A forum on the role of shareholder proposals and engagement: strengthening capital markets and protecting retirees and retail investors, by enhancing corporate governance, disclosure, and performance.
in empowering investors to boost corporate governance, disclosure, and performance.
The number of shareholder resolutions filed by at U.S. companies on the environmental, social and sustainability impacts of corporate activity has grown by 11 percent in the last ten years, increasing from 407 in 2010 to 454 in 2019. At the same time, average support has increased 40 percent, rising from about 18 percent to nearly 26 percent.
According to data compiled by the Sustainable Investments Institute, 176 resolutions on social and environmental topics came to a vote at US companies in the spring of 2019. Many of these were filed by investors with relatively small stakes consistent with the existing filing thresholds. The proposals received on average of 25.5 % support (about the same as the average of 25.4% for resolutions of this kind in 2018, and 21% in 2017). These numbers demonstrate that proposals of interest to a large portion of a company’s shareholder base can and do originate with smaller individual and institutional investors.
Examples of such resolutions that received majority support include:
A human rights reporting proposal filed at private prison operator Geo Group, by the USA West Province of the Society of Jesus, which received 87% support after the company’s board of directors withdrew its opposition.
A proposal for disclosure of governance measures implemented related to opioids filed by Domini Impact Equity Fund and others receiving 60% support.
Proposals requesting diversity reports filed by Trillium at Newell Brands and Travelers Companies received 56% and 50.9% support, respectively.
The season outcomes also illustrate the continued applicability and viability of the existing resubmission thresholds. Voting outcomes show that there were very few proposals resubmitted when the prior votes were close to the resubmission thresholds and that sometimes the vote outcomes improved markedly. For instance, a resubmitted and refined request to report on the company’s prison labor policy received 28.7% this year at Costco, after a proposal on the same topic garnered only 4.8% of the vote in 2018; a similar proposal at TJX Companies received 38% support, up from 7.75% in 2018. Concerns about prison labor in the supply chain is an emerging issue which was first brought to the investment community’s attention by a few forward-looking investors, but is now of concern to many. Substantially higher resubmission thresholds for first-year or second-year resolutions might have interrupted consideration and flagging of these issue at those companies’ annual meetings.
The average of favorable votes for ESG proposals continues to increase as investors recognize the materiality of ESG issues at their companies. However, where the business case is not effectively demonstrated by the proposal and proponents, shareholders are quite able to reject resubmission via the existing resubmission thresholds. For example, shareholders consistently gave less than 3% support to proposals seeking an ideological litmus test for board members at Discovery, Starbucks, Apple, Twitter and Amazon. Shareholders at Exelon similarly rejected a proposal to “burn more coal” with only 1.6 percent support. Investors also rejected a request to report on how Gilead Sciences spent its share of the federal tax cut, a proposal that earned only 2.2%.
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For over half a century, the shareholder proposal process has served as an effective way for investors to provide corporate management and boards with insights into their priorities and concerns regarding corporate governance, policies and practices. The process has resulted in numerous important changes to corporate governance in the U.S. Examples include:
Resolutions were the impetus behind the now standard practice – currently mandated by major US stock exchanges’ listing standards — that independent directors constitute at least a majority of the board, and that all the members of the following board committees are independent: audit, compensation, nominating and corporate governance.
In 1987 an average of 16 percent of shareholders voted in favor of shareholder proposals to declassify boards of directors so that directors stand for election each year. In 2012, these proposals enjoyed an 81 percent level of support on average. Ten years ago, less than 40 percent of S&P 500 companies held annual director elections compared to more than two-thirds of these companies today.
Electing directors in uncontested elections by majority (rather than plurality) vote was considered a radical idea a decade ago when shareholders pressed for it in proposals they filed with numerous companies. Today, 90 percent of large-cap U.S. companies elect directors by majority vote, largely as a result of robust shareholder support for majority-voting proposals
A proposal that built momentum even more rapidly and influenced the practices of hundreds of companies in the last few years is the request for proxy access. Resolutions filed by the New York City Comptroller to allow shareholders meeting certain eligibility requirements to nominate directors on the company’s proxy ballot achieved majority votes at numerous companies. As a result, since 2015, at least 400 companies have adopted proxy access bylaws.
“Say-on-pay” vote requirements — now mandated by the Dodd-Frank Act — also resulted from shareholder proposals.
Shareholder proposals or related engagements played a key role in moving close to 160 large companies (including more than half of S&P 100 companies) to commit to disclosure and board oversight of their political spending with corporate funds.
