more than 30% support, even more than 40%. Management may not like it, but if they ignore the wind, they’ll get blown off the cliff.”
It could be claimed, of course, that it is an oversimplification to judge an asset manager’s ESG record solely through its voting record on environmental and social resolutions. TROW’s ESG report indicates that its engagement on such issues has increased significantly. ESG disclosures, it says, are its number one engagement issue. But while a voting record is not the sole indicator of ESG engagement, it still counts. The question to ask is: why not do both? Support resolutions on, and engage on, environmental and social issues? McRitchie also puts in an appeal for TROW to disclose its voting record publicly, rather than “once a year in a coded, user-unfriendly format”.
“If TROW really believes they are doing such a great job,” he continues, “why not announce every corporate engagement and its result? If they are proud of their record, let’s see it.”
The record of shareholder resolutions’ effectiveness, however, is clear for all to see.
McRitchie added: “25 years ago, directors were basically nominated by CEOs. Today, they are nominated by ‘independent directors’. 10 years ago, unopposed directors needed only one vote to win. Now, at least at most large firms, they need a majority vote. Five years ago, 15 companies had proxy access. Now over 70% of the S&P 500 have it. Funds have started to pay more attention to the risk of their investment mix,” he concludes. “But they are still largely greenwashing, especially with respect to proxy voting.”
Richard Clayton, Research Director at CtW Investment Group, echoes McRitchie, and highlights the public achievements of shareholder resolutions: “How did this huge change in corporate governance take place? We know the answer: it was the result of persistent filing of and advocacy for shareholder resolutions.
“We know this is the case because the shareholder resolution process is public.” In contrast, he points out the merkiness of private engagement achievements. “Whatever its proponents may claim, the private nature of the engagement makes it impossible to confirm that such activity (assuming it actually takes place) has any impact at all on its own,” he says. Finally, he questions whether engagement would have any effect at all without the public advocacy of shareholder resolutions.
Sanford Lewis, Attorney at shareholder advocate Strategic Counsel, claims that “shareholder proposals are probably the principal vehicle for investors to bring new ideas to boardrooms, even in the midst of the Coronavirus, and to educate and build consensus among investors as to adoption of those ideas.”
“I can’t prove that the increasing numbers of companies that have complied with shareholder wishes on all these things did so because these were on their proxies. But similarly, T. Rowe can’t prove they didn’t” – Julie Gorte, Impax
For example, he says, “the degree to which shareholders seek material ESG data has been analysed by organisations like SASB, but it is currently being implemented through shareholder proposals that are finding substantial support at companies”, pointing to a 2017 report from US sustainability non-profit Ceres & the US Sustainable Investment Forum that summarised changes brought by proposals.
Lewis lists a number of additional governance-proposal revolutions: the need for independent directors to make up the majority of a board; and the need for membership of key board committees to comprise all independent directors. “In 1987, an average of 16% of shareholders voted for proposals to declassify boards of directors so that directors stand for election each year,” he observes. “In 2012, these proposals enjoyed an 81% level of support on average. Ten years ago, fewer than 40% of S&P 500 companies held annual director elections compared to more than two-thirds of these companies today.”
The Say on Pay vote also resulted from shareholder proposals, he notes, and points to the adoption of political spending disclosures at “close to 160 large companies, including more than half of S&P 100 companies” as a resolution result.
The list of examples is lengthy, Sanford says: sustainability reports, sourcing deforestation-free palm oil, international human rights principles as part of corporate codes of conduct, sexual orientation non-discrimination policies.
Julie Gorte, SVP for Sustainable Investing at Impax Asset Management, says: “T. Rowe’s proposition that shareholder proposals have not been an effective way of driving change is apparently backed up by one piece of evidence: those proposals are almost always non-binding.
"To say that shareholder resolutions aren’t effective is ridiculous because we can point to hundreds of companies shifting their policies and positions as a result of them" – Tim Smith, Boston Trust Walden
“This strikes me as being akin to the argument Senator Inhofe made that climate change wasn’t happening by bringing a snowball to the floor of the Senate.” Like others, she enumerates resolution results: “In 2001, women held 12.4% of board seats in the Fortune 500, according to Catalyst; by 2019 that figure was 22.5%.” Similar successes have been brought around emissions and climate reporting, and gender pay equity.
“I can’t prove that the increasing numbers of companies that have complied with shareholder wishes on all these things did so because these were on their proxies,” she continues. “But similarly, T. Rowe can’t prove that they didn’t.”
“Most shareholder proposals don’t pass,” Gorte concedes. “Particularly on environmental and social issues. Nevertheless, there are a lot of companies that have explicitly taken action in response to a healthy, less-than-majority vote on a nonbinding proposal.”
Michael Connor, Executive Director at shareholder advocate Open MIC, describes a series of minority supported shareholder resolutions that were quietly implemented by companies. For example, at Facebook, a 2018 resolution to introduce a Risk Oversight Committee was defeated, but “two weeks after the 2018 annual meeting, the company’s Board of Directors quietly adopted important and substantial changes to the charter of its Audit Committee, renaming it the ‘Audit and Risk Oversight Committee’.”
He also pointed to an apparent turnaround at Amazon over two shareholder proposals surrounding its facial recognition product. After advising shareholders to vote against the resolutions in May last year, “in September 2019, Amazon CEO Jeff Bezos publicly called for government regulation that could apply broadly to all facial recognition services, acknowledging that ‘there’s lots of potential for abuses with that kind of technology, and so you do want regulations’.”
“The same kind of thing used to be said by BlackRock and JPMorgan: we can talk to these folks – the resolutions aren’t so important,” says Tim Smith. “We agree that the vote is not the only factor in bringing change to companies, but to say that shareholder resolutions aren’t effective is ridiculous because we can point to hundreds of companies shifting their policies and positions as a result of them. Between a third and half get withdrawn because of agreements, which alone shows their leverage. Also, if you’re working on an issue of some urgency, you don’t have the luxury of allowing a company a five-year path. Let your voting follow your commitments,” he concludes.
Finally, Smith notes, it is now a business issue: several major pension plans have either put managers on notice or withdrawn mandates from them because of poor voting records.