Companies not implementing shareholder resolutions

PRI says 'inaction should raise red flags for investors'

The Principles for Responsible Investment’s (PRI) stewardship team has issued a series of recommendations to shareholders to up the ante on corporates amid concerns companies are not following through with approved shareholder proposals.

The team carried out research analysing 78 majority-supported shareholder proposals from the 2022 proxy season that focused on ESG issues or improving shareholder rights more broadly. They then looked at what had become of these proposals since the annual general meetings (AGMs) by surveying the shareholder proponents and the receiving companies.

They found investors believe companies are only fully implementing 23% of proposals, and that only 14% will be partially implemented. In around a quarter of the cases, shareholders believe the proposal will not be addressed at all.

When the stewardship team quizzed the companies it found similarly underwhelming results.

Only half of the companies said they have implemented or will be implementing the proposals their shareholders passed, in part or in full. Around 6% would be addressed ahead of, or during, the next proxy voting season.

For a quarter of the proposals analyzed by the team, some 20 proposals, neither the company nor the proponent indicated that the company has, or would be, implementing them, with no publicly available information showing otherwise at the time of publication.

Carly Jacobs, senior specialist, stewardship, at the PRI, commented: “Companies failing to put in place resolutions with majority support from shareholders compromises investors’ ability to enact a fully realized program of stewardship, and therefore stymies investors in their responsible investment efforts.”

In an accompanying article to the research the stewardship team said: “If companies frequently ignore the will of their shareholders, it can weaken the voice of investors overall and dilute the efficacy of proxy voting and shareholder proposals as important investor engagement tools.

“This is particularly the case for investors seeking to mitigate systemic sustainability issues. Without corporate boards that are responsive to shareholder concerns, achieving meaningful progress on these issues via shareholder engagement is unlikely.”

It added while the resolutions are not legally binding, “inaction should raise red flags for investors” around the governance of a company.

“It may also be an indicator of a captured board: when independent board members are more loyal to the company CEO or management team than to shareholders. Captured boards are more likely to govern in a way that favors management interests to the possible detriment of shareholders.

“For instance, captured boards are less likely to fire underperforming CEOs, more likely to approve increases in CEOs pay (independent of performance), and are more likely to rubber-stamp investments recommended by the CEOs rather than acting as a critical risk manager.”

Recommendations

The stewardship team recommended investors:

Define what constitutes issuer inaction

Investors should express how much progress they expect to see on majority-supported proposals by the next proxy season and identify expected evidence of steps taken.

Take action

Communicate with companies directly and hold boards to account. The team said:

“If an investor determines that the company’s actions are inadequate, or that it hasn’t demonstrated any action or commitment, efforts to hold the board accountable can be a powerful escalation strategy. Investors can do so by voting against all directors, or take a more targeted approach, such as withholding support for:

■ the board chair or lead independent director;

■ the chair or members of the governance committee;

■ the chair or members of the committee with the closest oversight responsibilities to the proposal’s request.

The PRI is holding workshops and creating resources to assist investors in identifying best practices for board accountability.

Update voting guidelines

The PRI team said investor voting guidelines should state “plainly their general expectations for what progress they think companies that receive strongly-supported proposals should make by the following AGM, and what they will do if those expectations are missed”.

Engage with proxy advisers

This will ensure that their positions on board accountability, for example, to proxy items match investor expectations.

PRI’s Jacobs added: “We hope this research spurs companies failing to act on resolutions to urgently rectify the situation. For investors, it should ring alarm bells and motivate them to move swiftly during the 2023 proxy season, to send a clear message that company unresponsiveness to passing shareholder resolutions is not acceptable.”

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Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...