Morningstar Column: How Advisors Can Engage With Shareholder Advocacy
By Phuong Luong
This column originally appeared on Morningstar.com on February 7, 2023.
This article is part of a series providing a framework for incorporating sustainable investing into your advisory practice.
Sustainable investing frameworks show us that sustainable investing is a spectrum of overlapping and complementary approaches. My introduction to sustainable investing was divestment, the act of not holding stocks of certain companies or industries, from learning about the anti-apartheid movement and global fossil fuel divestment. Another sustainable investing strategy I learned about more recently is holding stocks and pressuring companies to change, such as Engine No. 1′s campaign to elect three new independent directors to Exxon Mobil’s corporate board. In this column, we’ll explore how shareholder advocacy works and how advisors can engage with it.
What Is Shareholder Advocacy?
Shareholder advocacy stems from exercising one’s rights as a shareholder. A shareholder is a person or institution that owns at least one share of stock in a company. Outside of financial benefits such as dividend payments, owning stock in a publicly traded company also comes with rights to:
● Review the company’s books and records.
● Attend and participate in annual shareholder meetings.
● Sue a company.
● File requests to change company behavior or policies, also known as shareholder proposals or shareholder resolutions.
● Vote on corporate matters.
● Vote via a mail-in ballot or through an online platform if unable to attend an annual meeting.
● Delegate voting power (a “proxy vote”) to a representative.
Advocacy is taking action, usually on behalf of others, to create change. Exercising shareholder rights to support a cause is shareholder advocacy. Shareholder advocates may focus on changing a company’s environmental, social, and governance practices and/or increasing shareholder value. Shareholder advocacy is not always ESG-focused. I’ve seen the terms shareholder advocacy, active ownership, shareholder engagement, and shareholder activism used interchangeably. When an individual, organization, or firm participates in shareholder advocacy, those strategies may include one or more of the following activities:
● Engage with corporate management.
● Participate in annual shareholder meetings.
● Educate shareholders and the public.
● Write and send investor letters.
● Gather signatures on petitions.
● Convene and participate in multistakeholder discussions.
● Advocate for public policies.
● File lawsuits.
● File shareholder resolutions, also known as shareholder proposals.
What Are Shareholder Resolutions?
Of all the strategies above, you’ve likely heard of shareholder resolutions and proxy voting. Shareholder resolutions are written requests to companies, submitted by shareholders, to address concerns that are then voted on by shareholders to demonstrate how much, or lack of, support the issue has. Before annual or special shareholder meetings, companies are required by the SEC to provide a proxy statement and a ballot, in the mail or electronically, containing information shareholders may need to vote on active shareholder resolutions. Most shares are not owned by individual investors but by asset managers of mutual, index, and exchange-traded funds, and they hold the voting rights of companies held within those funds.
Shareholder resolutions are sometimes resolved before shareholders vote. Even if resolutions pass with a majority vote, they are nonbinding—corporations are not legally required to follow through with the request. However, a resolution receiving a large percentage of votes can be a strong point of leverage for shareholder advocates. According to As You Sow, a nonprofit shareholder advocacy organization, “it is rare, however, for a company to ignore the concerns of even 10% or 20% of its shareholders.”
Although they are not the only or first tools used by shareholder advocates, resolutions receive a majority of the attention in part because all shareholders of a company’s stock are notified when resolutions are open for voting. Before a resolution is put on the ballot, there may be a longer history of advocacy activities related to the issue, such as a coordinated campaign led by organizations, communities, investors, and/or firms, that shareholders may be unaware of.
An Example of Shareholder Advocacy
Green Century is a shareholder advocacy-focused mutual fund company, founded and owned by environmental and public health nonprofit organizations, that directs 100% of its net profits to environmental organizations. In 2021, Green Century launched the Insure Our Fossil Fuel Free Future campaign to stop insurance companies from underwriting new fossil fuel projects and investing customer premiums in fossil fuel companies.
As part of the campaign, Green Century:
● Educated the public and shareholders by working to get press coverage on the issue, such as coverage in The Washington Post and ClimateWire.