Since 2009, 85 companies have agreed to issue sustainability reports as result of shareholder resolutions. According to the G&A Institute, 81 percent of S&P 500 companies published sustainability reports in 2015 compared to just under 20 percent in 2011.
The first resolution requesting that companies source deforestation-free palm oil that went to vote was in 2011 and received 4.2 percent support. By 2016 more than 20 companies had responded to similar resolutions and protected their brands’ reputations by committing to source deforestation-free palm oil produced by workers free from human rights abuses.
Shareholder proposals have led to wide-scale adoption of international human rights principles as part of corporate codes of conduct and supply chain policies, protecting companies from legal and reputational risk.
A substantial majority of large companies have sexual orientation nondiscrimination policies largely as a result of hundreds of shareholder proposals. A 2016 analysis by Credit Suisse found that 270 companies which provided inclusive LGBTQ work environments outperformed global stock markets by 3 percent annually for the previous six years.
The impact of investor influence strategies
The evidence reveals that investor efforts to engage companies on ESG-related risks and opportunities are associated with better shareholder returns:
Academic research on corporate social responsibility engagements with US public companies over the period between 1999-2009 shows that after successful engagements, companies experience improved accounting performance and governance.
An examination of private engagements conducted by fund manager Hermes demonstrated financial outperformance associated with investor engagement rather than stock picking.
An analysis of the stock performance of 188 companies placed on the ‘focus list’ for ESG engagement by California Public Employees’ Retirement System (CalPERS) found that these companies performed significantly better than their peers (15.27 percent above the Russell 1000 Index) over a 14-year period.
Evidence from collaborative dialogues involving 225 investment organizations over the period between 2007-2017 shows that after “successful” engagements (as defined by a set of pre-determined criteria and scorecards) have occurred, target companies experience improved profitability (as measured by return on assets), while unsuccessful engagements demonstrate no change.
Research from Harvard Business School indicates that filing shareholder proposals is effective at improving the performance of the company on the focal ESG issue, even though such proposals nearly never received majority support. Proposals on material issues are associated with subsequent increases in firm value.
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US SIF
Since 1995, when the US SIF Foundation first measured the size of the US sustainable and responsible investment universe at $639 billion, these assets have increased more than 18-fold, a compound annual growth rate of 13.6 percent.
Through surveying and research undertaken in 2018, the US SIF Foundation identified:
$11.6 trillion in US-domiciled assets at the beginning of 2018 whose managers apply various environmental, social and governance (ESG) criteria in their investment analysis and portfolio selection, and
$1.8 trillion in US-domiciled assets at the beginning of 2018 held by institutional investors or money managers that filed or co- filed shareholder resolutions on ESG issues at publicly traded companies from 2016 through 2018
After eliminating double counting for assets involved in both strategies, the net total of SRI assets at the beginning of 2018 was $12.0 trillion.
Read the full report here.
Kosmas Papadopoulos, Managing Editor, ISS Analytics
Based on our analysis, the most significant change in investors’ voting behavior pertains to environmental and social issues, as these proposals are earning record levels of support in recent years. . . . The main drivers for changes in voting patterns on environmental and social issues are:
Increased momentum of UN PRI and other global policy initiatives focusing on ESG integration in finance;
Transition of debate on environmental and social issues from a values-based argument to longterm economic value and risk management; and
Urgency for action to tackle climate change, which was universally recognized as a significant risk and policy priority through the 2015 Paris Agreement.
As a result of these pressures, the data indicates a number of changes in proponent filings and proxy voting behavior on shareholder proposals:
More shareholders voting in support of environmental & social proposals, witnessed by the rapidly growing proportion of shareholder proposals receiving at least 30-percent support; and
Increased willingness of companies and proponents to work together to forge a solution, supported by a record proportion of environmental and social proposals being withdrawn prior to the vote.
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Luc Renneboog, Peter G. Szilagyi, July 27, 2010
This paper offers evidence on the corporate governance role of shareholder proposals by simultaneously investigating the selection of target firms and the proposal outcomes in terms of voting success, implementation, and stock price effects. Using 2,436 proposals submitted between 1996 and 2005, a sample of 1,961 target and nontarget firms, as well as extensive controls for governance quality, we make several contributions to the literature. First, we find that shareholder proposals tend to be targeted at firms that both underperform and have generally poor governance structures. The results show that regardless of the proposal objectives, submissions are more likely to be made against firms that (i) use antitakeover provisions to entrench management, (ii) have ineffective boards, and (iii) have ill-incentivized CEOs. More detailed analysis reveals that target selection is largely driven by governance concerns irrespective of the sponsor type. Overall, these findings provide very limited basis to the claim that activists such as union pension funds pursue self-serving agendas. . . .
