The shareholder voting era

Dan Mikulskis

Partner

The bottom line:

Support for environmental and social resolutions appears to have dropped in the 2022 shareholder voting season, but getting to the bottom of the cause of this is more complicated than it appears.

Voting on shareholder resolutions is a powerful way for asset owners to address systemic risk, but it is difficult to drive real change and needs a lot more focus from asset owners, advisers and managers.

Your vote matters

Getting to grips with shareholder voting in 2022

Should Sainsbury’s match workers’ pay to the Living Wage foundation? Should Tesla report on child labour in battery supply chains? Should Berkshire Hathaway report on the emissions of its large energy business?

All relevant big questions of the moment and all things that shareholders were asked to vote on during the 2022 shareholder voting season.

Shareholder voting explained

At a company's Annual General Meeting there will typically be a range of proposals (or 'resolutions') that shareholders will be asked to vote on. Some of these will relate to things like re-appointing the auditor and board members, and signing off the accounts. Others could be quite different, for example asking for management to produce a report on a particular question such as a diversity audit or into the firm’s carbon emissions. Often, these votes will be used as an endpoint to an engagement process between shareholders and management to demonstrate the level of support for a particular issue. In practice, a resolution may not need to have majority support to be a success; management may decide to engage with proposals that receive a significant minority of support.

It's sometimes called a 'proxy vote' because voting used to be done in person only. Shareholders would nominate an individual as their proxy, who would attend the meeting and vote on each shareholder’s behalf according to their instructions. These days votes are processed electronically, but the name 'proxy vote' has stuck.

Can investors really change the world?

The shareholder vote that really echoed around the world was at the Exxon AGM in May 2021. Exxon shareholders rejected the appointment of three company-nominated board members and replaced them with shareholder-proposed directors selected to point the company more strongly in a green and Net Zero direction.

Can investors really change the world? My view is: probably less than is sometimes hoped, but probably more than is often thought. Just the three largest asset managers combined own around a sixth of many of the world’s largest companies between them. Arguably the most effective tool investors have to make change is their ability to engage with their investee companies and influence their future direction. Investors have some control over the board of listed companies, and the board appoints the management team who set the strategy. So, investors do not set strategy directly but sit at the top of the corporate governance structure with clear roles of influence. This is most evident when it comes to voting on shareholder resolutions at AGMs (although this is far from the only way investors can exert this influence).

In 2021 support for AGM resolutions pushing for a more progressive approach to environmental issues rose as reported by ShareAction, with around a third of environmental resolutions gaining majority support that year. Just 15% of social resolutions though gained majority support. There remained many votes that still went un-exercised and many issues that could have passed if just one more large asset manager had supported them, prompting ShareAction to conclude that “The world’s largest asset managers continue to block efforts to make progress on environmental and social issues.”

For so long stewardship and engagement were considered as barely an afterthought in the long, involved investment chain of funds, consultants, managers and advisers. But stewardship is back and it’s big.

But it’s more complicated than it seems at first sight. In 2022, support for resolutions relating to environmental and social issues appeared to fall. Analysis by Morningstar showed a drop in average support for social resolutions from 31% in 2021 to 27% in 2022, reflecting a wider fall in support by asset managers for shareholder resolutions. Are the asset managers ignoring their promises? Are the resolutions being put forward inappropriate? Or are there just other priorities (such as pay) in a world of surging inflation and cost-of-living crisis? Being an investor – or an adviser - in today’s world involves wrestling with such questions.

Frameworks and voting priorities are vital

In fact, all three of the resolutions mentioned at the start of this piece (living wage at Sainsbury’s, supply chain child labour at Tesla and emissions reporting at Berkshire Hathaway) all failed to gain majority support, as did all of the resolutions flagged by ShareAction as “ones to watch” this proxy season – although three were withdrawn, perhaps suggesting a successful conclusion to the engagement without the need for a vote.

It’s clear that an investor simply couldn’t get by considering each of these resolutions individually. We need a framework to think things through along with a policy that governs an approach to voting in broad areas (such as pay, carbon emissions, or the environment more broadly). Asset owners should at a minimum know and understand their managers' policies, and should ask the question of whether they match up with their own priorities and what they believe to be important.

The latest guidance from DWP in the UK raises the bar on what pension funds, one large group of UK asset owners, need to do.

But how can one go about formulating a framework for making these decisions?

One framework (described in a joint paper with the Investor Forum) involves asking three fairly simple questions:

Materiality – is the issue at hand material to the company’s stakeholders?
Comparative advantage – does the company concerned stand in a better position to address this issue than any other?
Efficacy – there should be a realistic chance of the resolution bringing about real change.

Only if you can answer yes to all of these questions should a resolution be supported.

That's not to say this is the only correct framework that can be used, but the point is asset owners, and their advisers do need to start thinking in terms of such frameworks if they are to make sense of the array of resolutions brought forward each year and exercise their voting power thoughtfully and effectively.

Other lessons learnt from this year’s proxy voting season

Evidence for resolutions needs to be robust and inclusively presented to get close to a majority of support.
Look at the voting advisers. Firms like Glass-Lewis which many managers and asset owners use as input into their voting decisions remain very influential and their support correlates heavily with successful votes. Asset owners could place more scrutiny on whether managers are using proxy advisers and how the advisers are forming their views.
Resolutions in areas connected to workers’ rights are growing. This is definitely an area to watch and one where asset owners will need to set their own policies against which to investigate their managers’ approaches.
It isn’t just about votes. A proxy vote is often the last resort at the end of a long engagement process if investors are unsuccessful in getting the outcome they want. Much successful engagement doesn’t come from proxy votes and investors shouldn’t assume that support for proxy votes is the only indicator of engagement.

Votes matter. Asset owners have a powerful say on all the biggest issues of the moment, from workers’ rights to slave labour to emissions and equality. But evaluating whether they are using these votes effectively is more difficult than it first appears. This looks set to continue to be a key area of work for asset owners and their advisers - clear frameworks for assessing shareholder votes and policies to guide action are essential ingredients for both managers and asset owners.