Paul Hodgson: How do corporates really respond to shareholder proposals?

View from the ‘other side’ of shareholder engagement

There are a couple of myths put out by, among others, some US Securities and Exchange commissioners. 

The first is that the majority of shareholders are not interested in what the proponents of shareholder resolutions have to say. The second is that corporations want shareholder resolutions banned because they are distracting and costly.

So, a cluster of resolutions that have gained huge majorities, and some off-the-record thoughts from corporations, will help to explode both those myths. 

With votes being cast in the order of 60-80% support for some shareholder resolutions, it is clear that it is not just the 'SRI community' which is backing them. 

At least some of the largest mutual funds must have voted for these resolutions.

Corporate sources have told Responsible Investor that they know their sustainability reporting is on a continuum and that dislosures will evolve with each edition of their sustainability or CSR report.

In one instance, conversations were had with a company’s top shareholders in advance of the annual meeting; the investors wanted to know the company’s thinking on the particular proposal that eventually won almost two-fifths of shareholder support.

During the meeting, representatives of the company talked to shareholders about disclosures that could potentially be broader than those sought by the proposal. The company said it wanted to develop a comprehensive strategy that would carry it forward and have shareholders’ confidence.

Typically, however, if a company engages its largest shareholders prior to the AGM and tells them it's in a development phase, that it is moving towards the sort of disclosures needed, the reaction of the largest mutual funds is generally to give the company a pass and not to vote against management.

It is something of a surprise, therefore, that these top holders decided to vote for the proposal anyway at the firm in question.

Demonstrating that shareholder resolutions are not always, in fact are probably only rarely, confrontational, the company said it had a “great conversation” with its top holders but recognised that, based on the result, those holders did not hear exactly what they needed to. 

In this example, the shareholders made it clear that they wanted disclosure along Sustainability Accounting Standards Board (SASB) standards. They wanted to be able to look at companies in their portfolio and see “everything from A through Z” with the same comparators and metrics. The source admitted that they had fallen short of saying in the meeting that the company would comply with SASB disclosures.

Noting that SASB was clearly gaining traction among the largest investors, RI asked why the company had resisted these specific disclosures. The resistance came from an unwillingness to opt for a specific framework among the many different sustainability disclosure frameworks. The company did not want to ‘go down the SASB route’ and then have the market and/or the investment community say it was switching its demands for disclosure from SASB to another framework. 

Another source noted that the shareholder representatives the company talks to most often now are not portfolio managers and analysts but the stewardship teams representing those firms. They noted that this constituency is only going to become more influential.

With disclosures, also, all the companies that spoke to RI said that they had to “get more comfortable with our disclosure not being a competitive disadvantage”. There was a general attitude of ‘when all of our competitors do it, we’ll do it’ and a reluctance to ‘go out on a limb’.

Another theme to emerge from the conversations was that demands for disclosure have shifted away from environmental disclosures to social and human capital management issues. It was recognised that this was largely because many investors felt they are already getting what they want in terms of environmental disclosures but that the 'S' part is lagging.

Commenting on this development, one source said: “A little success has bred additional demands. Does this end?” There were some concerns voiced that there would never be a point where enough is enough and that demands for further disclosures and more detailed disclosures would keep evolving.

It’s an interesting moment. There has been continuous improvement in disclosure, whether it be executive pay, board diversity, environmental risk; it seems that the more investors get the more they want because it allows them to make better decisions about what to do with a particular stock, whether to keep it in their portfolio, how to weight it. They are hungry for information and they know that this newly available data is significant for valuation.

On the other hand, one company indicated that it generally went further than the specific demands in a proposal, if shareholders supported it. Making sure disclosures meet the resolutions’ demands is one objective, but ensuring that the company understands what the wider group of shareholders wants is the most important.

Demonstrating that some businesses were well ahead of the US Business Roundtable’s statement on the New Purpose of a Corporation – in other words, not so new at all – was the recognition that companies “have a lot of stakeholders in mind when [they] do anything”. 

Under consideration are: total shareholder return, but also being the employer of choice, the preferred supplier, the preferred customer, as well as giving back to the community. “We had that mission well before the BRT issued their new purpose thing,” said one source.