[T]he paper provides clear evidence that the market views shareholder proposals as a relevant device of external control. The stock price effects are most fundamentally driven by the target firm’s prior performance and governance quality. At the same time, they are strongest for proposals that win a majority vote as well as pass, which indicates that the market anticipates voting success reasonably well. Nonetheless, while voting outcomes and implementation rates have improved dramatically over time, the market returns are strongest during stock market peaks when there is a high premium for good governance.
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Jane Jagd
What if we told you how to avoid stocks that go bankrupt?
We think you would listen. Environmental, Social & Governance (ESG) factors are too critical to ignore, in our view. In our earlier report ESG: good companies can make good stocks, we found that ESG-based investing would have offered long-term equity investors substantial benefits in mitigating price risk, earnings risk and even existential risk for US stocks — ESG would have helped investors avoid 90% of bankruptcies in the time frame we examined. Our findings were encouraging enough to warrant a closer look. We here assess how US corporations, regulators and investors are positioned for ESG, and how the market is responding.
ESG is the best signal we have found for future risk
Prior to our work on ESG, we found scant evidence of fundamental measures reliably predicting earnings quality. If anything, high quality stocks based on measures like Return on Equity (ROE) or earnings stability tended to deteriorate in quality, and low quality stocks tended to improve just on the principle of mean reversion. But ESG appears to isolate non-fundamental attributes that have real earnings impact: these attributes have been a better signal of future earnings volatility than any other measure we have found.
US corporates may be behind the curve . . .
Despite empirical evidence of its efficacy, ESG is not drawing much enthusiasm from US corporates. Among companies participating in our survey at our March 2017 BofAML US Investor Relations conference, almost half of the survey respondents indicated they have no resources dedicated to ESG initiatives, and no intentions of implementation. Globally, the theme is burgeoning: ESG-related regulations have doubled since 2015; over 6,000 EU member state companies will be required to publish disclosures; and 12 global stock exchanges require written ESG guidance – but not one is in the US!
. . . but investors are ahead of it & PE multiples are responding
In our May survey of BofAML institutional clients, 20% cited using ESG, well above the estimated 5% of float that corporations believe is held by ESG-oriented investors. In another investor survey, 66% raised issues on sustainability disclosures, and 85% called for improved disclosure in filings. And the investment industry is changing to accommodate governance: for the first time ever, FTSE Russell ruled out the addition of zero voting rights stocks, citing “concerns raised by shareholders.” The market is listening: shareholder-friendly companies have seen significant multiple expansion — and we see strong signs that this re-rating continues.
Read the full text here.
James McRitchie, Editor, CorpGov.net
While at one time, ownership of a single share of stock came with the right to submit a proposal without restriction as to number or subject, in 1983 the SEC decided it made sense to impose a modest but low submission requirement, setting the threshold at $1,000 held for at least one year. The SEC raised this to $2,000 in 1998, “to adjust for inflation” but did not raise it higher “in light of rule 14a-8’s goal of providing an avenue of communication for small investors.” (File No. S7-25-97)
A study of 286 shareholder proposals submitted between 1944 and 1951 found that 137 or 47% were submitted by the Gilbert brothers. (The SEC Proxy Proposal Rule: The Corporate Gadfly, p. 830 av) The fact that three families submit a disproportionately high number of proposals is not historically unusual.
Without early ‘gadflies’ like the Gilberts and Wilma Soss, shareholders would not have the right to file proposals, vote on auditors, or have executive pay disclosed and there would be even fewer women directors.
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Sustainalytics conducted a quantitative analysis of their incident dataset, reviewing 29,000 company activities around the world that generated undesirable social or environmental effects. They found that incidents are increasing, some industries are more exposed than others, and some regions are more exposed as well. These activities can impact company share price, so asset managers and owners can benefit from applying incidents analysis in their portfolios.
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ING interviewed 210 finance executives in US-based large-cap and mid-cap companies about the importance of sustainability to corporate strategies. They found that over 80% of firms are embedding sustainable thinking into their business growth plans and that nearly half reported that sustainability concerns actively influence their growth strategies. The firms with the most robust sustainability strategies tend to have had better revenue, borrowing and credit-ratings outcomes.
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Heidi Welsh, Director, Sustainable Investments Institute
Both the Business Roundtable and the US Chamber of Commerce Center for Capital Markets Competitiveness comments submitted to the Roundtable docket make use of data from Proxy Monitor. This data analyzes proposals filed at the Fortune 250, and as such presents a skewed analysis. Because many proponents file at companies outside the Fortune 250, this Proxy Monitor data yields an inaccurate sense of the frequency of filings.
