Activism doesn’t require gathering people around a loudspeaker, chanting and holding up banners anymore. If you own shares in a company, you can have a meaningful and deeply impactful influence on its management, and this is called “shareholder activism”.
Stakeholder activism sounds hard (and expensive!), but we’re here to proclaim the benefits of using your ‘voice’ in the companies you invest in.
What is shareholder activism?
A shareholder activist is a shareholder who uses their stake in a publicly traded company to exert pressure on management for specific outcomes. These outcomes can vary from financial interests, such as maximising dividends for the shareholder, to personal motivations, such as aligning managerial outcomes with your personal values. This may include environmentally friendly policies, divestment from politically-sensitive countries, increased support for workers’ rights, etc. (Source: Corporate Finance Institute 2021).
Corporate law grants shareholders the right to vote in elections for the board of directors, proposed operational alterations such as shifts of corporate aims and goals or fundamental structural changes, and other strategic and/ or governance items. Not only do shareholders have important structural and managerial power, but they can also vote on matters that directly affect their stock ownership, including stock splits and mergers or acquisitions. Executive compensation, dividend payments and the selection of auditors similarly grace the agenda of such meetings (Source: Investopedia 2021).
Not all shareholders have voting rights, however. Common stock ownership gives shareholders voting rights but is last to receive dividends in comparison to creditors, bondholders and preferred shareholders. Preferred shareholders, on the other hand, have no voting rights but have priority in receiving dividends. Among common stock ownership, there is a variation of voting rights; some companies will grant one vote per share, giving larger shareholders a greater say or, alternatively, giving each shareholder one vote regardless of how much stock they own (Source: Investopedia 2021).
Voting occurs at a company’s annual general meeting (AGM) or other meetings convened for voting purposes. An AGM is the yearly gathering of a company’s shareholders and is important for transparency, the inclusion of shareholders, and holding management accountable. For the most part, AGMs discuss the minutes of the previous meeting, financial statements, ratify the director’s actions and elect a board of directors (Source: Investopedia 2021).
Before the AGM, shareholders all receive a ‘Proxy Statement’ which gives voters the necessary information to make informed decisions at the meeting. Shareholder voting can occur in person or by proxy. According to Investopedia, “A proxy is an agent legally authorised to act on behalf of another party.” While companies prefer voting to take place in person, it gives shareholders the option to have their say in the event they cannot attend.
According to the Corporate Finance Institute, there are 5 forms of shareholder activism. Each form describes a different method for reaching your desired company changes. The most viable of those five options are:
1. Shareholder resolutions
Where shareholders can submit a proposal at the company’s annual general meeting. While companies resist this activism, it is reasonably effective in creating change.
2. Proxy fights
When a group of shareholders are discontent, they may use their proxy vote to gather behind one key change in the company. A proxy fight is when there is competition between the support of the shareholder raising the issue and the company (Source: Business Insider 2016).
3. Publicity campaigns
Shareholders may utilise mass media to uphold corporate accountability, raise issues in the company or push a certain view of the company.
Other ways of pushing your agenda within a company are through negotiation with management or through litigation. Litigation is expensive and an undesirable means to leverage company goals.
Does my voice matter? How much influence can I really have?
Shareholder activism is important as shareholders vote on fundamental managerial issues at the heart of the companies they invest in. In part, shareholders can determine, through their voting power, the profitability and success of their investment (Source: Investopedia 2021).
While there is nothing new to shareholder activism, shareholding itself used to be more exclusive and operated at a slower pace than it does today. Nowadays, shareholding is dynamic, stock holding times have decreased, and companies have been forced to generate returns in shorter periods of time. A shorter deadline creates more dissatisfaction from shareholders as companies are forced to prioritise the bottom line (Source: World Economic Forum 2017).
These factors have created a melting pot for shareholder activists who want their voices heard and manage more capital than before. According to the World Economic Forum, shareholder activists manage more than $170 billion in capital, compared with less than $3 billion in the year 2000, meaning that shareholders own more and, consequently, have a greater say. See here for the trends of shareholder activism in 2020.