● Worked to educate the insurance industry by getting press coverage about the campaign in insurance trade publications.
● Secured the public support of investors, including the New York State Common Retirement Fund.
● Filed shareholder resolutions with Chubb, The Hartford, and Travelers, three of the largest global commercial property and casualty insurers.
● Won enough shareholder votes to refile the proposals if the companies do not take action.
● Filed a second set of resolutions with Chubb, The Hartford, and Travelers, again asking the insurers to address climate risks by ceasing to underwrite new fossil fuel supply projects and investing customer premiums in fossil fuel companies.
Green Century will continue engaging with these companies with the goal of coming to an agreement. If they don’t reach an agreement, shareholders will vote on the most recent filed resolutions in the upcoming voting season.
How Advisors Can Integrate Shareholder Advocacy Into Their Work
Remember that shareholder advocacy may include a range of activities, from dialoguing with corporate management to filing shareholder resolutions. Consider your firm’s mission and capacity, and your clients’ goals, to determine how you can be most effective as a shareholder advocate.
There are asset-management firms that specialize in sustainable investing and shareholder advocacy and offer their services as separate-account managers. US SIF, the Forum for Sustainable and Responsible Investment, maintains a list of sustainable investment separately managed accounts, with a self-reported summary of the screening and advocacy practices employed by each strategy.
Advisors can vote proxies on behalf of clients. Individual investors may vote on resolutions as shareholders if they directly own a share of a company. Individual investors can delegate voting power via a proxy vote to a representative, such as their advisor. You can create a free account on Proxy Preview to access analysis of shareholder resolutions and proxy-voting trends.
Deciding how to vote can be overwhelming because of the volume and complexity of resolutions. Nonprofit shareholder advocacy organizations such as As You Sow and Majority Action publish proxy-voting guides to assist shareholders and proxies. There are services that provide outsourced proxy voting, such as Broadridge ProxyEdge, ISS’ ProxyExchange, and Glass Lewis’ Viewpoint, along with their own or custom voting guidelines. The Broadridge ProxyEdge platform also provides access to third-party research and proxy-voting guidelines, such as the As You Vote service from As You Sow (currently only available to institutional investors).
Advisors can also choose funds that intentionally engage in shareholder advocacy since most shares are not held by individual investors but by the asset managers of mutual, index, and exchange-traded funds. As part of your due diligence when recommending funds for your clients’ portfolios, ask asset managers about the shareholder advocacy activities they engage with and review their proxy-voting guidelines.
Some funds publish their proxy-voting histories on their websites, or you can find a fund’s voting history on the SEC’s Edgar database. US SIF also maintains a list of sustainable investment mutual funds and ETFs, with a self-reported summary of the screening and advocacy practices employed by each fund along with links to their proxy-voting records and policies.
There are tools that rate a publicly traded fund’s shareholder advocacy activity based on public information and disclosures from its asset managers. Ethos derives an A to F rating of a fund’s advocacy activities and voting history. YourStake assigns a three-tiered shareholder “Engagement Level” to funds using a research-based methodology that considers advocacy activities such as voting history, shareholder resolutions filed, and corporate engagement.
Large asset managers are also starting to adopt pass-through voting, allowing institutional investors to vote directly on shareholder resolutions. I’m looking forward to policies and technologies, such as pass-through voting, becoming more widely available and giving retail investors in funds a greater voice in shareholder voting.
Where to Learn More
Engaging with shareholder advocacy as an advisor can feel like a big endeavor. You don’t have to do this work alone. In addition to the resources above, there are nonprofit shareholder advocacy organizations and coalitions that can help you get started, such as:
● Corporate Accountability International
● Intentional Endowments Network
● Interfaith Center on Corporate Responsibility
● U.S. Forum for Sustainable and Responsible Investment
The work of these organizations and others highlights the importance and opportunity of utilizing multiple approaches and taking collective action alongside directly affected communities, individual and institutional investors, consumers, workers, partner organizations, and governments.