By Chloe Horne, Specialist and Paul Chandler, Director, Stewardship, PRI
The Securities and Exchange Commission (SEC) has proposed new rules that would require mutual funds to disclose their votes on shareholder and management proposals related environmental, social, and governance (ESG) issues more clearly. With growing concerns around the ways companies can improve practices that advance ESG efforts and increasing support for proposals this year, the SEC’s recent move presents a unique opportunity for investors to apply an often underutilised tool in most markets: shareholder resolutions.
Shareholder resolutions are a powerful tool available to shareholders that allows them to influence companies on how they address ESG issues. By focusing efforts on a single, concrete call to action, shareholders’ resolutions aggregate a wide set of views and express those views in a numerical form that resists mischaracterisation by companies or shareholders. This critical tool works to strengthen engagement between investors and companies by facilitating two-way accountability and ensuring that shareholder sentiments are clearly expressed.
With investors facing growing systemic risks – from climate change to instability tied to socio-economic inequalities – it is crucial for filers of shareholder resolutions to do everything they can to ensure that resolutions are as supportable for investors as they can be, whilst preserving the ambition needed to address these pressing issues. To aid in these efforts, our organisation, the Principles for Responsible Investment (PRI), recently interviewed and collected feedback from a select group of institutional investors, frequent filers of shareholder resolutions, and proxy advisors to gain insights on what proponents can do when developing and promoting resolutions to make them more likely to be supported by investors.
One of the key ways proponents can develop strong resolutions is by linking the resolution to the specific company it is being filed at and clearly communicate a strong understanding of what the company is already doing and how the “ask” of the resolution will fill a meaningful gap. By providing examples of what peers are doing on the topic, the resolution is addressing and outlining whether there are opportunities for a company to be a leader in the industry and where it risks becoming a laggard. This enables filers to tell a clear story on how to address organisational challenges in a meaningful way. Furthermore, the language in the resolution helps to frame it in a way that’s constructive and avoids accusatory or inflammatory language.
It’s also important to consider the framing of the investor case. Many shareholder resolutions provide either the business case for the specific company the resolution is filed at or outline the systemic risk associated with the issue the resolution is addressing. Most successful proposals however blend these two points and bridge the gap between systemic risks and how these risks will impact long-term investor portfolio returns.
Whenever possible, filers should also seek input from investors that are influential on the wording of the resolution and consult with investor networks during the early stages of development. Consider co-filing with other investors – especially those who have a credible reputation in the investor community. This can provide the resolution with more legitimacy. For example, a 2018 study by Glass Lewis found that proposals filed or co-filed by pension funds tend to garner significantly more support than those filed by advocacy or special interest groups. In addition, company management may recommend that investors support the shareholder resolution if they are comfortable with it. Filers should use this to their advantage and feel empowered to engage with the company and try to seek its input on the resolution.
Once the shareholder resolution has been filed, proponents should consider gathering support for the resolution and circulate supplementary materials, such as investor briefs, with more background on the shareholder resolution to garner support from investors. There should also be planned outreach to key investors or investor groups and networks through the form of one-to-one conversations or meetings, roundtables, webinars, roadshows, and presentations. This gives proponents the opportunity to answer questions from investors. It’s important to be strategic when deciding which investors should publicly promote the shareholder proposal, for example investors with an interest in the long-term returns of a company may be more influential in promoting a resolution over others.
Since voting recommendations by proxy advisors often have a significant influence over the outcome of a vote, it’s also beneficial to meet with proxy advisors to provide background on the shareholder resolution and the investor case for supporting the resolution and answer their questions clearly. Make it clear how the resolution seeks to fill a meaningful gap between existing efforts of the company and expectations of investors.
With support for climate-related shareholder resolutions at US companies significantly increasing this year, investors are demonstrating that ESG-related issues are a clear priority. But even the most well-justified resolutions must be thoughtfully and strategically crafted to garner the significant support that they deserve.
About the authors:
Chloe Horne is a stewardship specialist at the Principles for Responsible Investment (PRI), responsible for coordinating investor stewardship initiatives on social issues and human rights and providing guidance on active ownership best practice including on engagement and voting.
Paul Chandler is the Director of Stewardship at the Principles for Responsible Investment (PRI). He leads the PRI’s work on stewardship including efforts to improve the effectiveness of investor practice through Active Ownership 2.0.