Undoubtedly, activist campaigns have become more prolific. Their initiation, while easier today, still requires many resources and coordination. According to the Corporate Finance Institute, shareholder activists “leverage a relatively small stake of less than 10% of the outstanding shares to initiate a campaign,” but they also need much research, a media plan, a legal team and an activist strategy. Activists need to both gather support and maintain secrecy to establish a successful campaign. Oh, and if an activist buys more than 5% of a company, it needs to be disclosed to the SEC (if in the U.S.: Securities and Exchange Commission), so an activist needs to be wary! See here for more on your step-by-step guide to being a shareholder activist.
In Australia, we have been following the global trend of increasing shareholder activism, with mid-sized shareholder activist funds and the proxy advisor sector continuously growing. Fund managers such as Perpetual and UniSuper as well as entrepreneurs like Soloman Lew, John Singleton and Gina Rhinehart, have launched various campaigns and attracted attention (Source: Australian Institute of Company Directors 2020).
Not only has the space been growing in Australia, but Australian legislators have made shareholder activism more easily accessible in comparison with other jurisdictions, such as the U.S. In the U.S., voters must hold a larger stake (10-25%) in the company for the same rights while in Australia, voters holding just 5% of the company have a right to:
Assemble a general meeting
Put resolutions to a general meeting, including the appointment of removal (without cause) of the company’s directors
Require the company to distribute their statement
See here for more on shareholder activism in Australia.
ESG Investors and the Increasing Influence of Voting Rights in a Company’s Decisions
According to the Harvard Law School Forum on Corporate Governance in 2020, “Environmental, social and governance (ESG) matters remain a priority for institutional investors when engaging with the companies whose shares they hold - and climate change is arguably at the top of their agenda.” Over the past year, we have seen increasing pressure on internationally active energy companies to improve their environmental impact, driven by shareholder activism and other initiatives.
Shell and Shareholder Pressure
For example, in the past year, Shell has received surmountable pressure from their shareholders, resulting in a dramatic shift in the company’s climate targets. Shell has been no stranger to a backlash regarding their climate action as they have extensively perpetuated the oil and gas industry. The company attempted to remedy such a reputation, however, through interim climate targets. These targets were criticised for lacking ambition and credibility. Investors and campaign groups such as ‘Follow This’ rallied around the cause and voted against the company's climate transition targets at the annual meeting in May 2021. 30% of voters called for much more radical and binding climate targets, necessary in order to align the company’s goals with the Paris agreement of keeping warming to less than 1.5C (Source: The Guardian 2021). The strong vote against the company requires Shell to now consult with shareholders and report back to them in the next 6 months (Source: The Guardian 2021).
The success of such a campaign was beyond the expectations of even the founder, Mark van Ball, of ‘Now This’. Mark aptly encapsulates the power of stakeholder activism when he says, “Finally investors are urging oil companies to really commit to the Paris climate agreement, not to hide behind 2050” (Source: The Guardian 2021).
For more, read this.
Importance of Stakeholder Activism Amongst Supposedly ‘Green’ Investments
As an environmentally conscious investor, you may not have a large stake in oil and gas companies, but that’s not to say that the transparency of ESG fund managers and ETF providers is crystal clear either. According to MIT Sloan School of Management 2021, index funds with an environmental, social and corporate governance mandate do not always vote in alignment with their shareholders either. In research found here, fund managers responsible for “ESG and ethical” labelled funds were able to vote against their stated ethical objectives as a result of the ambiguity of proxy voting (Source: Market Watch 2020).
For example, Vanguard and Blackrock funds voted against shareholder resolutions requesting disclosure of board diversity in every single instance since 2006. Both Vanguard and Blackrock in 2019 voted against proposals requesting disclosure of board diversity and qualifications at Apple, Discovery, Twitter, Facebook and Salesforce. Yet Vanguard, in particular, has published their commitment to diversity in the boardroom, claiming that the fund has “long believed in the importance of diversity” (Source: Vanguard 2019). Full release here.
The voting records of both companies (below) were not published for shareholders but rather gathered through research to see how they weigh up against their public ESG claims. The records show that The Vanguard Social Index Fund has voted against almost all environmental resolutions over the past 14 years (Source: Market Watch 2020).
