A standoff is brewing between investors, corporate boards and federal regulators as shareholders prepare to vote on resolutions that concern human rights, corporate governance, and climate change.
Bolstered by more industry-friendly federal regulators, corporate trade associations are lobbying for constraints on activist shareholders and so-called “political” resolutions. They also want to stymie proxy advisory firms, which many shareholders rely on for research and recommendations on how to vote.
“It’s a shift, and the fact that shareholders are feeling empowered is I think uncomfortable for corporations, and that’s why you’re seeing them fight back,” says Danielle Fugere, president of As you Sow, a non-profit that runs and consults on shareholder campaigns.
Leveraging shareholder votes for environmental and social ends isn’t new, but such resolutions have been on the rise in recent years. Shareholders proposed 464 resolutions in 2018 compared with 407 in 2010, according to an analysis by the Sustainable Investments Institute.
Although that’s down slightly from a record of 494 resolutions in 2017, the number of proposals that were withdrawn jumped in 2018, often following quiet deals with management to accomplish some part of what the resolution called for without going to a public vote.
Environmental, social and governance resolutions are gaining support from a broader range of shareholders. The average percentage of shares voting for those resolutions rose to an all-time high of 25.7% in 2018, up from about 19% in 2010.
One key reason: Backing from the three largest asset managers in America. BlackRock, State Street, and Vanguard, taken together, are the largest shareholder in 40% of all public companies in the United States.
All three of those heavyweights have altered their shareholder voting guidelines in recent years to be more open to progressive resolutions, resulting in a series of high-profile votes in favor of them. For example, in 2017 the trio voted for resolutions requesting that ExxonMobil and Occidental Petroleum compile reports analyzing how future climate change regulations would change their businesses.
Most shareholder resolutions are technically non-binding, and completing a report on the potential impact of climate change may not seem like that big a deal. But companies see them as a first step on the road toward real limits on their activities, and ultimately their profits.
“It can start with disclosure, and then goes to, why haven’t you reached X?” says Tim Doyle, vice president for policy with the American Council for Capital Formation. “It’s the beginning of a slippery slope when a shareholder recommendation turns into things that shareholders can ask for in the future.”
Companies push back and the White House is listening
To cut back on this kind of resolution, ACCF and other trade associations formed a group called the Main Street Investors Coalition. It advocates for small-time shareholders who might lose out if “politically motivated” resolutions hurt investors’ portfolios.
Along with Nasdaq, the Business Roundtable, and the Chamber of Commerce’s longstanding Center for Capital Markets Competitiveness, the coalition has been pushing for legislation that would raise the threshold of support needed to re-submit a resolution that failed previously. They’re also asking the Securities and Exchange Commission to more tightly regulate proxy advisers.
At an SEC roundtable in November and a Senate Banking Committee hearing in December, SEC Chairman Jay Clayton said there should be some changes to proxy adviser oversight. His staff is preparing recommendations for what those could look like.
Some changes already are taking root — including a narrower view of what’s considered fair game for proxy ballots.
In late 2017, the SEC’s staff issued a bulletin reinforcing the idea that boards of directors are better positioned to run the company’s everyday operations than are shareholders, leading to fears that climate change resolutions would be ruled out of bounds.
in early 2018, the SEC ruled in favor of the oil producer EOG Resources when the company complained that a resolution calling for greenhouse gas emissions reductions had too much to do with its “ordinary business.” Core business functions one of the categories considered off-limits for shareholders to micromanage.
“They’re having more success in basically changing the rules of the road,” says Heidi Welsh, executive director of the Sustainable Investments Institute.
What’s best for the bottom line?
This isn’t just upsetting to activists. The Council of Institutional Investors, whose members collectively manage more than $25 trillion in assets, has opposed most attempts to muzzle proxy advisers or constrain shareholder rights. One of its largest constituents, T. Rowe Price, wrote a blistering letter to the SEC highlighting “significant concerns” about proposals that would give companies more influence over proxy advisers’ recommendations before they go out to investor clients.
Some big investors are eager to litigate the right to propose resolutions with a higher purpose. Last week, the aerospace company TransDigm Group agreed to accept a resolution on this year’s ballot that would set limits on its greenhouse gas emissions to settle a lawsuit filed by New York City’s five public pension funds.
“Reducing greenhouse gas emissions is a moral imperative — and it’s better for business,” said Comptroller Scott Stringer, announcing the settlement.
The power struggle between corporate management and their shareholders will be heating up in the coming year, reflecting a divergence in opinion over how a company’s performance should be evaluated: Short-term profits, or sustainability over the longer term.
Proponents of environmental resolutions say the ability to adapt to a warming world will be critical to a company’s ability to deliver returns decades in the future, when it will matter for most retirees currently paying into the system.
“Even if you think that fossil fuels are the greatest thing in the world, you’re not making any more of it. So what is your plan going forward?” says Nell Minow, vice president of ValueEdge Advisors, which helps institutional investors engage with their portfolio companies.