When Patient Capital Becomes Impatient

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Shareholder voting surprises help no one: Six steps to keep shareholder engagement on track.

“Danger, Will Robinson”—the robot’s warning in Lost in Space comes to mind lately as both corporate executives and some investors have shared stories about a disturbing development in the 2021 proxy season.

The worrisome development is not the increase in shareholder proposals on environmental and social issues or the unprecedented level of support they received in 2021. As the recent report from The Conference Board, 2022 Proxy Season Preview: Bracing for Challenge, makes clear, there are good reasons for these trends.

Rather the concern is more specific yet potentially quite consequential. Several respected leaders at companies and in investment firms have described discussions where shareholders assured companies that they would not support a shareholder proposal on an environmental or social topic—because of the progress the company was already making or because the investors regarded the proposal as too extreme—only to then vote in favor of the proposal at the annual shareholder meeting, much to the surprise of the corporate executives and directors.[i]

Investors’ about-face might not cause much concern if just a few companies were left feeling blindsided. But if this phenomenon continues into the 2022 proxy season, there could be serious negative consequences. Such surprises can undermine trust between companies and institutional investors, which is essential for candid, constructive discussions about how companies are addressing issues like climate change and workforce diversity.

The unexpectedly stronger position taken by investors could also backfire. Companies are not monolithic enterprises. If shareholders treat companies that earn high marks for sustainability the same as firms that deserve a D or F, they strengthen the hand of skeptics within the company, who may well ask: “Why spend so much effort if it won’t be recognized in shareholder votes?”

An abrupt switch on a proposal is particularly damaging when directors were involved in the discussions that ended (from the company’s perspective) with a sucker punch. Boards ultimately determine the company’s posture on sustainability issues and how seriously to take concerns expressed by institutional investors.

I understand why these unwanted surprises happen, even with major shareholders and companies alike acting in good faith. Just like a company, an institutional investor is not a monolithic entity, and votes on shareholder proposals are often determined by committees or individuals who do not feel bound by commitments made during discussions with companies. In addition, asset managers are under pressure from clients who want to move quickly and forcefully on environmental and social issues—and asset managers do not want to be seen as ESG laggards.

Moreover, some of those involved in voting decisions do not fully appreciate the impact of their votes on shareholder proposals. Some have said to companies, in effect: “What are you so worried about? These are just advisory shareholder proposals; we’re still investing in your company and supporting directors’ reelection.” If they are new to their roles, they may not appreciate, for example, that if boards do not implement a shareholder proposal that received majority support, proxy advisory firms are likely to vote against directors at a future annual shareholders meeting.

How do we avoid these unfortunate incidents?

Companies can do three things:

1. Do not let this derail your ESG efforts. And do not retreat from shareholder engagement. Both are far too important to the long-term welfare of the company, its shareholders, and other stakeholders.

2. Increase efforts to educate investors about your ESG programs and to listen to investors’ views on an ongoing basis, not just during the “proxy season” and “off season” engagements. As noted in 2022 Proxy Season Preview: Bracing for Challenge, there are a lot of new faces at institutional investors, and many are still getting up to speed on ESG.

3. Make clear to investors the real-world negative impact that their votes on shareholder proposals can have on the company and the execution of its sustainability agenda, even if the votes are nonbinding.

For their part, investors can keep their engagement on track by doing the following:

4. As a threshold step, those who are speaking with companies need to be clear about who will be making the voting decisions on shareholder proposals and how much the company can rely on any comments or commitments made during the conversation.

5. Give companies more of a fighting chance to address emerging concerns. Provide as much advance notice as possible about potential changes to your voting policies—and, apart from policy changes, let companies know what information you are likely to rely on in making voting decisions so companies have time to provide that information.

6. Take a fresh look at their approach to supporting shareholder proposals. Voting in favor of a shareholder proposal may seem to simply send a shot across the bow, but it could hit someone on deck…or worse. Successful shareholder proposals can have serious negative consequences, not only in terms of diverting resources, but also by making the company seem vulnerable to shareholder activists who may not be interested in long-term shareholder value. Now that the SEC has opened the door for shareholder proposals on “significant social policies” that have no nexus with the company’s business or its financial performance, it is more important than ever for investors to use their votes on shareholder proposals judiciously.

Both companies and investors should ensure that their dialogue is not dominated by whatever shareholder proposals may be submitted or come to a vote. Over the past 20 years, discussions between institutional investors and companies have been enormously beneficial in strengthening governance and board accountability, improving the quality and diversity of boards, increasing transparency of corporate decision-making, and enhancing board and senior management focus on the risks and opportunities associated with environmental and social issues.

As companies and investors alike are navigating this new era of stakeholder capitalism, constructive dialogue must not be derailed by shareholder proponents with a narrow agenda. Keeping an eye on long-term value and preserving a trusting relationship between companies and their main investors are more important than ever.


[i] Company executives and investors conveyed their experiences and concerns about this issue over the course of events held by The Conference Board and in one-on-one discussions during 2021. Their stories were relayed in confidence, often in Chatham House Rule settings. They have not discussed these matters publicly to avoid generating more controversy.

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