I’m talking about voting but don’t worry! It’s nothing to do with the latest UK prime minister or US mid-terms. I’m talking shareholder voting.
Getting to grips with shareholder voting in 2022
Should Sainsbury’s match workers’ pay to the Living Wage foundation? Should Tesla report on child labour in battery supply chains? Should Berkshire Hathaway report on the emissions of its large energy business?
All relevant big questions of the moment and all things that shareholders were asked to vote on during the 2022 shareholder voting season.
A decent first cut is that shareholder voting doesn’t matter. That’s not completely right or anything. Sometimes there are things — proxy fights, controversial mergers, new share issuances for meme stocks — where the shareholder vote really matters. But for almost every US public company, almost every year, the things that come up for votes are:
- Director elections, which seem like they would matter, but don’t. The director elections are almost always uncontested; you can either vote for the incumbent directors, or you can vote against them and for nobody else. If a majority of the shares are voted against a director, then she will probably have to resign from the board, though not always, but in any case she’ll be replaced by another director chosen by the other incumbent directors. It’s not like the shareholders vote every year on whether or not to fire the board or the chief executive officer.
- Nonbinding advisory proposals on things like executive pay, environmental initiatives, governance stuff, etc., where if a majority of shareholders vote against management’s recommendation then that is embarrassing but nothing really happens.
The shareholders almost never vote on anything binding; in the ordinary course, they have no real power to choose the managers or strategy of the company.
Frameworks and voting priorities are vital
In fact, all three of those resolutions mentioned all failed to gain majority support, as did all of the resolutions flagged by ShareAction as “one’s to watch” this proxy season – although three were withdrawn, perhaps suggesting a successful conclusion to the engagement without the need for a vote.
It’s clear that an investor simply couldn’t get by considering each of these resolutions individually. We need a framework to think things through along with a policy that governs an approach to voting in broad areas (such as pay, carbon emissions, or the environment more broadly). Asset owners should at a minimum know and understand their managers’ policies, and should ask the question of whether they match up with their own priorities and what they believe to be important.
For so long stewardship and engagement were considered as barely an afterthought in the long, involved investment chain of funds, consultants, managers and advisers. But stewardship is back and it’s big.
But it’s more complicated than it seems at first sight. In 2022, support for resolutions relating to environmental and social issues appeared to fall. Analysis by Morningstar showed a drop in average support for social resolutions from 31% in 2021 to 27% in 2022, reflecting a wider fall in support by asset managers for shareholder resolutions. Are the asset managers ignoring their promises? Are the resolutions being put forward inappropriate? Or are there just other priorities (such as pay) in a world of surging inflation and cost-of-living crisis? Being an investor – or an adviser – in today’s world involves wrestling with such questions.
The latest guidance consultation from DWP in the UK raises the bar on what pension funds, one large group of UK asset owners, need to do.
But how can one go about formulating a framework for making these decisions?
One framework (described in a joint paper with the Investor Forum) involves asking three fairly simple questions:
- Materiality – is the issue at hand material to the company’s stakeholders?
- Comparative advantage – does the company concerned stand in a better position to address this issue than any other?
- Efficacy – there should be a realistic chance of the resolution bringing about real change.
Only if you can answer yes to all of these questions should a resolution be supported.
That’s not to say this is the only correct framework that can be used, but the point is asset owners, and their advisers do need to start thinking in terms of such frameworks if they are to make sense of the array of resolutions brought forward each year and exercise their voting power thoughtfully and effectively.
As Matt Levine says in his article, one response to this push from some managers is to give their clients the ability to vote themselves – so the manager isn’t under so much pressure to take a view. So far so sensible, apart from, as Matt says, this probably means overall there is far less investor influence as bigness really matters when it comes to voting, hundreds or even thousands of separate investors doing their own thing is unlikely to give any meaningful outcomes in a world where it is really hard to get a majority for any of these votes.
I think one response to this by the way is that a more progressively minded “proxy adviser” (a firm that investors can effectively sub-contract out their voting intentions) needs to exist that takes a stronger pro-ESG stance than the existing firms so that investors can make sense of the large number of votes and work in tandem with other investors.
Votes matter. Asset owners have a powerful say on all the biggest issues of the moment, from workers’ rights to slave labour to emissions and equality. But evaluating whether they are using these votes effectively is more difficult than it first appears. This looks set to continue to be a key area of work for asset owners and their advisers – clear frameworks for assessing shareholder votes and policies to guide action are essential ingredients for both managers and asset owners.
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