Shareholder engagement, sometimes referred to as active engagement (or simply engagement), is a key component of public markets impact investing. As shareholders in public companies, investors can leverage their ownership to communicate with a company’s management and may push the company towards positive change. Every shareholder has a voice, and many investors use their voice as a catalyst for positive change: filing shareholder resolutions, voting proxies, engaging directly, and joining coalitions with other investors to strengthen their voice.
There are two main objectives of shareholder engagement. One is to gather information to better understand existing and potential risks, and how those risks are being managed and mitigated. The second is to push companies to publish disclosure around key risks, or even suggest policy changes within a company that would not have otherwise occurred. Engagement in either form can be related to both ESG (environmental, social, and governance) and traditional financial risks and opportunities.
Shareholder engagement is often part of a cycle that does not reach a solution or enact change in one simple meeting. The cycle typically begins with direct outreach, where the investor shares their request with the company. The company can either comply with the request, engage further with the investor and work towards a solution together, or simply refuse to engage. If a satisfactory solution is not reached between the shareholder and the company, the shareholder can file a shareholder resolution, which is a formal proposal to be voted on by all shareholders at the annual shareholder meeting. Although the results of proxy voting are indicative of shareholder views, they are not binding, meaning investors must follow up and circle back to the start of the engagement cycle with direct company outreach.
Resolutions are proposals submitted by shareholders to raise awareness about a given topic. These proposals are voted on by shareholders at the annual meeting, and typically request the company improve or change a practice such as disclosure, reporting, or firm processes. Examples of shareholder proposals that investors may submit include: reporting on various internal metrics such as diversity and inclusion, reporting on environmental metrics, addressing human rights violations, and electing members to the board of directors. Companies are not required to comply with proposal requests even if a majority of shareholders vote in favor of the proposal, but it does send a signal to the company (and often the rest of the company’s stakeholders). Many companies do consider shareholder proposals when they are submitted and incorporate the request into their processes.
The SEC regulates the shareholder proposal process. A shareholder can only submit a proposal if they hold at least $2,000 of a company’s securities for at least three years, $15,000 of a company’s securities for at least two years, or $25,000 of a company’s securities for at least one year. Although filing shareholder resolutions is restricted to investors with a certain asset size, all shareholders can vote on the resolutions filed by other investors.
Voting on proposals by a shareholder who does not attend the annual meeting is called proxy voting. Proxy voting is another key engagement tool, as it lets every single shareholder – regardless of the asset amounts they have invested – have a voice. Proxies are voted differently depending on how shares are owned. If an investor owns a single stock position in a company, they can vote their proxies directly or partner with a proxy voting company who can vote the proxies for them. If an investor holds an exchange traded fund (ETF) or mutual fund, the proxies will be voted by the fund manager, not by the end investor. This means, as an end investor, it is important to work with (or own shares of) funds where managers vote proxies in line with your beliefs. For example, some fund managers vote in favor of ESG standards, while some side with management on all issues or even choose to refrain from voting their proxies at all.
Direct engagement is typically initiated by large investors with significant assets, including both asset owners and asset managers. Managers have the ability to meet with companies because of the large amount of assets they have under management on behalf of their investors. Independent shareholder engagement specialists like As You Sow often gain support from different individual and institutional investors and leverage this to schedule meetings with companies.
Successful shareholder engagement campaigns can lead to real progress. In 2021, a relatively small activist manager – despite holding just 0.02% of the company’s shares – succeeded in replacing three board members from ExxonMobil with new directors who had significant expertise around climate and renewables. The activist manager’s strategy consisted of electing members to the board that hinged on getting votes from two of Exxon’s largest shareholders, BlackRock and Vanguard, who collectively own about 15% of the company’s stock. The activist engaged with these larger asset managers to help them understand the key climate risks and exposures that Exxon must manage to continue creating value for shareholders over the next market cycle.
Overall, shareholders engage in many different ways to push companies towards positive change. Engagement can be incredibly impactful when conducted in a thoughtful, strategic manner, and is an essential component of generating impact in the public markets. Speak with an Abacus advisor to learn more about how you can align your investments with your values.