Shareholder resolutions: Defining Newton’s approach

Key points

• The rise of global shareholder resolutions in recent years can be partly explained by the right to file a shareholder resolution becoming a more common escalation tool for investors.
• Over the last decade, much of this growth has been via environmental and social resolutions, which we believe have been impactful in achieving changes to corporate governance arrangements.
• Newton believes shareholder resolutions deserve a case-by-case approach and careful consideration as to the context of the company; our view is that a manager’s shareholder proposal voting record is not always a great proxy for effective stewardship.
• Below, we share insight on how we think about some common shareholder resolutions and how the trends have evolved over the years, noting a surge in environmental and social resolutions including, more recently, ‘anti-ESG’ resolutions such as requests for cost and benefit analysis on diversity, equity and inclusion programmes at companies.

As a steward of capital, Newton is committed to the responsible allocation, management and oversight of that capital to create long-term economic value for its clients. An important part of this stewardship role is the exercise of ownership rights, including proxy voting.

Taking the example of the US, as of mid-July 2022, a total of 813 resolutions were filed in the Russell 3000 index and 642 in the S&P 500 index – denoting the maximum numbers reported in each index for the last five years. Of these resolutions, Russell 3000 companies received 471 proposals on environment and social considerations (58% of the total shareholder resolutions), up from 328 in 2018.[1]

Shareholder resolutions not a new phenomenon

The filing of shareholder resolutions is not a new phenomenon though. In the US, the Securities and Exchange Commission (SEC) introduced regulations in the mid-20^th century, particularly with the adoption of Rule 14a-8 in 1976, which allowed shareholders to submit proposals for inclusion in a company’s proxy materials. This regulation aimed to democratise corporate governance and ensure that shareholders had a mechanism to express their views on important matters affecting the company. These proposals typically covered a range of governance issues, such as advocating for the repeal of classified boards and the adoption of cumulative voting.

Similarly, in the UK, shareholders became more active in the late 20^th century, spurred by corporate governance scandals and a growing emphasis on shareholder rights. Back then, shareholder resolutions in the UK often focused on issues related to corporate governance, such as the separation of chair and CEO roles and increasing board independence, greater transparency and accountability in executive compensation, as well as issues related to shareholder rights such as improving proxy access or enhancing the ability of shareholders to call special meetings. While the UK regulatory framework differs from that of the US, principles of shareholder democracy and engagement have driven the establishment of mechanisms for shareholders to file resolutions and engage with companies on governance issues.

Making management and boards accountable

The rationale behind establishing the right for shareholders to file proposals lies in the belief that shareholders, as owners of the company, should have a say in its direction and governance. Shareholder resolutions serve as a tool for shareholder to hold company management and boards accountable, address governance concerns, and advocate for changes that align with their interests and values. Over time, they have become an integral part of corporate governance, reflecting the increasing emphasis on transparency, accountability and responsible business practices. While the specifics of shareholder rights and regulations may vary between jurisdictions, the underlying principle of empowering shareholders to participate in corporate decision-making remains consistent.  

As highlighted above, the long-term trend was that shareholder resolutions mostly focused on installing a change in a company’s arrangements that were considered unfriendly to shareholders, such as majority voting standards or proxy access. Compared to the US, shareholder resolutions were also less common in Europe and the UK for many years, where arguably direct engagement with company management (stakeholder engagement) was more accepted than in the US, where the rise of the hedge funds and ‘activist’ investors had created a sense of misalignment and interference which resulted in an increased uptake of the shareholder resolution tool.

Extreme escalation strategy at the expense of patient engagement

At Newton, we believe the ability of shareholders to file resolutions at company general meetings is an important and powerful tool, and one that should be exercised in exceptional circumstances. If used responsibly, shareholder resolutions could serve as a protective tool, addressing the agency problem between management and other stakeholders where these can create different incentives.  As we have demonstrated, the uptake and use of shareholder resolutions has increased significantly over the last few years and, often, we believe it can be an extreme escalation strategy at the expense of patient engagement with the company over time.

