New website aims to prevent investor rights erosion

With the SEC set to announce new rules on proxy voting this week, a new website has launched for organisations concerned about the erosion of investor rights. A quick browse of InvestorRightsForum.com shows why it deserves some attention.

Backed by established names such as the Forum for Sustainable
and Responsible Investment and the Shareholder Rights Group, this site hits you
with its big message: “Investor rights are at risk.”

The site’s aim is clear. It believes investors, large and small, should
be able propose changes to companies that they own, as concerns rise.

It comes at a time when the US Securities
and Exchange Commission is proposing tighter restrictions on the filing, and resubmission, of
shareholder proposals. InvestorRightsForum.com
is resisting this change.

Putting investors first

There has been a growing desire among shareholders for their views to be
represented in the boardroom, on issues as diverse as executive pay, climate
change, child labour, modern slavery and human rights.  Stewardship experts say that the shareholder proposal process often sheds
light on issues neglected by boards, leading to better-considered strategic
decisions and more transparency, and advocates investors push for change.

The Investor
Rights Forum has plenty of examples where shareholder proposals have made a
positive impact. For instance, Kroger, the largest grocery chain in the US, agreed to develop
and implement a no-deforestation policy after Green Century filed a
shareholder resolution with the company urging them to take action.

And a
resubmitted investor request for Costco to report on its prison labour policy
received over 28% support this year, after a proposal on the same topic
garnered only 4.8% in 2018 – reaffirming the Forum’s belief that resubmission
restrictions proposed by the SEC would be detrimental.

Meeting
resistance

As investor
voices have become augmented, they have been accused of ‘micromanaging’
executive decision making. In 2018 and 2019,
SEC staff said a number of investor proposals were ‘requiring’ companies, including Exxon Mobil, JB Hunt Transportation and Devon Energy, to make changes relating to greenhouse
gas emissions. Investors disagreed. They said their proposals didn’t ‘require’
but were ‘requesting’ changes, and were advisory in nature. In essence,
they believed the staff’s broadened definition of micromanagement was depriving
shareholders the opportunity to vote on clear, effective proposals on urgent
risks such as climate change.

This resistance
and mistrust may partly explain why investors are sticking to their guns and
wanting more input into the companies in which they invest.

Thomas DiNapoli,
a supporter of InvestorRightsForum.com and comptroller trustee of New York State Common
Retirement Fund, said the investor voice is becoming an important risk
mitigation tool. 

“Indexing
strategies do not readily lend themselves to selling a company’s stock entirely
as a means of mitigating risk,” he said.

“Instead, we
encourage companies to address material ESG issues that could jeopardize
long-term financial performance. The
shareholder proposal process is an important risk mitigation tool.”

Robert Eccles, a professor of management practice at Oxford
University’s Saïd Business School, believes we are in the dawn of an ‘Investor
Revolution’, with more shareholders willing to hold companies to account on
important social issues.

In a recent article for Harvard Business Review (HBR), he said
investors are demanding more from businesses on ESG issues, as it isn’t just a
‘nice-to-have’ anymore.

“It’s something shareholders will demand, because they believe
it’s going to drive everything else they care about. Growth, market share,
profitability. So, for any company keen to attract capital, sustainability has
to become a focus,” he said.

Profit focussed

Profitability is crucial to investors and with consumers becoming
more socially responsible and environmentally aware, it has become easier to
track the correlation between corporate performance and sustainability
attitudes.

Data from
asset management firm Arabesque, for example, found that S&P 500 companies
ranked in the top quintile for ESG factors outperformed companies in the bottom
quintile by more than 25 percentage points between 2014 and the end of June
2018, while their stock prices were also less volatile.

Nudging companies
to be more ESG-friendly and stay in the consumer’s ‘good books’ therefore makes
good business sense. So much so,
investors aren’t afraid to nudge even the biggest of global companies to
‘behave’ better.

Parnassus
Investments, a small San Francisco-based money manager, along with other
shareholders, has pushed the giant food company Mondelēz International (which owns
Oreo, Cadbury, Ritz, and other household favourites) to make all of its
packaging recyclable by 2025. A classic case of David beating Goliath (or
gently poking Goliath to get its act together).

Other prominent
cases of investors taking companies to task include Exxon Mobil’s shareholders, who
launched a proxy fight against the oil company’s directors in May, stating
their
“inadequate response to climate change constitutes a serious failure of
corporate governance.”

German car makers Volkswagen and Daimler are also facing investor
pressure over its climate change policies. Similarly, BP is being taken to task
by Climate Action 100+ and a
number of shareholders, including 58 banks and fund managers, to set out a business plan for reducing its
CO2 emissions in line with the 2015 Paris climate change agreement.

While companies
may not welcome the increased scrutiny they’re facing, it has become an
established process in recent years. And investors are increasingly widening
their scope on the issues where they have expectations.