April 16, 2019
Environmental And Social Shareholder Proposals Get Popular Worldwide
Environmental and social (E&S) shareholder proposals are important topics with all stakeholders including shareholders, employees, and the communities where companies do business. Corporations are increasingly required to justify policies and explain their approach to challenges that are beyond typical “business management.” For example, some of these challenges like climate change are global, while others may be more country specific. This Farient Brief examines E&S shareholder proposals in the EU, Canada, U.S., China, Japan, and Australia stemming from our Global Trends in Corporate Governance report. After reviewing the various shareholder proposals across these countries, the key takeaways are:
- Shareholders are best served when they engage with boards to create change and avoid
shareholder sponsoredproxy items.
- Legislated proxy items rightly or wrongly focus executives and shareholders on specific areas of governance.
- E&S shareholder proposals have declined globally year over year.
Considering capital is fungible across borders, shareholders are on the hunt for greater returns at more acceptable risk. We have found that corporate governance practices, legislation, and shareholder rights represent some of the areas on which shareholders often focus as they evaluate global markets.
“Shareholder engagement often happens behind the scenes. Many of the largest shareholders around the world have an engagement-first philosophy whereby discussions are ongoing throughout the year, not merely votes of dissent at the annual meeting. Clearly, when we look at the relatively few shareholder proposals that actually pass, tremendous progress has been made through shareholder engagement in terms of building safe capital markets, protecting the environment, and advocating for all stakeholders. This reminds us that a shareholder proposal doesn’t have to pass to have–Dayna Harris, Partner, Farient Advisors
impactand lay the groundwork for improved transparency and disclosures for the future.”
The number of global E&S proxy proposals dropped off in 2018 after a steady increase over the previous three years, from a high of 338 in 2017 to 275 in 2018. The decrease was exclusively driven by a decline in proxy activity in the U.S. where E&S shareholder proposals slipped from 227 in 2017 to only 160 in 2018. However, in the other surveyed countries, the number of E&S shareholder proposals remained relatively constant over the past five proxy seasons.
Since 2014, only 46 of 1,257 shareholder proposals have passed in the countries that we examined. Environmental issues have been the most popular shareholder-sponsored proposals with political activities ranking second. It’s important to keep in mind that overall proposal counts may not tell the full story since the types of shareholder proposals and their relative success rates reflect specific concerns within each country.
In the U.S., shareholder-sponsored proposals are evenly distributed among the political, environmental, and social areas. Shareholder proposals have low success rates despite getting reasonable support from Institutional Shareholder Services (ISS). Only five shareholder proposals have passed since the beginning of 2018, three related to the opioid crisis and two related to gun violence – issues that reflect nationwide concerns. Also in the news, two proposals to combat “fake news” at Facebook and Twitter were sponsored by shareholders. Both proposals failed to get majority support.
As Japanese investors become more engaged in exercising shareholder rights, environmental proposals are getting more airtime and almost exclusively focus on nuclear energy and associated waste products. The 2011 meltdown of the reactor at Fukushima following the tsunami has cast a long shadow over the safety of nuclear power in general on the Pacific Rim. Interestingly, not one E&S proposal passed in Japan, all were sponsored by shareholders, and the majority of proposals associated with the nuclear energy industry were not supported by ISS.
In the U.K., approval / authorization of political contributions, including those to the EU, are required by law, sponsored by management, and receive overwhelming support from ISS and shareholders. All but two have passed since 2014. International Game Technology in 2016 and River and Mercantile Group in 2015 both failed this vote.
Boards of directors will continue to be well-served to proactively engage shareholders, listen to their concerns, communicate the company’s approach to anticipated and unanticipated challenges, and explain what the company is doing in terms hot-button issues like diversity, executive compensation, carbon emissions, pay inequality, and the list goes on.