Sharowner Advocacy and Impact - July 2016
Posted on Tuesday, July 19, 2016
Proxy Season 2016
By Holly Testa, Director, Shareowner Engagement
School is out, the weather is warm, and the flowers are in bloom. Yet, for First Affirmative, these signs of summer herald another yearly milestone-proxy voting season!
In addition to going over financial information and voting on management resolutions, these legally required annual meetings with investors, highlight the most visible aspect of shareowner advocacy-the filing of, and voting on, shareholder resolutions. Investors can file resolutions requesting a company's board to report or take action on specific environmental, social, and/or governance ("ESG") issues, in accordance with Securities and Exchange Commission ("SEC") rules.
In total, 916 shareholder proposals (also known as proxy resolutions) were filed with public companies domiciled in the U.S. in 2016, according to Gibson Dunn.
Governance issues dominated the numbers, in part due to the 201 "proxy access" proposals that would allow shareholders that meet certain criteria to nominate directors for board elections. First Affirmative was but one of many investors voting in favor of this important governance proposal that allows shareholders to have direct input into the nominating process.
A record 65 of proxy access proposals received majority support over the past two years. Separately, more than 55% of companies facing this resolution in 2016 implemented proxy access before it came to a vote. Given the widespread support and the rapid adoption rate by companies, proxy access is likely to become standard practice very quickly.
The Sustainable Investments Institute has indicated that 430 shareholder proposals were focused on social and environmental concerns. This is comparable to the 433 filed in 2015 and the 417 that were filed in 2014. Environmental issues accounted for about 33% of those resolutions, while another 26% percent addressed election and lobbying spending. About 30% of the resolutions filed were withdrawn before making it to the ballot, which is generally the best possible outcome; it means that the concerned investors and company management agreed to productive discussions.
First Affirmative filed or co-filed 12 shareholder resolutions on behalf of clients in 2016, two of which were lead files. Four garnered well over 20% support from shareholders, one over 30% support, and one over 40%.
When it comes to shareholder resolutions, majority support is not necessary to be effective and is in fact a rare occurrence, particularly on environmental and social issues. A proposal only needs to garner 3% of shares in the first year, 6% the second year, and 10% in subsequent years to qualify for the following year's ballot. Companies will often agree to constructive dialogue even at low levels of shareowner support to avoid future proposals. Votes in excess of 30% imply increasing "mainstream" support.
Proxy Voting Record
First Affirmative votes electronically, on behalf of clients, according to our comprehensive Proxy Voting Guidelines.
As of June 30th, we had cast over 9600 votes at 839 meetings. Our evaluation process led us to vote against management's position about 35% of the time. We voted against 65% of executive compensation proposals which, according to our voting guidelines, are excessive or poorly structured.
A prime example is Yahoo, a company that earned the dubious honor of placing seventh on the 100 Most Overpaid CEO list compiled by As You Sow. Another area where we disagreed with Yahoo management concerns who serves on the board of directors. First Affirmative voted against directors who oversee executive compensation and those responsible for nominating new board members when the company lacks gender and racial diversity.
374 of our votes were on proposals filed by shareowners. We voted in favor of a substantial majority of shareowner resolutions, 75%! This is not surprising, given our focus on the long-term sustainability issues that many of these resolutions address. Regrettably, most companies routinely recommend a vote against these proposals or even try to keep them from coming to a vote in the first place. In fact, "managers seek to exclude 40% of all (shareholder) proposals they receive," according to a Harvard Business School publication from April 2016.
Shareowner Resolution Highlights
Kinder Morgan-Carbon Asset Risk
Outcome: 27.1% support, 3rd year of filing
Once again we have filed this resolution to disclose the risks posed by climate change and describe its plans to mitigate climate risks. Once again, the company rebuffed requests for dialogue and opposed the resolution. So, why do we persist?
Regardless of the company's opposition, we are having an impact. Support for this resolution increased from 22.25% last year. In 2015, the company finally established board level oversight of environmental, health, and safety issues, signaling some recognition of a business imperative to address these risks.
Most importantly, we look at this resolution in the context of a bigger picture. Institutional investors, including First Affirmative, are increasingly, and more insistently, asking energy firms to disclose risks to their business models posed by the historic Paris agreement that aims to limit global temperature increase to less than 2C. Although a number of international companies, including Total and BP, have increased disclosure and now include climate considerations in their long-term planning, U.S. companies generally lag behind. Kinder Morgan is a key player in an industry at the front lines of a seismic shift in how the global economy will be powered. Our investor voice can influence the speed of change.
Whole Foods' Food Waste
This resolution asking Whole Foods to report on their efforts to manage and minimize food waste was the first of its kind to be filed at ANY company. Food waste is defined simply as food that does not get eaten. Sadly, an estimated one-third of food produced worldwide is lost from farm to table. In fact, if global food waste were a country, it would rank third behind the United States and China in terms of its carbon footprint! This waste coexists with almost 50 million people who are food insecure in the U.S. and the problem reaches tragic proportions in much of the Third World.
