Shareholder Activism on Sustainability Issues is Surging

It was not long ago that shareholder activism most often focused on changing the trajectory of what investors saw as a rudderless or poorly-run company. Corporate governance directives, such as changing directors on a board, swatting aside a CEO or reining in executive salaries, have long been driven by proxy statements that asked shareholders to vote on such proposals.

But a Harvard Business School study suggests that concerns over environmental and social sustainability challenges are the the fastest growing cause behind today's shareholder proposals.

The joint research led by Jody Grewal, George Serafeim and Aaron Yoon found the number of documented shareholder proposals doubled between 1999 and 2013. They used a broad definition of “sustainability,” (the authors prefer ESG, or environmental, social and governance). Serafeim, who summarized the research for the Harvard Business Review, found that issues such as political spending, climate change, workplace diversity and human rights have emerged as the subject of far more frequent resolutions in recent years.

Of course, the knee-jerk reaction of many companies is to insist that shareholders vote no on the proposals, or scuttle them altogether. One example is ExxonMobil’s attempt earlier this year to exclude a climate change proposal from its most recent proxy ballot. The Securities and Exchange Commission (SEC) overruled ExxonMobil on that spit-spat, but history shows that manipulating the shareholder resolution process is hardly necessary. Many of these proposals fail, often struggling to reach the "yes" threshold.

But this Harvard study posits that crossing that 50 percent threshold on these votes is not necessary for the proposals to influence a company. In fact, the research indicates that the submission of a proposal related to social or environmental sustainability can nudge a company to improve its performance on such issues. Even though Serafeim and his colleagues concluded that as many as 58 percent of these proposals were financially immaterial to the company, they suggest that raising such issues can still push companies to change their business practices.

More companies now understand that taking a proactive stance on these challenges, instead of trying to quash them, can gain investors’ trust and confidence, the evidence suggests. For example, the Canadian oil sands giant Suncor actually urged its shareholders to vote “yes” on an environmental proposal. That proposal passed with 98.18 percent at its annual shareholders meeting in April.

Many Wall Street analysts still adhere to the Milton Friedman view that environmental and social concerns related to a company’s performance are unnecessary distractions from the firm's goals, which are to make money and increase shareholder value. On that point, the data in the over 2,000 proposals studied show that company executives often responded aggressively to these shareholder proposals, even though history shows that most of them fail anyway, and do so by an overwhelming margin.

Such action by companies is often done for several reasons, Serafeim says. Perhaps the goals of a company’s executives and those of its investors were not aligned; the company fundamentally struggled to discern between what proposals were genuinely material or immaterial; or such opposition to an immaterial issue was calculated to distract investors and the general public from another problem the company wished to see swept under the rug.

But the study claims that this outlook could be true for shareholder proposals that are financially immaterial to a company. Many of these resolutions related to sustainability issues, however, are important -- whether they are related to human rights concerns within a firm’s supply chain or a company’s consumption of, or investment in, fossil fuels.

Indeed, the passage, or the executives’ and board’s acceptance, of a sustainability-related shareholder resolution could at first have a negative impact on a firm’s financial performance. In the end, however, shareholder activism can improve overall financial performance while strengthening the trust between investors and the company.

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