With the 2023 proxy season fast approaching, investors will be counting the votes at AGMs, but the votes will count in different ways.
Active ownership covers a broad spectrum of tactics that investors can utilise to exert influence over an investee company’s strategy and actions. For asset owners seeking to manage their ESG risks and impacts shareholder resolutions represent an essential engagement tool for driving sustainable outcomes.
As the 2023 proxy season begins to gather pace, environmental, social and governance themes will take centre stage, against a backdrop of growing market uncertainty, with investors filing and supporting a myriad of proposals aimed at driving public companies to take action on issues from climate to workers’ rights to executive pay.
However, the dynamics of filing a shareholder resolution vary country by country, with different rules, requirements, thresholds and restrictions on who, how and what can be filed at annual general meetings (AGM).
What is required to file a shareholder resolution?
In the US, the legal minimum in terms of shares that one must hold to submit a resolution is relatively low in comparison to Europe and the UK. In fact, shareholders must have a shareholding of US$25,000 of the company’s stock for at least one year to file, with that threshold falling to US$15,000 after two years, and US$2,000 after three years.
By comparison, in the UK, Italy and Germany, shareholders must own five percent of the company to file.
“This creates a highly resistant environment to shareholders filing a shareholder proposal – you need to be a major asset owner to have a voice in Europe,” Andrew Behar, CEO of non-profit shareholder advocacy group As You Sow, tells ESG Investor.
Unlike in the US, once filed, shareholder proposals in the UK are subject to achieving a majority vote and are binding. “In the US, we got a 96% majority vote last year and the company told us to take a hike,” says Behar.
Passing a resolution requires a simple majority (>50% of the total voting rights) in the US, with that threshold even higher across most of Europe (>75% of the total voting rights).
However, in the US, the act of passing a resolution is a “misnomer” due to the advisory, non-binding nature of shareholder proposals, says Behar.
But a shareholder proposal doesn’t have to passed to be adopted.
“We only care if a company is going to adopt a new policy – some of our biggest victories have come after securing less than six percent in a vote at the AGM,” he says, noting that a lot of shareholder resolutions get adopted because they are “good ideas”.
In contrast, shareholder proposals in Europe and the UK are seen as a “highly escalatory tactic”, according to Simon Rawson, Deputy CEO at responsible investment-focused charity ShareAction.
Further, if investors in the US do achieve a majority vote, and the company is unresponsive, proxy voting services providers like ISS and Glass Lewis, along with institutional investors, will often escalate engagement by initiating a ‘no confidence’ vote to the board, says Behar.
Therefore, while shareholder proposals are non-binding in the US, if company boards don’t feel compelled to take action, they risk being replaced by shareholders.
What if you don’t own enough of the firm to file a resolution?
Interestingly, the UK is the only country with a second route to filing a shareholder proposal, Rawson tells ESG Investor.
“The threshold in the UK is either five percent of the shares in a company, which is unachievable in most cases, or a relatively low amount of stock in total (£10,000), but with a high number of different shareholders,” he says.
“At ShareAction, the way we file resolutions in the UK is by bringing together a group of institutional investors who hold a not insignificant amount of stock, typically less than one percent in the company, and up to 100 individuals who each hold a single share in the company. They are typically shareholders who want to challenge companies on their climate, biodiversity, health, and decent work initiatives.”
The rationale for imposing higher thresholds for filing a shareholder proposal is an attempt by regulators to balance the interests of small minority shareholders with the interests of other owners in the company.
However, given that almost all investors, institutional or otherwise, are highly diversified – both for reasons of risk mitigation and the proliferation of pooled and exchange traded funds – it has become harder than ever to reach higher thresholds for filing shareholder resolutions, says Rawson.
For that reason, among others, Rawson believes that thresholds should be reduced in almost every jurisdiction.
To help signatories get to grips with the nuances above and others, the Principles for Responsible Investment (PRI) has created country-by-country factsheets that provide an overview of the key legal and technical processes relating to filing a shareholder proposal.
What are the challenges of filing ESG-related shareholder proposals?
As the climate crisis intensifies and the cost-of-living crisis continues to rise, exacerbating social inequalities, more investors are increasing their engagement with companies on ESG-related issues during the proxy voting season. To do so, investors must navigate complex and legal frameworks which differ from country to country, each with their unique dividing lines between the rights of shareholders and company boards, which are subject to change.