We have always subscribed to the idea that one should not vote indiscriminately in favour of shareholder resolutions, and this has become even more important recently, as many have spilled over into the environmental and social area, which can lead to greater complexity and ambiguity. Some reports may have us believe that all well-intentioned ‘E’ and ‘S’ resolutions should be supported and that is the true measure of a responsible steward. We believe, however, that it is important to explore the nuance and context of each of these votes and take a discerning, case-by-case approach to ensure we are taking actions that are in our clients’ best interests for the strategies they have invested in. Below, we peel back the layers of our approach to shareholder resolutions, highlighting how we evaluate each resolution on its own merits.

Enhancing the value of our clients’ assets

Our primary focus is delivering on our clients’ mandate with us in a diligent way. This commitment calls on us us to act as thoughtful, active investors, and we believe this includes the way we exercise the ownership rights of the capital we have invested on our clients’ behalf. Unless explicit in the product prospectus or stipulated in the mandate, we seek to deliver good risk-adjusted returns as a singular goal.

Corporate governance arrangements are material to all businesses and, over the years, we believe it has been in our interests to support many shareholder resolutions as they have sought to enhance our rights to protect our clients’ capital should something go wrong with the leadership of the investment. Examples of this could be the right to vote on material related-party transactions or having the ability to (through a democratic majority) eject a director for mismanagement or poor performance (plurality voting vs majority voting standards).

The importance of context and details

While most of these resolutions have been guided by a universal stance on a particular issue, we have still always taken into account the details and the context. For example, a shareholder resolution seeking changed proxy access thresholds should be considered in the context of the shareholder makeup of the company (dispersed or concentrated) and we would, for example, support a lower threshold if the ownership was more dispersed. In other instances, we may have engaged with the company on the issue and have sought assurances that they are making the relevant changes. We would then give management the benefit of the doubt and oppose the resolution. Ultimately, we invest in companies that we believe in and support, and if we find such egregious arrangements in the governance system through our analysis, we would not invest in the first place.  

Below are some of our key considerations for shareholder resolutions:

• Does the requested action align with our view on the topic raised?

• Will the outcome be additive to our investment case or benefit our clients in other ways?

• Are we already engaging with the company on the issue?

• Is the proponent’s request proportionate and reasonable to the issue in question and to the company?

• Is the proposal practical and sensible in relation to the size and type of company?

Using this approach, Newton supported 47% of the total shareholder resolutions it voted in 2023 (56% of G-related and 37% of total E and S-related resolutions). The stewardship team worked particularly closely with the responsible investment research and wider investment teams to ensure that the E and S resolutions in particular were understood and discussed.

Scrutiny on political spending and lobbying

Our scrutiny also extends to areas such as political contributions and lobbying, race equity and board composition, after a recent upsurge in shareholder resolutions related to political spending and lobbying at US companies. Such resolutions seek increased disclosure of political and/or lobbying spending or reporting on alignment of such spending to corporate statements and policies.

We believe this surge is driven by concerns about the influence of corporate political spending on legislation and regulation, as well as concerns that political expenditures may expose companies to significant reputational risk, particularly if that spending supports political positions that do not align with a company’s public position on an issue.

We tackle these resolutions on a case-by-case basis. To illustrate, for a global beverage company, we supported a shareholder resolution asking for a report on how its political spending aligned with the company’s values and priorities. This was mainly owing to a discrepancy we observed between the company’s public pledge to recycle every bottle it sells by 2030, and its opposition to container-deposit laws that aid recycling initiatives. Furthermore, the company has contributed to supporters of a contentious voter rights law, which contradicts its stated commitment to workforce equality and inclusion. Our view is that it would be advantageous for shareholders if the company was to address the contradiction between its political expenditures and its declared commitments to diversity and the environment.

