Hiking the threshold for shareholder proposals will put more pressure on IR
One of the more unheralded proposals in the controversial Financial Choice Act in the US, which passed a financial committee hearing earlier this month, is set to have a significant impact on IR professionals. This is because it contains a proposed reform to drastically restrict shareholder resolutions.
The proposed change is to introduce a new threshold that means only investors that hold a minimum of 1 percent of a company’s outstanding stock for three years will be able to file a resolution on a corporate ballot paper. For most listed companies, this threshold will be impossible to reach for all but the very biggest investors, and at a stroke will remove a shareholder tool that for more than seven decades has allowed constructive communications between investors and companies.
Why are shareholder resolutions important?
Resolutions are one of the main channels by which investors can encourage positive corporate action, especially on environmental and social issues. Under current rules, investors with as little as $2,000 worth of shares for a year can file proposals for a vote and they can provide an important channel of communication between corporates and capital markets.
Sustainability reporting is a good example: according to a report prepared by US non-profit Ceres and others, since 2009 a total of 85 companies have agreed to publish sustainability reports as a result of shareholder resolutions. Similarly, in 2015 more than 5,600 companies disclosed environmental data through CDP (formerly the Carbon Disclosure Project) at the request of a $100 tn group of investors that often use shareholder resolutions to make the request.
Shareholders often file resolutions to protect the reputation of portfolio companies from environmental or labor scandals. For example, the first proposal requesting that companies source deforestation-free palm oil went to vote in 2011, and five years later more than 20 companies had committed to source deforestation-free palm oil, in response to similar resolutions. Shareholder resolutions have also led to wide-scale integration of international human rights frameworks into corporate codes of conduct and supply chain policies, protecting companies from both legal and reputational risks.
Most major companies now have sexual orientation non-discrimination policies, chiefly as a result of hundreds of shareholder proposals on the topic. In 2016 Credit Suisse found that 270 companies that offered inclusive LGBTQ work environments outperformed global stock markets in the preceding six years by 3 percent. Investors initiated say-on-pay votes through shareholder proposals, including with Aflac, which was the first company to allow its shareholders to have this vote in 2009 as a result of Boston Common’s engagement.
In the case of both sustainability issues and diversity, many of the filers behind these resolutions have been smaller shareholders, both retail and institutional investors. Yet these are the ones that would be excluded from this process entirely by the proposed Financial Choice Act.
ESG as an indicator of long-term financial performance
The opposition to shareholder resolutions stems in part from their increasing popularity. Since 2000 the number of proposals that received at least 25 percent support has almost doubled to 61 percent. The argument that Trump administration officials are making in favor of the reform, including such business figures as the chief executive of JPMorgan, is that shareholder resolutions have been taken over by a handful of activist investors that own small stakes and are pursuing ‘special interests’ not related to shareholder value.
On the contrary. According to Ceres, the vast majority of resolutions are filed by institutional investors with large and long-term holdings or individuals with similarly long-term interests in the company’s performance. These investors recognize that natural resource strain has significant material impact, while promoting equality and diversity clearly makes for better decision-making and is simply good business sense. Investors increasingly seek information on ESG performance to gauge the quality of corporate management, and as a key indicator of long-term financial performance.
From too big to fail to too big to listen
The original Dodd-Frank Act, which the Financial Choice Act aims to repeal, was created to stop companies becoming too big to fail, yet the proposed reforms would enable them to ignore shareholders and act as if they are ‘too big to listen’.
Overturning the rule won’t make investors’ concerns over labor rights and the environment go away. Rather, the onus will be on IR professionals to fully engage with shareholders to provide transparent information and maintain the highest ESG reporting standards. While opposing forces might want to reverse the trend, investors – big and small – recognize that diverse portfolio companies that manage environmental risks have the advantage.
Lauren Compere is a managing director at Boston Common Asset Management
The information in this article should not be considered a recommendation to buy or sell any security