New barriers to shareholder proposals were established in the US under the Trump administration.
The new rules favour larger shareholders and give wealthier investors a bigger voice at AGMs, says Behar. They also require higher thresholds for resubmitting proposals and restrict shareholders to filing only one resolution per company.
“As You Sow used to file an environmental-related resolution, as well as others on social and governance-related themes at the same company – that’s been restricted now,” he said. “The new rules ultimately suppress open dialogue and erode trust between companies and their beneficial owners.”
Although, the Trump-era reforms were designed to limit the number of resolutions, since coming into force there has been a significant increase in the volume of shareholder proposals.
In 2022, the US proxy season saw a record 607 shareholder resolutions on ESG-related issues, representing a 22% increase from the previous year, according to data from the Proxy Preview Project.
The Trump-era reforms are currently being challenged in the US courts by the Interfaith Center on Corporate Responsibility (ICCR), a coalition of over 300 institutional investors representing more than US$4 trillion in AuM. The lawsuit asserts that the Securities and Exchange Commission’s (SEC) rule changes are unlawful under the Administrative Procedure Act and are contrary to the SEC’s role as ‘investor advocate’.
Across the Atlantic, the rules for filing a shareholder proposal “appear to be designed to stop shareholders ever filing a resolution” says Behar, noting that the five percent shareholding required to file a resolution in certain jurisdictions effectively creates a pay-for-say environment where only the wealthiest shareholders have a voice. In many European countries, shareholders have restricted rights, with many delegated to directors, explains ShareAction’s Rawson.
“The only rights some European shareholders have relate to the approval of company directors’ actions each year, or sometimes discharging directors at an annual vote,” he says.
ClientEarth has created a guide to the law on climate-related shareholders resolutions for institutional investors that highlights the legal complexities across thirteen key jurisdictions in Europe. It has also produced a similar guide to eleven markets across the Asia-Pacific region.
How do dual class share structures impact the filing and approval of shareholder proposals?
Adding to the complexity of filing a shareholder proposal, dual class share structures (DCSS) are a highly contentious concept. DCSS arrangements involve the issuance of two types of shares in the same company, with one offering more voting rights than the other.
While it can be argued that they can be beneficial for certain companies, particularly in the tech industry where a founder’s vision and control can be important, it can also be undemocratic and limit the voice of minority shareholders, according to Rawson.
Further, there may be cases where a significant portion of the shares are held by inside interests, making it difficult for minority shareholders to have their views heard.
In such cases, ShareAction may consider filing a shareholder proposal to send a signal, even if the theoretical maximum vote in favour may be limited.
“ShareAction supports the principle of one share, one vote, particularly on matters of environmental and social impact,” he says.
DCSSs are an “extremely dangerous, authoritative regime”, according to Behar.
“Mark Zuckerberg has a 10-to-one voting preference, so even if every shareholder in Meta voted in favour of a resolution, including his entire board, it still won’t get a majority vote,” he said. “Frankly, I don’t think Meta should be allowed to call itself a public company, because it’s run by one person.”
Despite this, As You Sow has continued to file multiple shareholder resolutions at Meta over the past several years, because it believes it has done significant damage to society.
Ultimately, it is up to individual companies to decide whether to adopt DCSSs, and for shareholders to assess the potential benefits and drawbacks of such structures when making investment decisions.
Use of DCSSs is becoming increasingly popular amongst companies going public. In the first half of 2021, 24% of US companies launched on public markets had a DCSS, according to research by the Council of Institutional Investors (CII), a non-profit organisation based in the US.
In response, asset owners are engaging with policymakers and pre-IPO companies to defend shareholder rights.
UK-based pension fund Railpen (£32billion AuM) teamed up with the CII to establish the Investor Coalition for Equal Votes (ICEV), which was launched in June last year to curb the use of DCSSs in response to increased regulatory willingness to relax listing rules to improve competitiveness.
The CII has drafted a bill for the US government that mandates national stock exchanges to disallow new dual-class firms from being listed, except if they feature a seven-year sunset provision or if each class of shares approves the unequal structure within seven years of going public.