Climate change

Many companies are now approaching their first interim climate-related targets against a backdrop of difficult macroeconomic conditions: countries are under severe budgetary pressure following the pandemic and there is immense strain on energy markets owing to the Russia-Ukraine war. Many energy companies have benefitted from windfall gains, while people are struggling with a cost-of-living crisis. This has resulted in heightened attention around climate stewardship and climate activities at company AGMs, most notably those of big oil companies.

Where shareholders had an opportunity to vote on climate-transition plans at AGMs in 2023, or voice concerns by voting on shareholder proposals or other standing items, we applied a case-by-case analysis. This was based on the expectations laid out for companies by our voting guidelines and feedback from the extensive multi-year engagements we have had with three of the five big oil companies, whose AGMs attracted substantial stakeholder attention given their respective levels of global emissions. Overall, we opposed one executive as we considered that the board was not engaging in strategic thinking on the company’s net-zero approach and was disregarding material climate considerations.

The transition to a low-carbon world presents significant risks that will affect the overall operating environment of many companies we are invested in and, in some cases, the companies’ licence to operate and their long-term existence. While we have observed a slight decline in support for climate-related proposals owing to their prescriptive nature and politicisation of the debate, our commitment to scrutinise each proposal remains unwavering.

Racial equality and civil rights

In the realm of racial equity and civil rights, we believe our approach is comprehensive and deliberate. We recognise the crucial importance of addressing and actively engaging with these systemically critical issues. Our stance is clear: when a company’s disclosures fall short, or when controversies have marred its commitment to racial equity, we would benefit from shareholder resolutions asking for adequate disclosures or audits, as this would enable us as shareholders to gain deeper insights into related risks and assess whether the company is effectively managing these issues, thus safeguarding financial materiality.

For us, these votes underscore our commitment to driving change where it is most urgently needed. On the other hand, when a company has demonstrated a dedication to this cause by setting targets, providing transparent and comprehensive disclosures, and avoiding controversies, we acknowledge its efforts and refrain from supporting the resolution. We believe this nuanced approach not only encourages responsible corporate behaviour, but also recognises and rewards those who are genuinely striving to make a positive impact.

Executive governance

We continue to see resolutions seeking separation of the CEO and chair function. We typically prefer a structure where these roles are clearly separated as we believe it protects us better in terms of challenging executive management and taking the right decisions for the long-term health of the business when something goes wrong, including, if needed, a change in leadership. When this is not in place, we expect robust justification and counterpowers to be in place. Overall, we also expect the board to demonstrate robust succession planning.

We will typically look unfavourably on cases where a company is recombining the chair and CEO roles after a period of separation and may support shareholder resolutions requiring independent chair positions at companies in general, as a good governance practice. For example, at one leading US life science and diagnostics conglomerate, we supported the shareholder resolution that proposed the appointment of an independent director as chair of the board. We observed that the current board leadership structure was complex, with three key figures, including a lead independent director, a relatively new CEO, and a former CEO, who was also the company’s founder and serving as an executive chair.

In this case, adopting a policy for an independent board chair could simplify the leadership structure and enhance independent oversight. Moreover, continuing concerns about excessive pledging within the company indicated that shareholders would benefit from a stronger form of independent supervision. The resolution was not overly prescriptive and allowed the board flexibility in implementing an independent chair policy at its discretion, without an immediate overhaul of the current leadership setup.

Conclusion

In summary, in a complex world that is growing increasingly polarised around issues, a binary approach to voting shareholder resolutions will not be sufficient. We believe our case-by-case philosophy embodies the essence of responsible corporate governance, ensuring that the interests of our clients and the long-term success of the companies we invest in always take centre stage. This will remain more important to us than any ranking or league table displaying our voting record concerning shareholder resolutions.

[1] Source: https://www.conference-board.org/pdfdownload.cfm?masterProductID=39966

Authors

Therese Niklasson

Global head of Sustainable Investment