This week will see the first peak in the mountain range of U.S. corporate annual general meetings (AGMs, also known as shareholder meetings), and the start of the fourth year of NB Votes, our advance proxy voting disclosure initiative.
As a shareholder and as an active manager, we view voting as an integral part of the investment process: It is a way for us to ensure that our elected representatives, the boards of directors, properly govern portfolio companies in a manner that creates long-term value for all shareholders.
But it is just one tool available to shareholders as they seek to engage with companies. Critically, we believe that voting should be informed by bottom-up fundamental analysis and broader company engagement.
That is partly because frequent engagement addresses the many gaps left by shareholder resolutions, and is often more effective than proxy voting for addressing issues and sustaining dialogue. Our portfolio managers and analysts spend considerable time on the full range of governance issues, many of which rarely require a formal shareholder vote—things like capital allocation, for example, which is perhaps the most important job of a senior management team and board of directors.
In addition, we believe frequent engagement enriches our voting: By having our portfolio managers and industry analysts review proposals and inform our proxy voting process—rather than leaving it to an independent stewardship team—we believe our votes express a deep understanding of these companies and the nuances of their industries.
In addition to voting for directors, each AGM often has many proposals up for vote, some financially material to the company and its business, some not. And each year we see a number where we believe an informed vote requires prior engagement and a full understanding of the company’s fundamentals—the ability to sort through the noise and focus on what is actually material to the company’s financial performance. That is why we think it is useful to both our clients and our asset-management peers to disclose the thinking behind a select number of important proxy votes each season.
This year, given the news around banks over recent weeks, we think it’s interesting to draw attention to two notable proposals tabled for this sector by shareholders and non-profit groups: one put forward at a number of Canadian banks, and another put forward at several North American banks.
The first proposes that each of the Canadian banks should “make clear its commitment to continue to invest in and finance the Canadian oil and gas sector” and conduct a review of its policies to ensure that none has the effect of “encouraging divestment from the sector.”
The second proposes essentially the opposite: that each bank adopt “a time-bound phase-out” of “lending and underwriting to projects and companies engaging in new fossil fuel exploration and development.”
Despite these proposals coming from conflicting sides in a high-profile debate, we intend to oppose both of them, for two reasons: one strategic, one tactical.
A Line to Be Drawn
First, the more strategic reason.
We conduct ongoing engagement with banks on climate-related risks to their businesses. We want to understand how every bank we invest in manages these risks. If they have adopted net-zero emissions targets, we want to understand and assess how they plan to achieve them and how they are financially impactful to the business. But when it comes to shareholder resolutions, we believe there’s a line to be drawn between proposals that encourage better reporting on financially material issues, and proposals that would unduly influence routine business operations.
We think these resolutions cross that line. The banks targeted by these proposals are highly transparent in their disclosure of business exposures and lending strategies. In our view, that gives investors the information they need to make allocation decisions. We believe the banks’ senior executives are themselves best placed to decide lending policies, and we would engage only if we determined that disclosure was inadequate or that lending decisions were diverging from stated strategies.
Second, the tactical reason.
One of the Canadian banks facing the resolution above is making a major acquisition: As our analyst observes, right now our main concern as shareholders should be to ensure that it pays the right price for that acquisition. More broadly, in our view, now is not the time to beset the sector with demands that might distract it from its current, critical regulatory and risk-management challenges.
Some of the voting resolutions that had been tabled for the AGMs of Silicon Valley Bank and Credit Suisse elicit wry amusement. Many of the issues addressed are important—but with hindsight, these banks clearly had bigger fish to fry on which the proposals were silent.
These are just two of the many votes that we are likely publish, along with our rationales, ahead of AGMs this season.
We spotlight them because they exemplify the problems that can arise when we think of proxy voting happening in a vacuum. When a resolution is proposed, it’s one thing to take a view on it in principle, and another to take a view on whether it makes sense for a specific company in a specific sector at a specific time. We believe each one needs to be analyzed against real-world conditions, informed by a good understanding of how the targeted company works.
When we bring our full bottom-up analytical expertise to our proxy voting process, we believe we make it work more directly for our clients, the ultimate beneficial owners of voting shares. That involves voting in favor of proposals that we believe can enhance companies’ long-term value—and sometimes it involves voting to stop worthy-sounding but ultimately poorly targeted or timed resolutions in their tracks.
In Case You Missed It
- NAHB Housing Market Index: +1.0 to 45.0 in April
- China Q1 GDP: +4.5% year-over-year
- U.S. Building Permits: -8.8% to SAAR of 1.41 million units in March
- U.S. Housing Starts: -0.8% to SAAR of 1.42 million units in March
- U.S. Existing Home Sales: -2.4% to SAAR of 4.44 million units in March
- Japan Consumer Price Index: National CPI rose +3.2% year-over-year and Core CPI rose +3.8% year-over-year in March
- Japan Manufacturing Purchasing Managers’ Index: +0.3 to 49.5 in April
- Eurozone Manufacturing Purchasing Managers’ Index: -1.8 to 45.5 in April
What to Watch For
- Tuesday, April 25:
- S&P Case-Shiller Home Price Index
- U.S. Consumer Confidence
- U.S. New Home Sales
- Wednesday, April 26:
- U.S. Durable Goods Orders
- Thursday, April 27:
- U.S. Q1 GDP (First Preliminary)
- Friday, April 28:
- Eurozone Q1 GDP (Preliminary)
- U.S. Personal Income & Outlays
Investment Strategy Group