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Paul Hodgson: How investor-corporate engagement can be beneficial for all concerned (with examples!)

A sometimes confrontational process can often result in positive outcomes and even mutual respect

Believe it or not, investor-corporate engagement works. And I’ve got a lot of examples to prove it, in the hope that the Securities and Exchange Commission reads Responsible Investor! 

It all started in the 1970s with Episcopal priests showing up at General Motors’ annual meetings to discuss South African apartheid, Andrew Behar, CEO of US shareholder advocate As You Sow, told me. We all know what happened there, eventually. And, yes, sometimes it can take years.

Behar shared a number of case studies, including one that started 15 years ago with a raft of shareholder proposals on bottle and can recycling at major soft drink companies.

“Dialogues were respectful and appreciated by companies, not viewed as a problem or nuisance,” he said. And what had started out as “an adversarial dialogue with Nestle Waters” became a joint effort by As You Sow and Nestle Waters to persuade other large brands to take financial responsibility for recycling single use plastic and aluminium containers. 

“This led to the development of a $100 million Closed Loop Fund by Walmart, along with Coke, Pepsi, Procter & Gamble and several other brands, to help fund improvements to US recycling infrastructure, which will increase materials recycled.”

He cited US pharma company Abbott Laboratories progress on its non-GMO Similac infant food formula. He said it made the larger point that honest labeling is a marketing advantage, though companies always saw it as negative. 

“Abbott has made millions of dollars on the innovation we requested in the resolution and it is now one of their most profitable lines of business. They did not want to do it, but finally listened and are glad they did.” Again, this started with a series of shareholder resolutions calling for GMO ingredient labeling and an encouragement to produce a non-GMO infant formula, resolutions that struggled to pass resubmission thresholds and then finally failed – a failure that was followed by Abbott agreeing to the demands of the resolution anyway because of all the engagement As You Sow had had with it.

“I also love the recent agreements by [restaurant chains] YUM!, McDonalds, and Dunkin [Donuts],” said Behar. “All three agreed to stop using styrofoam. That means over three billion foam cups will not be produced this year. That saves marine life and decreases demand for fossil fuel plastic feedstocks. So positive ocean impact plus climate with one resolution at three companies that all got great press for their decision.”

Dialogues were respectful and appreciated by companies, not viewed as a problem or nuisance” – Andrew Behar

But he reserved his highest enthusiasm for the ‘antibiotics in poultry story’. “We engaged fast food companies as parents were stopping their kids from eating chicken nuggets due to antibiotic resistant ‘superbugs’,” he said. “Once McDonald’s realized the material impact to their bottom line, ‘the McNugget crisis’, they signed a no-antibiotic pledge. Rivals like Wendy’s, Burger King and KFC followed. 

“We brought this upstream to their suppliers. [Poultry producers] Tyson, Purdue, and Sanderson had no choice other than to produce antibiotic-free poultry. The power of market forces transformed a whole market sector in three years.”

Engagement works.

Sonya Dreizler, ESG and impact investing speaker and consultant, relayed another engagement success story at US bank Wells Fargo from February this year. Led by Clean Yield Asset Management, this engagement persuaded the bank to drop its use of ‘forced arbitration only’ for sexual harassment cases. “Wells Fargo has raised the bar for financial institutions aiming to root out sexual harassment in the workplace,” Molly Betournay, Clean Yield’s director of shareholder advocacy, said in a statement. Wells Fargo is believed to be the first big bank to end forced arbitration for such claims, Clean Yield said.

Again, the change was made following the filing of a shareholder proposal that resulted in productive discussions with the company and then the withdrawal of a follow-up resolution.

Tim Smith, director of ESG shareholder engagement at Boston Trust Walden (BTW), also shared a number of success stories, beginning with board diversity at healthcare company Ensign Group and at Bridge Bancorp. Shareholder proposals calling for more board diversity at both companies were withdrawn after both voluntarily amended board nomination policies to “explicitly include race, ethnicity, and gender among the factors considered and committed to seek women and people of colour in each candidate pool” according to BTW’s website. Bridge Bancorp also committed to these kinds of searches for senior management positions. Soon after, the Ensign Group added an “ethnically diverse” woman to its board, said the firm’s ESG Impact Report.

Likewise, filing shareholder resolutions at Choice Hotels, Hyatt Hotels, and furnishings company Williams-Sonoma that asked for the disclosure of the composition of their workforces along race, ethnicity, and gender lines led to engagement and withdrawal of the resolutions when all three committed to the disclosures requested. All three also agreed to diversity and inclusion (D&I) initiatives.

Smith also told a story about “an interesting turnaround by a company we engaged over the years – Emerson Electric”. 2020 was the first year in a decade that BTW did not file a shareholder resolution at the company due to its announcement of a substantial greenhouse gas (GHG) emissions reduction goal. 

From 2011 to 2015, the BTW filed resolutions seeking comprehensive ESG reporting that ultimately earned a 39% vote, then from 2016 to 2019, it shifted its engagement and resolutions to focus on the adoption of GHG emissions reduction goals, leading to 40% support in 2018 It then withdrew its 2019 proposal after Emerson made a commitment to develop GHG goals. These were eventually published in its corporate social responsibility report.

Bruce Freed, president of the Center for Political Accountability (CPA) offered a brace of successful engagements. The first, described as “an S&P 500 consumer-facing company that had a blank slate on its political spending policy”, involved a standard CPA political disclosure resolution for the 2019 proxy season.

“Upon receiving the resolution, the corporate secretary reached out,” said Freed. “In the course of our dialogue, he said, unprompted, that the company was concerned that a controversial contribution could lead consumers to shift their purchasing to a competing product. He asked about the policies that the company needed to adopt to make it a Trendsetter company in the CPA-Zicklin Index [that ranks companies according to their disclosure levels surrounding political donations].” The company adopted the policies and went from a low position in the index to “trendsetter” (score of 90 or above). “The thing that struck us,” added Freed “was the corporate secretary’s statement about the company recognising controversial contributions as a risk, understanding the bottom-line consequences and moving quickly to address the risk with strong policies.”

The second story also involved a company at the bottom of the Index in 2019: chemicals company DuPont. “The company was named in a newspaper story which its CEO read,” said Freed. “He called the company’s Washington office and said that the score was unacceptable and that the company should find out what it needed to do to become a Trendsetter. A member of its Washington office contacted us and we met with him and have spoken with him several times since.” Again, policies adopted will lead to this company becoming a “trendsetter”.  “In both cases,” said Freed, “we found that the companies recognised the risks that political spending posed and the need to manage them with robust policies. We had very positive engagements with them.”

ICCR and the Investor Alliance for Human Rights engaged US online behemoth Amazon and provided the company with input and resources to help it develop a comprehensive human rights policy. Amazon adopted its human rights policy based on the United Nations Guiding Principles on Business and Human Rights,  ILO Declaration on Fundamental Principles and Rights at Work, and the UN Universal Declaration of Human Rights.

See, SEC, this process seems to be working very well. Maybe you should leave it alone.