Shareholder Advocacy: David vs. Goliath Replayed Hundreds of Times Every Year

Posted on Thursday, March 31, 2011

Download PDF Version

by Holly Testa, AIF®
Business Development Consultant

Few investors think of themselves as part owners of large multinational companies, but many of us are. We may work with an investment advisor who helps us invest our money in portfolios of stocks or mutual funds, or we might contribute to a 401(k) plan that owns stock or stock funds.

The idea that a small shareowner can influence the behavior of a behemoth corporation may seem like an idealistic pipe dream, but all shareowners have the right to have their voices heard in the corporate boardroom. Think of it as democracy in action in corporate America.

Advocacy Basics

Shareowners exerting influence on corporations is known as shareowner advocacy. It is simply a process of persuasively and effectively communicating with corporate management, other stakeholders, policy makers, and customers. Shareowner advocacy can take several forms.

Proxy Voting. Shareowners of publicly traded corporations may vote on resolutions presented at the annual general meeting. They may attend, but most choose to vote "by proxy," via mail, phone, or online. Proposals are placed on the ballot by management or by shareowners. Management proposals typically cover "routine" items, such as electing directors and approving auditors. Shareowner resolutions often cover matters related to environment, social, and governance issues.

Many investors delegate proxy voting responsibility to an investment advisor or mutual fund. If you do, find out how proxies will be voted on your behalf. Mutual funds are now required to disclose to their clients how they vote each proxy. Some institutions, including First Affirmative, have developed proxy voting guidelines that focus on key issues of corporate governance and social responsibility.

Many investment managers, including large institutional and mutual fund managers, go along with company management, or don't vote at all. An un-cast ballot is automatically voted in favor of the management recommendation.

Voting your proxy is important! However, reading through complex proxy documents and voting shares can seem an overwhelming chore. Unfortunately, many shareowners throw out the materials in frustration, thus giving their vote to management. Don't!

You may feel that your vote could not possibly make a difference. But collectively, individuals own around 25% of all shares of stock, representing a significant voting bloc.

There are now several websites available to help individual investors understand proxy issues and vote their shares effectively. Proxy Democracy,, and MoxyVote provide shareowners with access to information on how like-minded investment managers, non-profit organizations, and unions plan to vote. These sites offer proxy voting support and opportunities for direct involvement
by teaming up with other activist groups.

Dialogue. Shareowner advocacy starts with the most human of approaches-a conversation! Corporations seem unapproachable, but they are made up of people, after all. Dialogue avoids the confrontational approach of shareowner resolutions, and many corporations see the wisdom of working with shareowners to improve policies and procedures. Investment managers representing large blocks of stock can have significant influence. Management will often agree to meet in person to negotiate, particularly if investor concerns are shown to affect financial or reputational performance.

Shareowner Resolutions. When dialogue fails, it's time to bring concerns to shareowners. Most shareownershave the right to put resolutions on the company ballot. Proxy resolutions can address any issue that could adversely impact the long-term well being of the company, its stakeholders, communities, and the planet. Resolutions may also propose changes to company practices or policies.

Unfortunately, virtually all shareowner resolutions are non-binding, meaning that companies can choose to ignore the direction provided by shareowners. However, companies recognize the consequences of ignoring shareowner input, so even non-binding resolutions especially when they represent a large percentage of the vote-can be a powerful tool in the process of changing corporate behavior.

Divestment. When all else fails, investors may sell their shares. This technique has been used to help stop companies from doing business with repressive governments, such as in South Africa in the 1980s and, more recently, in Burma and Sudan. Divesting means losing your voice as a shareowner, so in order to be most effective, divestment needs to be accompanied by publicity that brings pressure to bear on the company and encourages others to divest.

Public Policy Engagement

The behavior of corporations is governed by many rules formulated by government bodies and agencies. Public policy makers at all levels have a tremendous impact on the development and enforcement of environmental regulations and the establishment of long term public policy objectives. Advocates work to advance public policies that support their goals. Campaigns include letters, petitions, position papers making specific recommendations, and face to-face conversations with legislators and government agency personnel.

Public policy engagement is a long-term commitment, as policy makers hear many competing voices-corporations, business trade organizations, non-profits, and the public-all advocating for different policies. Elections change the political landscape and alter priorities set by government agencies, sometimes very quickly.

An example of successful public policy engagement that has had a direct effect on shareowner rights was a crucial campaign to reverse the SEC's (Security and Exchange Commission) position on "risk evaluation" shareowner resolutions. The SEC had routinely disallowed resolutions that asked companies to address the risks associated with significant social and environmental issues, which prevented shareowners from even asking companies to address these issues, and allowed companies to avoid disclosing relevant information about risks to financial and reputational health. The SEC was persuaded to change course and now shareowners can file resolutions asking company management to disclose business risks associated with a broad range of issues-from climate change to human rights to health care.

Coalitions Can Make All the Difference

A single shareowner can indeed feel like "David" when faced with a "Goliath" multinational corporation. Forming a coalition can increase the impact of a shareowner proposal and improve the chances of success. Coalitions bring together the legal, technical, and communication expertise necessary for a successful campaign.

These formal coalitions establish priorities, coordinate letter writing campaigns, file resolutions at targeted companies, and manage campaign publicity. Such coalitions focus on corporate sustainability by demanding accountability, disclosure, and continuous improvement of environmental and social performance.

What Does Success Look Like?

Shareowner advocates once felt like the proverbial voice in the wilderness; but today, more investors are evolving from passive holders of stock to determined shareowner activists. There is growing awareness that public companies have not been accountable to shareowners. Short-term desire for quick profits is endangering the long-term viability of many companies and the global community in which they operate. The recent mass failure of banks due to lax lending practices, weak corporate governance, and weak regulatory oversight illustrates the problem, as does the recent environmental disaster in the Gulf of Mexico.

Companies Come to the Table

Corporations are becoming more responsive to investor demands, particularly on issues that have received high levels of support from shareowners. Instead of watching resolutions come to a vote year after year, companies are recognizing the wisdom of negotiating with shareowners to address crucial issues, and to view active shareowners as partners rather than adversaries. Commonly now, over half of the resolutions filed in any give year on issues such as equal opportunity, board diversity, and sustainability are withdrawn before going onto the proxy ballot.

Moving Into the Mainstream

Particularly gratifying for long-time shareowner advocates are the large mainstream investors who are voting in favor of shareowner resolutions. Not long ago, a double-digit vote in favor of a shareowner resolution was considered successful. The last several years have seen successive record-breaking years for both the number of resolutions filed and the number of votes cast in favor of shareowner resolutions. The majority of shareowner resolutions dealing with corporate governance issues, such as executive compensation, now regularly receive more than 40% of the shareowner vote. Some resolutions are even garnering a majority of votes. Collectively, the voices of shareowner advocates are becoming a powerful force for positive change.

The views expressed in Deeper Thinking are those of First Affirmative and may not be consistent with the views of individual investment advisors, broker-dealers, or RIA firms doing business with First Affirmative. Mention of a specific company or security is not a recommendation to buy or sell that security. For information regarding the suitability of any investment for your portfolio, please contact your financial advisor.