Doubling Down On ESG: Proxy Season With A Social Conscience

This proxy season there is an unusual push by large investors to effect ESG-related changes by companies well before the annual meeting.

As the 2019 proxy season commences, shareholder proposals continue to be ripped from the headlines. Board diversity, climate change, the opioid epidemic and gun violence will top the agenda in corporate boardrooms in 2019—with directors called upon to ensure that sophisticated policies are in place to address them.

Given the intense media attention surrounding all-male boards, mass shootings and severe hurricanes, floods and wildfires, such shareholder activism is not terribly surprising. What is unusual is the push by large investors to effect ESG-related changes by companies well before the annual meeting.

“The uptick in engagement is encouraging companies to take actions that previously were accomplished via the more antagonistic shareholder proposal process,” says Courteney Keatinge, director of ESG research at proxy advisory firm Glass Lewis & Co. “The increase in dialogue appears to be diminishing the number of shareholder proposals that go to vote each year.”

Investors have made their positions on ESG clear over the past two years—such issues are actually viewed as material to a company’s long-term financial performance, depending on the entity type.

“Investors are looking at ESG in a more nuanced manner,” Keatinge says. “ESG can have this ‘warm and fuzzy’ connotation—like planting trees and promoting nonviolence. But, these are not ‘feel good’ issues, they’re legitimate operational issues.”

In other words, something that is good for society can also be good for the bottom line. “This is not the tail wagging the dog,” says Anne Sheehan, former director of corporate governance at CalSTRS (California State Teachers’ Retirement System) and a senior advisor at global advisory-focused investment bank PJT Partners. “Companies should have a firm grasp of what risks they need to assess and the investments they need to make in response to our changing climate or other environmental and sustainability risks… there is business value in these decisions as much as social value.”

Clout Matters

That sentiment is reflective of the position on ESG taken by large institutional investors like BlackRock, Vanguard and State Street Global Advisors (SSGA). Together, the three firms are the largest shareholder in 40 percent of all publicly listed firms in the U.S. and 88 percent of the S&P 500.

Over the past few years, the firms have been proactively posting their voting decisions online prior to annual meetings, giving individual investors the opportunity to see where they stand.

“Previously, if shareholders wanted to effect change, they submitted resolutions that went to vote,” says Sheila Hooda, CEO of Alpha Advisory Partners and a member of two boards (public company Virtus Investment Partners and Fortune 300 insurer Mutual of Omaha). “Now, with increased institutional engagement, companies are encouraged to take [early] actions that would have been handled through the shareholder proposal process in the past.”

BlackRock CEO Larry Fink made headlines when his annual letter to CEOs suggested ESG would factor into the $6.3 trillion investment firm’s decisions with statements like, “A company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”

This position has been proliferating across the investment universe, with Vanguard, State Street and other large investors helping to make ESG the “new normal” in shareholder demands. Among these is SSGA, the world’s third-largest asset manager, with nearly $2.8 trillion in assets under management. Matthew DiGuiseppe, vice president and head of Americas on SSGA’s Asset Stewardship Team, acknowledges that board discussions and evaluations have shifted toward corporate social responsibility, “thinking effectively about the impact of a company’s culture on long-term financial performance and strategy,” he says.

Keatinge agrees. “Board member must undertake a materiality assessment of what I call the ‘non-financial metrics’ to identify issues of material importance to a company’s long-term financial performance,” she said. “In doing these assessments, they may find that climate change or gun violence or the opioid crisis—depending on their business profile—are, in fact, material. If this is the case, board members must take pains to do something about it.”

Bye-Bye, Old Boys Network

While gun violence and opioids affect the performance of only a few companies, the gender diversity of boards affects most companies. A June 2018 survey by consulting firm Aon indicates that 68 percent of 223 institutional investors have expressed concerns over board gender diversity in their proxy voting.

Large institutional investors have put a bulls-eye on all-male boards. It’s been nearly two years since SSGA erected “Fearless Girl,” the bronze statue featuring a young girl squaring off against Wall Street’s symbolic giant bull, in New York’s Financial District in 2017. The firm’s message to the then-787 companies with all-male boards was crystal clear: Add women to your ranks now.

More than 300 companies have since heeded the demand. The remainder suffered the firm’s rebuke: SSGA voted against the chair of the board’s nominating committee entrusted to select new members.

Unquestionably, board diversity is gaining momentum as a priority. “With California breaking ground as the first state to require publicly traded firms to place at least one woman on their board of directors by the end of 2019, we believe board diversity will be a prominent issue among longer-term and activist shareholders alike,” says Dana S. Grosser,

spokeswoman for Vanguard, which tallies more than $5.1 trillion in investment assets. “Boards without women will increasingly be perceived as outliers,” says Marc Goldstein, executive director and head of U.S. research at proxy advisory firm Institutional Shareholder Services (ISS). “Our surveys indicate that far fewer investors are willing to admit that a lack of board diversity is not a problem. Boards have to get it right.”

ISS’s 2018 survey reveals that more than 80 percent of investors consider all-male boards to be problematic, up from 69 percent the prior year.