Senior lecturer at MIT Sloan, Gita Rao, believes that such a misalignment occurs through the complexity of proxy voting; she claims, “Proxy voting is an arcane process, which urgently needs to be made more transparent to shareholders” (Source: MIT Sloan School of Management). Only half of the investors comfortable with proxy voting actually understood the process. Such examples have led the Australian Federal Government to crack down on proxy advisors, ensuring that voters' ESG values are upheld. More here.
Similarly, super fund investments also allow voting to occur. Since Australians all hold a super fund, it is important that the fund is voting in accordance with their member’s values. One way to check is to look for the super fund voting records - if they publish them. Not all super funds post their voting records, but, for example, Future Super does. Here is an example of their voting record from 2018 to 2019:
Voting records allow investors to view what is on the agenda and what was done about it. For example, Investors can see that in March 2019, Future super voted in favour of Starbucks providing further reporting on sustainable packaging. This resolution sought additional disclosure targets and initiatives to address plastic waste. According to Starbucks’ website, 12 major cities are now recycling Starbucks cups with new technologies being trialled. The company has pushed for strawless lids and straws made out of sustainable materials.
Watch Starbucks' 2020 AGM to see if their initiatives have held up:
Accountability is in Your Hands
Much greenwashing and impact washing is taking place in the financial products space. As an investor, observing ‘ESG’ and ‘ethical’ labels isn’t enough to ensure your investments are aligned with your values. There are also various steps you can take to improve the environmental impact of companies. To hold companies accountable, you can:
1. Post on Social Media
Social media can be an effective location to initiate a campaign. It can be an effective method to change how companies vote too. For example, poor working conditions at Foxconn were raised on social media, as well as pressure from shareholders at Exxon and Chevron. This attracted media attention and fuelled action (Source: MIT Management Sloan School 2021).
2. Contact your Mutual Fund
Individual investors can communicate (whether it’s sending an email or a letter) with mutual funds that vote on proxies' mounting pressure. Companies will be forced to respond when many shareholders take action in such a way (Source: MIT Management Sloan School 2021).
3. Crowdsource
Crowdsourcing is an effective but more difficult means of gaining attention. If a large number of people express dissatisfaction with the portfolio of their Super fund, for example, Superfund administrators would need to adapt by either choosing funds that align with ESG values or holding existing funds to account (Source: MIT Management Sloan School 2021).
4. Make a shareholder resolution
Market Forces 2021 says it takes 100 people to make a shareholder resolution. Market Forces aims to bring climate change to the boardroom. You can sign onto their resolutions here and learn more about using your shareholder power here.
5. Participate in transparent funds
Alternatively, you can participate in funds that are already transparent. For example, Future Super publishes their Super voting records from 2019 - 2020 here. If an ESG-focused fund is willing to be transparent, it is much easier to know where your money goes.
Bloom is committed to being transparent as we understand how important it is for consumer decisions. In the future, we will publish holdings and voting records to ensure transparency.
You can make an impact!
Do you want your money to work for not against nature? Then download the Bloom app and start using your investments to fight climate change.
Don't forget, you can also join the Bloom community if you want to learn more about sustainable investing We have an upcoming array of events where you can learn how to make a positive impact on your finances.
Note: This article is intended for educational purposes only. The Bloom Climate Impact Fund only invests in companies which positively contribute to climate action, and so does not itself act as a shareholder activist.
The information on this website is prepared by Bloom Impact Investment Services Pty Ltd (ACN 651 965 098 AR 001294778), who is an authorised representative of Cache Investment Management Pty Ltd (ACN 624 306 430 AFSL 514 360) (Cache). Bloom’s financial products are issued by Melbourne Securities Corporation Limited (ACN 160 326 545 AFSL 428 289), as disclosed in the relevant PDS. All information provided in this article is general information only and does not take into account your personal circumstances, financial situation or needs. Before making a financial decision, you should read the relevant product disclosure statement and target market determination consider whether the product is right for you and whether you should obtain advice from a professional financial adviser.