According to Bloomberg Intelligence, as of June 9, 29 shareholder proposals on environmental and social issues at U.S. companies have already won majority support, compared with just 21 for the whole of last season. Proposals requiring disclosure of the workforce diversity data that companies collect under U.S. government-mandated EEO-1 reporting have doubled. The Center for Political Accountability notes that, in 2019, none of the 51 political spending proposals at S&P 500 companies in 2019 passed, and they received an average of 28% support, whereas through June 5 of this year, five of the seven it has worked on have passed, sometimes with very large majorities. At the beginning of June, one tiny ExxonMobil shareholder made headlines by getting three of its proposed directors onto the board.
Confluence of Events
Given the unique confluence of events of the past 15 months, we are not surprised by this enhanced level of engagement.
As part of our NB Votes initiative, we disclose our proxy-voting positions in advance for a select group of critical votes affecting companies, publishing them in nine categories that comprise our Governance and Engagement Principles: Strategy, Incentives (essentially management compensation), Board Independence, Shareholder Representation, Capital Deployment, Transparency and Communications, Risk Management, Environmental Issues and Social Issues.
Each one has been a headline issue over recent months.
The economic impact of the coronavirus lockdowns, both immediate and long term, has refocused strategy, risk and capital deployment conversations at virtually every company on the planet.
The pandemic itself, as well as the sudden rush of net-zero emissions commitments from governments, corporations and investors worldwide, has driven environmental risk up the agenda. The global protests following the murder of George Floyd, and the way the pandemic uncovered inequalities in income, educational opportunities and access to quality health care, have done the same for social issues, including pay, incentives and equity within corporations. Worker safety is now a pressing issue for virtually every business, not just the traditionally “dangerous” occupations.
We see investors increasingly insisting not only on independence on company boards, but more diversity and inclusion, too. And in the U.S., in particular, with an eye on reputation risk, they are clamoring for transparency into lobbying and political donations following the Capitol Hill riot, misinformation around the result of the Presidential election and growing controversies around voter registration.
Sure enough, many of these issues have come up in this season’s votes—and we have been pressing a lot of companies to improve their performance and throwing our support behind those we regard as best-in-class.
We supported the boards at Waste Connections and Home Depot in recognition of their efforts to enhance pay and benefits, and create a safe environment for their frontline workers during the pandemic. In contrast, we voted against the board of Chartwell Retirement Residences and in favor of a shareholder proposal for additional disclosure on work practices, given the substantial pandemic-related risks it faces as Canada’s largest operator of senior living residences.
On the critical governance goal of ensuring diversity of perspective and expertise on boards, we have singled out the insurer Progressive Corporation as a leader. While only 28% of S&P 500 directors are female, it has achieved board gender parity. Seventeen percent of its directors are from ethnic minorities; moreover, the chair is female, and that board diversity is reflected in senior management appointments, reflecting the firm’s desire to achieve not only a diverse board, but also diversity in leadership. At First Solar, however, we voted against a board with no minority representation in favor of a shareholder proposal for additional disclosure on how it seeks diverse candidates; and at Union Pacific, we supported a shareholder proposal for disclosure of EEO-1 reporting, which passed with 86% support.
In our efforts to keep compensation and incentives appropriately aligned with shareholder interests, we opposed boards on senior management pay at a number of companies, including General Electric, Heineken, Amerisource Bergen and Russia’s X5 Retail Group.
We voted in favor of shareholder proposals for reporting of political contributions at Netflix and lobbying activities at Charter Communications. And in pursuit of transparency into environmental risks, we supported shareholder proposals for enhanced emissions disclosure at Berkshire Hathaway, Phillips 66 and Caterpillar, while also urging the latter to align its reporting with the Task Force on Climate-Related Financial Disclosures framework.
Transparency and Agency
Not all of this season’s votes against boards were on hot-button topics. Most were on important but more typical issues, such as opposing the appointment of non-independent directors, or supporting a proposal for Alphabet/Google to eliminate unequal voting rights across its share classes. In Japan, we are holding Asics to account for maintaining unnecessary poison-pill protection and pressing Daiwa Industries to do something with its enormous pile of unused cash.
We have always believed that engagement with companies and boards is an important part of active management and a source of value for our clients. With the increased ownership of almost all companies by passive investors, via index and exchange-traded funds, we think it is more important than ever that active owners, who have the experience and judgment to assess management teams, to take the lead on corporate governance. Our NB Votes initiative is about communicating that to the wider world, not least to encourage other investors to adopt a similarly collaborative, transparent approach.
The events of 2020 may prove to be the decisive catalyst. They have made many investors more aware of how much hidden risk there can be in their portfolio companies—and therefore more demanding of transparency into what’s going on and of the agency to influence it.
It feels like a new era of engaged investing has dawned.
In Case You Missed It
- Japan 1Q 2021 GDP (Final): -3.9% quarter-over-quarter annualized rate
- Eurozone 1Q 2021 GDP (Final): -0.3% quarter-over-quarter
- European Central Bank Policy Meeting: The Governing Council made no changes to its policy stance
- U.S. Consumer Price Index: +0.6% in May month-over-month and +5.0% year-over-year (core CPI increased 0.7% month-over-month and 3.8% year-over-year)
- U.S. Initial Jobless Claims: +376,000 for the week ending June 5
What to Watch For
- Tuesday, June 15:
- U.S. Producer Price Index
- NAHB Housing Market Index
- U.S. Retail Sales
- Wednesday, June 16:
- U.S. Housing Starts and Building Permits
- FOMC Meeting, Summary of Economic Projections and Press Conference
- Thursday, June 17:
- U.S. Initial Jobless Claims
- Bank of Japan Policy Rate Decision
- Japan Consumer Price Index