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Why voting against directors matters
Asyiqin Binte Radzuan
Associate Investment Consultant
Let’s be honest: shareholder proposals get a lot of attention but they’re sometimes more hype than substance. They’re popular because they give informed investors a direct opening to push company boards for changes, especially regarding ESG issues.
Shareholder proposals are items at company meetings not proposed by management, but by shareholders directly. These allow investors to voice opinions on how a company is run, whether it’s about sustainability, tweaking executive pay, or enhancing transparency. Think of it as a way for shareholders to step up and say, “Here’s how we think the company can do better!”
These proposals have surged as more investors become aware of the need for urgent action, whether on climate change, social issues such as child labour, or human rights – plus the desire for better corporate governance.
However, are they making a difference? In 2023, the pullback in support for E&S (environmental and social) shareholder resolutions by several of the largest asset managers caused the number of key E&S resolutions to almost halve (Morningstar). Despite increasing awareness of ESG issues, the success rate remains low due to:
- Legal hurdles: Companies use legal mechanisms such as no-action requests to omit proposals from AGM ballots.
- Low support: Many proposals fail to gain majority support, partly because they’re seen as too prescriptive, companies have already addressed those issues, or there has already been a vote on the issue at a previous meeting.
Only a quarter of sustainability proposals (FAIRR Initiative) received support from US shareholders in 2023. Investors are becoming more cautious and the evolving no-action process, along with new SEC disclosure requirements, means that shareholder proposals may not always be the most effective tool for driving change.
So, where should investors focus their efforts for more substantial impact?
Voting against directors is a powerful tool to keep company boards in check, making sure they're serious about ESG risk management, including climate action, and transparency.
Director votes: the alternative (and possible better) catalyst for change
Voting against directors can be a game-changer. Directors hold significant influence over a company’s sustainability and governance practices. When asset managers vote against directors, it sends a strong message to them: “We demand better.”
Suppose a director consistently fails to address concerns about environmental sustainability, and a major investor feels this is a critical issue for the company's future. The investor might decide to vote against that director's re-election at the annual general meeting (AGM).
For example in 2021, Engine No. 1 successfully led a proxy battle electing three independent directors to push ExxonMobil to reduce its carbon footprint.
Investors often make their stance clear before the meeting. This can be through public statements or direct engagements. Following the AGM, engagement doesn’t stop. Investors may continue engaging through face-to-face discussions, public reporting or ongoing monitoring.
How have managers voted at CA100+ companies?
Looking at how asset managers vote at Climate Action 100+ (CA100+) companies offers valuable insights. CA100+ companies are some of the most carbon-intensive globally and asset manager votes at these companies can significantly influence climate action and governance practices, accelerating the transition to net-zero emissions. Analysing these votes helps assess whether asset managers are genuinely committed to steering companies towards sustainability or are yielding to short-term pressures.
Companies with Transition Pathway Initiative (TPI) scores of 1 and 2 (scored by TPI on a scale from 0 to 5 assessing the level of action companies are taking to address climate change) are companies that are taking little action to address climate change1.
Votes against directors at companies with TPI scores of 1 and 2
Sources: Manager(s), Diligent Boardbooks Ltd., CA100+, Transition Pathway Initiative
When examining the voting behaviour of both passive and active managers, as shown in chart above, passive managers in general tend to vote against directors more frequently than active managers. This is likely because passive managers are locked into the companies they own due to their index-following strategies. As they can’t simply divest, they use their voting power to push back against directors who fall short on climate strategy. In contrast, active managers might have chosen not to invest in companies that fail to meet their standards. They could also be less familiar with, or have less capacity to use, director votes compared to passive managers (who tend to be larger).
Including companies with TPI scores of 3 broadens the picture, as these companies are taking more action on climate change than those with scores of 1 or 2 (on TPI’s five point scale).
How have managers voted at CA100+ companies?
Sources: Manager(s), Diligent Boardbooks Ltd., CA100+, Transition Pathway Initiative
Focusing specifically on passive managers A, B and C — each holding a similar number of CA100+ companies — their voting patterns reveal significant differences. Manager A stands out for being notably more proactive in exercising its voting rights, as indicated by the higher proportion of companies with at least one vote against directors. In contrast, B and C, despite managing similar portfolios, tend to be more conservative, voting against directors less often.
Turning to active managers, we see a much broader variation of voting practices. In the market, sustainability-focused managers tend to advocate more robust governance and sustainability practices, leading them to vote against directors more frequently when they believe change is necessary. In contrast, other managers who do not prioritise action on ESG risks, may vote against directors less often. However, it is not always simple – managers could also prioritise stable relationships with company boards and avoid aggressive governance interventions unless absolutely necessary. There are a range of approaches taken. We believe that, whatever approach is taken, managers should use voting as a tool to support their engagement with companies and vice versa, for example, using a vote against directors as an escalation tool when initial engagement has not been successful.
This variation in voting practices among active managers highlights their differing strategies and values, reflecting a nuanced approach to influencing corporate governance. It all depends on their priorities and investment philosophies.
Conclusion
Voting against directors is a powerful tool to keep company boards in check, making sure they’re serious about ESG risk management (including climate action) and transparency. Yes, managers may be stepping up, but there’s still a lot of work to do. We need to push for smarter, stronger stewardship that truly aligns corporate decisions with what’s best for both investors and the planet.
What can we do?
- Communicate regularly with your asset managers to ensure their voting reflects your priorities on sustainability and governance.
- Ask for details. Engagement reporting varies substantially across managers and your manager might not be giving you enough information about their stewardship activities.
- Review your managers’ performance regularly and don’t be afraid to look at alternatives if they aren’t meeting your expectations.
If you want to learn more about how your managers are engaging on your behalf, please reach out to our colleagues at LCP to learn more about our stewardship services and how we can help you make a difference with your investments.
1 TPI Score is a metric used to assess how well companies are prepared to transition to a low-carbon economy. The score evaluates a company's performance, between a 1 and a 5, with 1 indicating that the company recognises climate change as an issue but has done little to address it and 5 indicating that the company is a leader, fully integrating climate change into its strategy and aligning with international goals like the Paris Agreement.
