SHAREHOLDER ADVOCACY 101:
A Guide to Corporate Influence through Ownership BY BRUCE HERBERT, AIF
Many individual investors and institutions today recognize the power they hold to influence corporations through the access that comes from owning shares of a company. This influence is called shareholder advocacy. This approach has gained significant traction in recent decades as investors, especially institutional ones, use their shareholder status to drive social, environmental, and governance (ESG) reforms.
What is Shareholder Advocacy? At its core, shareholder advocacy (or shareholder engagement) refers to any effort by an individual or group of shareholders to influence corporate behavior, policies, and practices. Stock ownership comes with a bundle of rights, one of which is the right to communicate with other shareholders at a company’s annual general meeting (AGM)—often by submitting a resolution or proposal that is then voted upon. Shareholders leverage this right to engage with companies on improving issues around environmental sustainability, human rights, labor practices, corporate governance, and social equity. Unlike a person who owns stock solely for financial gain, shareholder advocates seek financial gain while also using their influence to push for changes that are both economically beneficial and aligned with some higher value or mission. Advocacy takes many forms, including filing shareholder proposals, engaging in direct dialogue with management, and voting on resolutions at AGMs. The goal is to persuade companies to adopt practices that are more aligned with longterm value creation for all stakeholders, not just short-term profits at the expense of everything else. In more than five decades of shareholder engagement, we’ve found that if company actions are more sustainable, equitable, just, and fair, they tend to also be more profitable over the long-term.
How Does Shareholder Advocacy Work? There are three key mechanisms through which shareholder advocacy operates. These include shareholder proposals, proxy voting, and shareholder meetings.
Shareholder Proposals A shareholder resolution is a formal proposal submitted to a company for inclusion in proxy voting, which typically asks for an improvement in company policies or practice. Proposals can cover a broad range of issues such as environmental sustainability; employee and human rights; fairness, diversity, 6
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and inclusion; or board composition and good governance. Shareholder proposals are submitted to the company and, if they meet certain criteria set forth by the U.S. Securities and Exchange Commission, will be voted on by all shareholders at the next AGM. Although receiving a majority vote is somewhat rare, shareholdersponsored proposals bring focused attention to critical issues, push company management to take positive steps in response to shareholder concerns, and launch discussion of the topic into the business press. In fact, roughly 60 percent of the time the mere filing of a shareholder proposal results in a company taking positive steps such that the proposal is withdrawn—a win-win outcome achieved without even going to a vote.
Proxy Voting At the AGM, shareholders vote on matters related to the company’s operations, such as the election of board members, executive compensation packages, mergers and acquisitions, and shareholder proposals. Institutional investors, such as mutual funds and pension funds, typically have significant voting power due to the large number of shares they own. By voting in favor of specific resolutions or opposing certain corporate practices, shareholders can influence the company’s decision-making processes. Often, even quite low votes lead to positive change, as companies recognize shareholder proposals as a leading indicator of popular sentiment.
Direct Dialogue Shareholders, especially large institutional investors, can engage in one-on-one conversations with company management to express concerns or advocate for improvements. These dialogues can be informal or more structured, and shareholder advocates use these opportunities to discuss issues ranging from ESG practices and policies to corporate governance reform, encouraging companies always to take positive steps in a more responsible direction.
What Sorts of Impacts Can Shareholder Engagement Achieve? Shareholder advocacy often leads to meaningful change within a company. While specific outcomes depend on the issues being addressed, common areas of beneficial impact include environmental sustainability, labor and employment policies, corporate governance, and human rights. (Other articles in this issue outline some of these meaningful outcomes in more detail.)