Shareowner Activism
Shareowner activism, or advocacy, consists of shareowners’ use of dialogue, shareholder proposals, and proxy votes to influence the managers or directors of a corporation to act in some specified way.
Shareowner activism is a feature of the unique form of business enterprise we call the publicly-traded corporation. The owners of today’s corporations — the shareowners — are so numerous and so dispersed that there are few mechanisms for any individual shareowner to exert control or even have a voice in the overall direction of the enterprise. Yet they certainly have a material stake in the performance of the corporation. The good news is that public corporations allow people who do not (and may never) know each other to combine their capital and, in the words of Robert Monks and Nell Minow, “get things done” at a scale that would be impossible without it.
Formally, the shareowners of a corporation delegate the responsibility for advancing their interests to the board of directors. When shareowners feel that the board is not doing an adequate job of representing their interests, they essentially have three options: sell their shares (divestiture); hold their shares and do nothing (passive acceptance); or hold their shares and express their dissatisfaction through dialogue, proxy voting, or shareholder proposal filing (shareholder activism).
At Pax World, we take our responsibilities as a shareowner seriously, and we believe that engaged shareowners can play an important role in improving the financial, environmental, social and corporate governance performance of the companies they invest in. That’s why we:
- Vote shareholder proxies in accordance with our environmental, social and governance criteria;
- Engage in dialogue with corporate management on issues of concern;
- Initiate or support shareholder resolutions at annual stockholders meetings aimed at persuading companies to adopt higher standards of corporate responsibility; and
- Support public policy initiatives that promote greater corporate transparency, accountability and social responsibility.
The right of shareowners to file shareholder resolutions was established by the Securities and Exchange Commission (SEC) in 1943. The mechanism that permits shareholder proposals, Rule 14a-8,
“…provides an opportunity for a shareholder owning a relatively small amount of a company’s securities to have his or her proposal placed alongside management’s proposals in that company’s proxy materials for presentation to a vote at an annual or special meeting of shareholders.”1
The degree of access shareowners have to corporate proxy ballots has been a work in progress ever since. Over the years, shareowners, the courts, and the SEC have all struggled to define the limits of shareowner rights. In the decade following the adoption of Rule 14a-8, 607 proposals were filed by 92 shareowners.2 By 1978, the American Society of Corporate Secretaries reported that of the 790 proposals received, 179 of them dealt with social issues and 611 concerned corporate governance. In the 2006/7 proxy season, over 350 shareholder proposals have been filed on social and environmental issues.
Increased shareholder activism, however, has been met with increased scrutiny by the SEC. The Corporate Library reports that, between December 1, 2006 and April 30, 2007, the SEC staff issued 405 No Action letters permitting companies to exclude shareholder proposals from their proxy ballots. These No Action letters represented 75% of all the shareholder proposals tracked during the period in question.3 It is entirely likely that the struggle over where to draw the line defining shareholder control, or voice, will continue to shift.
At Pax, we strongly believe that the process of shareholder advocacy has been and continues to be an important force in helping to improve corporate governance and promote greater social and environmental responsibility. What we call “sustainable investing” is fundamentally about identifying well-run corporations by analyzing all the relevant parameters of long-term performance, including environmental, social and governance (ESG) factors. Therefore, our shareholder advocacy efforts are largely aimed at helping the companies we invest in limit their ESG-related liabilities and take advantage of ESG-related opportunities to create financial value by developing more sustainable business models.
For example, Pax has for many years been a participant in an ongoing shareholder dialogue with major computer manufacturers to reduce electronic waste and design new products with end-of-life considerations in mind. We believe that taking such steps will help to reduce the companies’ vulnerability to expensive retrofits or redesigns as state, local, and federal governments tighten the regulatory landscape of electronic waste disposal.
We have also engaged companies on the issue of ESG disclosure, including the successful withdrawal of a shareholder resolution we co-filed with Walden Asset Management at Medtronic after the company agreed to publish a sustainability report using Global Reporting Initiative (GRI) guidelines. Other initiatives include discussions with companies regarding their operations in Sudan, better representation of women on corporate boards and in upper management, and annual election of directors to increase accountability to shareholders.
We also conduct shareowner advocacy through our proxy voting, and we follow detailed guidelines in order to align our proxy votes with our environmental, social and governance criteria. Proxies are fundamentally the assets of shareowners, and we have always believed that shareowners should know how those assets are managed. Pax was one of the early firms to disclose not only proxy voting guidelines but proxy votes, prior to the SEC requiring such disclosure in 2003. We agree with the SEC’s logic in mandating such disclosure, as shareowner involvement in shaping corporate governance “may have a dramatic impact on shareholder value.” Furthermore, we believe that corporate governance is expressed not only through board and committee structure, charters and bylaws, and other such standard metrics, but through management of impacts on the natural environment and human communities, which can have profound impacts on brand value, reputation, and a company’s license to operate.
Pax also engages in public policy advocacy where we believe changes in public policy are necessary in order to preserve or advance shareowner rights, promote better corporate environmental, social or governance performance, or the more efficient and equitable performance of capital markets. Recently, Pax CEO Joe Keefe was a signatory to an Investor Network on Climate Risk initiative, “Capital to the Capitol,” in which corporate CEOs urged the US government to regulate greenhouse gas emissions. The US is one of a tiny group of developed nations that have no national regulation of greenhouse gas emissions, and this lack of regulation (together with the growing effects of a warming climate itself) create significant sources of new risk and opportunities for corporations, capital markets and asset managers. Joe Keefe was also a signatory to a CEO statement on climate change and regulation presented at the 2007 meeting of the G8. Finally, Pax has long been a signatory to the Carbon Disclosure Project, an international initiative aimed at getting all corporations to disclose their greenhouse gas emissions, as well as policies and actions related to climate change.
Finally, Joe also recently wrote a letter to SEC Chairman Christopher Cox urging the SEC to continue to provide an open channel for the filing of shareholder resolutions, rather than place limitations of the ability of shareholders to gain issue access to corporate proxy ballots. Most shareholder resolutions are advisory or nonbinding, but have been a significant force for more enlightened governance of publicly traded corporations. Pax will continue to advocate and support policies that advance shareowner interests and promote greater corporate transparency and accountability on financial matters as well as environmental, social and governance issues.
1Securities and Exchange Commission, “Division of Corporation Finance Staff Legal Bulletin No. 14 — Shareholder Proposals,” July 13, 2001.
2Stuart L. Gillian and Laura T. Starks, “A Survey of Shareholder Activism: Motivation and Empirical Evidence,” Contemporary Finance Digest, Autumn 1998, p. 6.
3Ric Marshall, “No Action, No Disclosure: No Action Letters and excluded shareholder proposals in the 2007 proxy season,” The Corporate Library Analyst Alert, May 14, 2007.