The Sustainable Investments Institute (Si2) analyzes a larger universe of concern than the Manhattan Institute data, and finds different outcomes. Si2’s data demonstrates that the proportion of proposals leading to productive engagement is underrepresented by Proxy Monitor’s data. To get a full picture of investor engagement, one must analyze all filings. This information is non-public unless a) proponent provides publicity in a press release or other announcement or b) the resolution is challenged at the SEC with a no-action letter. For instance, when it comes to analysis of engagement, Si2 finds that a high proportions of resolutions seeking sexual orientation policies, board diversity policies/reporting and sustainability reports get withdrawn at companies beyond the Fortune 250.
The Manhattan Institute data also are not normalized to SEC methods of vote counting, but rather rely on company specific standards and therefore do not allow effective cross comparison between companies on levels of support for issues.
In 2016, shareholder John Harrington, the president of Harrington Investments Inc., filed a proposal at Monsanto regarding health risks from the company’s flagship weedkiller Roundup. The proposal noted “an increasing number of independent studies assessing the toxicity of glyphosate, the active ingredient in Roundup, associate it with cancer, birth defects, kidney disease, and hormone disruption, causing world-wide concern about its safety”. The proposal requested a report assessing the effectiveness and risks associated with the company’s policy responses … to the impact of recent reclassification of glyphosate as “probably carcinogenic,” and quantifying potential material, financial risks or operational impacts on the Company in the event that proposed bans and restrictions are enacted.
On its 2016 vote, the proposal received 5.3% voting support. Refiled in 2017, it still only received 5.5% support. Yet, this relatively small group of shareholders proved to be prescient in identifying a material issue.
Only two months after Monsanto was acquired by the German pharmaceutical company Bayer in June 2018, a jury granted a $289 million award in a suit alleging public health threats and cancer of a plaintiff caused by Roundup. This news sliced billions of dollars from Bayer’s valuation. Bayer’s market capitalization has descended steeply in the following months, from $99.1 billion as of August 10, 2018 (the date of the jury verdict), to $64.8 billion as of November 20, 2018 and after losing another jury verdict, $56.2 billion by May 24, 2019.
From Ceres: The Business Case for the Current SEC Shareholder Proposal Process
The Business Roundtable suggests that companies spend an average of about $87,000 per shareholder proposal. This figure originates from an SEC release in which the SEC attempted to utilize limited and ambiguous data to calculate costs associated with the shareholder proposal process. Prior to its 1998 rulemaking, the SEC surveyed companies regarding the costs of the process. The questionnaire contained ambiguous questions yielding results that do not support the above figure.
First, the SEC asked how much it costs companies per year to determine whether or not to include shareholder proposals, including following the exclusion rules and procedures. Because the question was ambiguously worded, the average figure of $37,000 per year arguably applied to the total cost to companies of considering whether or not to include all proposals. It did not appear to reflect the cost per proposal. The wide range of responses to the question from $10 to $1,200,000 (a median value of $10,000) also reflects the ambiguity of the issue and question, as well as the range of resources expended by companies in their discretion in response to shareholder proposals. Similarly, the SEC reported survey results indicating an average cost of $50,000 to publish proposals, and as with the first question it appeared that this may be the average cost for including all proposals in the proxy, rather than a per proposal expense. These ambiguities in the original questionnaire and responses undermine the conclusion that it costs companies an average of $87,000 per proposal.
Most companies receive few, if any, shareholder proposals. While there are about 4,000 publicly listed companies in the U.S. (excluding over-the-counter stocks), in 2016 approximately 1,000 resolutions were filed — or approximately one proposal every four years per company on average. Moreover, most proposals tend to be filed with larger (i.e., S&P 500) companies, which have the resources to deal with such shareholder input. The number of shareholder proposals in recent years has not been significantly increasing. Rather the number of proposals has vacillated from a high of 1,126 in 2009 to a low of 691 in 2011.
Finally, the SEC oversees a robust “no-action letter” system that allows companies to exclude proposals from the proxy ballot that do not meet certain procedural and/or substantive hurdles. Requesting an informal no-action letter provides companies with a means of knowing whether the SEC Staff would recommend no enforcement action if the company’s excludes the proposal from the proxy. During the 2013–2015 proxy seasons companies challenged nearly one-third of shareholder proposals submitted. About half of those challenged proposals were omitted from the proxy with SEC approval.
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