This SRI article discusses how shareholder activism plays a large role in corporate social responsibility, SRI investment performance – especially for social investing, socially responsible investing, and sustainable investing portfolios.
Whereas screening is the fundamental tool for socially responsible investment, the power of shareholder activism has been significantly growing. In fact, according to the Investor Responsibility Research Center, shareholder proposals voted upon during corporate annual meetings increased by 30% between 2002 and 2003 alone. Since 2003, the number of shareholder proposals continues to increase.
As the most pro-active strategy to socially responsible investing, shareholder advocacy takes action to influence the policies and corporate social responsibility activities of the corporations in question. For the investor engaging in sustainable investing, these advocacy policies not only impact profitability, but environmental sustainability and ethical governance.
A look at shareholder advocacy in action….
Changing Aflac and Pfizer’s executive compensation structure. Influencing Safeway’s policies regarding cloned food and GMO food labeling. Protecting indigenous rights impacted by ConocoPhillips’ operations. Impacting the AXA Group’s cluster munitions development
There are four different steps to enacting shareholder activism, including proxy voting, engaging in dialogue, developing resolutions, and divestment.
Step 1: Encouraging proxy voting ballots
To begin utilizing the power of shareholder activism, proxy ballets must be developed to engage voters. Whereas shareholders do not need to physically attend the annual corporate meetings to cast their votes, many opt to forgo their vote because of their perceived lack of knowledge.
However, every proxy ballot that is left blank by the shareholders is automatically transferred to management, giving them greater power in determining the outcome of the vote. Generally, when it comes to socially responsible investing, the management’s perspective will be in opposition to the shareholder’s resolution. This is why it is critical to rally together the proxy votes; each unmarked proxy ballot actually works against the shareholder’s efforts.
Step 2: Engaging in dialogue with management
Recent shareholder movements have demonstrated the power of numbers in engaging in dialogue with management. At this stage, the shareholders and management believe that they can create an agreement that will satisfy both parties. However, if this stage of the dialogue does not produce resolution, the shareholder activism moves into the next phase.
Step 3: Developing resolutions
At this stage, any shareholder who has owned $2000 or more of the company’s stock for more than one year can draft a resolution. This opens the lines of formal communication between all of the shareholders, board of directors, and management. The resolution must achieve at least 3% of the vote in its first year in order to move into consideration in the second year. To move from the second year into the third year, the resolution must win 6% of the vote.
In 2006, shareholders of Dow Chemicals forced a resolution vote to address certain corporate governance policies, especially in regards to the health and environmental detriments of the 1984 Bhopal gas disaster. They garnered 6% of the vote in the first year, ensuring that the resolution would be addressed in the second year’s annual meeting.
Step 4: Divesting
If the shareholders and management cannot come to a resolution, then the shareholders are left with the final card of divestment. If a significant amount of shareholders divest, such as in the protests of American businesses engaging in apartheid in South Africa, then this can impact the management’s willingness to reconsider a resolution. However, without a significant volume of divesting, this is generally an ineffective strategy for enacting change within corporate governance policies.
Enacting your shareholder advocacy power
Although institutional investors traditionally held the shareholder pressure to enact resolutions, individual investors have gained shareholder advocacy power. Through successful lobbying efforts, even individual investors can suggest resolutions, prompting other shareholders and management to review corporate governance policies that impact the community and the environment. As a powerful tool for social investing, shareholder advocacy allows for the accountability of profitability, labor relations, and sustainability practices – leading to long-term SRI investment performance.
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