While Whole Foods has moved beyond landfilling and embraced composting, it is still a method of disposal. The best solution is to prevent food from ending up in the compost bin in the first place. The EPA Food Recovery Hierarchy tells us that maximizing source reduction and donating unsalable food is essential.
We co-filed this resolution because, disappointingly, for a company so prominently supporting sustainable agriculture, they are absent as a leader in combating food waste. There is good news, though- Whole Foods is in the process of implementing data collection systems for evaluating their waste footprint nationwide and, we hope, take action that will eliminate the need for this resolution.
Travelers Insurance-Lobbying Policies and Practices
Outcome: 43.9% support
We asked Travelers to disclose information on its lobbying priorities and spending. Although we did have the opportunity to discuss our concerns, the company did not respond with the necessary disclosure, particularly with regard to lobbying conducted on behalf of the company by trade associations. Companies who delegate lobbying activities to outside parties are at high reputational risk, particularly when the lobbying activities of the trade association are found to be out of step with a company's publicly stated goals and priorities.
This resolution garnered the highest level of support for lobbying resolutions filed this year and marked the highest support level ever for a First Affirmative lead file. This outcome indicates substantial mainstream support, thus providing us with considerable leverage in future dialogue with the company.
Alphabet, Inc.-Lobbying Policies and Practices
Outcome: 12.2% support
We co-filed a similar lobbying proposal at Alphabet, the company formerly known as Google. The relatively low support level of this vote reveals that voting outcomes can be misleading, particularly when insiders own the lion's share of the voting stock. Excluding insider votes would bring support to 44.6%, right up there with this year's most supported lobbying resolution. This insider impact was reflected in other important votes as well, including equal shareholder voting rights and a report on gender pay. Learn more about lobbying here.
PPG Industries Gets the Lead Out!
Last year we shared the challenges we faced asking PPG to eliminate lead from their full product line, when co-filing a resolution with a coalition of Investors Environmental Health Network (IEHN) members. The company successfully challenged the resolution at the SEC, preventing it from being presented to shareholders for a vote. Our conversations with company representatives were also not initially encouraging, and the company became the target of a petition by Occupational Knowledge International. We are pleased to report that PPG, in a significant reversal, announced at their annual meeting in April that they will remove lead from all products by 2020.
Empowering Impacted Communities
First Affirmative clients can delegate their proxies so that non-owners that are adversely impacted by the actions of corporations can be heard. This year we arranged for a member of the Munduruku tribe in Brazil to attend the annual General Electric meeting and put a human face on the impacts of a proposed dam. A client also delegated their Kroger proxy to a field worker in Florida so that she could express her concern that Kroger has not joined the Fair Food Program. This program has improved migrant worker conditions and is supported by many Kroger competitors.
First Affirmative participates in ongoing dialogues with several companies. Some notable updates:
We partnered with Boston Common Asset Management in ongoing discussions with PNC Bank and Fifth Third Bank regarding how these banks are addressing climate risk and opportunities associated with their lending portfolios. These dialogues are part of a broad investor coalition focused on transforming how banks evaluate and act upon climate risks. There are signs that the banking industry is positioning itself for the transition away from fossil fuels toward a renewable energy economy. In the run-up to COP 21 in Paris, the six largest U.S. banks joined together in support of a strong global climate agreement and committed substantial resources to support green energy projects.
We joined a coalition of IEHN members for a second year to discuss how Dollar Tree assesses and manages toxic chemicals in its products. Our conversation this year included how the merger with Family Dollar was going to impact their operations and toxic chemical screening standards, and obtaining a firm commitment for more robust public disclosures.
First Affirmative also supported the recently published first annual Chemical Footprint Project report. This will help concerned investors understand a company's chemical footprint and to better evaluate risk management and reduction strategies. We will ask selected companies in our portfolio to participate. The ultimate goal will be to benchmark corporate progress that will drive the adoption of safer chemicals.
Summer is the season for meeting with our advocacy partners and discussing priorities for the coming proxy season. Here are some likely key foci:
- Income inequality issues are of increasing concern. Expect investor focus on several fronts, including executive compensation, gender pay disparity and minimum wage.
- In this contentious election year, corporate political and lobbying spending will be a priority. We will continue to ask companies for full disclosure!
- Environmental issues, including the ever present climate risk, will continue to take center stage.
Last year at this time we were anxiously awaiting the COP 21 conference in Paris which was viewed by many as the last chance to secure a binding, global agreement to address greenhouse gas emissions. Now that we have this agreement signed by 177 countries, maintaining the momentum inspired by this unprecedented agreement is essential.
For years to come, our advocacy efforts must be focused on working with companies to ensure that the goals of this global agreement are integrated fully into their long-term planning. Climate change may be the ultimate challenge of our times, but for companies and investors who embrace this challenge, it also presents an opportunity for transformation.
NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.