New website aims to prevent investor rights erosion
With the SEC set to announce new rules on proxy voting this week, a new website has launched for organisations concerned about the erosion of investor rights. A quick browse of InvestorRightsForum.com shows why it deserves some attention.
Backed by established names such as the Forum for Sustainable and Responsible Investment and the Shareholder Rights Group, this site hits you with its big message: “Investor rights are at risk.”
The site’s aim is clear. It believes investors, large and small, should be able propose changes to companies that they own, as concerns rise.
It comes at a time when the US Securities and Exchange Commission is proposing tighter restrictions on the filing, and resubmission, of shareholder proposals. InvestorRightsForum.com is resisting this change.
Putting investors first
There has been a growing desire among shareholders for their views to be represented in the boardroom, on issues as diverse as executive pay, climate change, child labour, modern slavery and human rights. Stewardship experts say that the shareholder proposal process often sheds light on issues neglected by boards, leading to better-considered strategic decisions and more transparency, and advocates investors push for change.
The Investor Rights Forum has plenty of examples where shareholder proposals have made a positive impact. For instance, Kroger, the largest grocery chain in the US, agreed to develop and implement a no-deforestation policy after Green Century filed a shareholder resolution with the company urging them to take action.
And a resubmitted investor request for Costco to report on its prison labour policy received over 28% support this year, after a proposal on the same topic garnered only 4.8% in 2018 – reaffirming the Forum’s belief that resubmission restrictions proposed by the SEC would be detrimental.
As investor voices have become augmented, they have been accused of ‘micromanaging’ executive decision making. In 2018 and 2019, SEC staff said a number of investor proposals were ‘requiring’ companies, including Exxon Mobil, JB Hunt Transportation and Devon Energy, to make changes relating to greenhouse gas emissions. Investors disagreed. They said their proposals didn’t ‘require’ but were ‘requesting’ changes, and were advisory in nature. In essence, they believed the staff’s broadened definition of micromanagement was depriving shareholders the opportunity to vote on clear, effective proposals on urgent risks such as climate change.
This resistance and mistrust may partly explain why investors are sticking to their guns and wanting more input into the companies in which they invest.
Thomas DiNapoli, a supporter of InvestorRightsForum.com and comptroller trustee of New York State Common Retirement Fund, said the investor voice is becoming an important risk mitigation tool.
“Indexing strategies do not readily lend themselves to selling a company’s stock entirely as a means of mitigating risk,” he said.
“Instead, we encourage companies to address material ESG issues that could jeopardize long-term financial performance. The shareholder proposal process is an important risk mitigation tool.”
Robert Eccles, a professor of management practice at Oxford University’s Saïd Business School, believes we are in the dawn of an ‘Investor Revolution’, with more shareholders willing to hold companies to account on important social issues.
In a recent article for Harvard Business Review (HBR), he said investors are demanding more from businesses on ESG issues, as it isn’t just a ‘nice-to-have’ anymore.
“It’s something shareholders will demand, because they believe it’s going to drive everything else they care about. Growth, market share, profitability. So, for any company keen to attract capital, sustainability has to become a focus,” he said.
Profitability is crucial to investors and with consumers becoming more socially responsible and environmentally aware, it has become easier to track the correlation between corporate performance and sustainability attitudes.
Data from asset management firm Arabesque, for example, found that S&P 500 companies ranked in the top quintile for ESG factors outperformed companies in the bottom quintile by more than 25 percentage points between 2014 and the end of June 2018, while their stock prices were also less volatile.
Nudging companies to be more ESG-friendly and stay in the consumer’s ‘good books’ therefore makes good business sense. So much so, investors aren’t afraid to nudge even the biggest of global companies to ‘behave’ better.
Parnassus Investments, a small San Francisco-based money manager, along with other shareholders, has pushed the giant food company Mondelēz International (which owns Oreo, Cadbury, Ritz, and other household favourites) to make all of its packaging recyclable by 2025. A classic case of David beating Goliath (or gently poking Goliath to get its act together).
Other prominent cases of investors taking companies to task include Exxon Mobil’s shareholders, who launched a proxy fight against the oil company’s directors in May, stating their “inadequate response to climate change constitutes a serious failure of corporate governance.”
German car makers Volkswagen and Daimler are also facing investor pressure over its climate change policies. Similarly, BP is being taken to task by Climate Action 100+ and a number of shareholders, including 58 banks and fund managers, to set out a business plan for reducing its CO2 emissions in line with the 2015 Paris climate change agreement.
While companies may not welcome the increased scrutiny they’re facing, it has become an established process in recent years. And investors are increasingly widening their scope on the issues where they have expectations.Last Updated: 18 August 2019