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When investors want a company to change its ways on environmental or social practices, what makes shareholder proposals on these issues fare well, and when do they fall flat?
Three characteristics appear to be correlated with scoring high levels of support for so-called E+S proposals: targeting, sponsor, and timing, according to “Growing Traction for Environmental & Social Shareholder Proposals at U.S. Companies,” a new paper from IRRC Institute.
“Proponents’ targeting strategy, the type of lead proposal sponsor, and the connection between the proposal and current events are the three characteristics that appear to have a particularly high impact on how much attention, support, and momentum are attached to a proposal,” the study states.
Based on primary research by Ernst & Young, the study examines nearly 1,300 shareholder proposals that came to a vote at Russell 3000 companies from 2005 to 2011. All the proposals had to do with E+S topics, which range from the sale of arms and animal testing to corporate political spending, sustainable forestry, and tobacco-related health risks.
As the paper notes, E+S proposals on average don’t get as much support as other types of shareholder proposals, such as those on a company’s corporate governance, which averaged more than 50 percent support in 2011.
However, IRRC finds that, overall, there was an uptick in E+S investor support during the time period studied.
“During 2005–2011, the proportion of shareholder-sponsored resolutions on E+S topics grew by a third, from about 30 percent to 40 percent of all shareholder proposals going to a vote,” according to the analysis. “At the same time, average support for these proposals rose from about 10 percent to more than 20 percent.”
The proportion of “higher-scoring proposals” has also increased. In 2005, only 3 percent of E+S proposals got more than 30 percent support, whereas by 2011, nearly a third of E+S proposals crossed that threshold.
Some proposals did particularly well: 66 secured support rates of 40 percent and above. The breakdown by topic of the highest-supported proposal looks like this:
- Corporate political spending/lobbying (19 proposals voted)
- Climate change and sustainability (16)
- Equal employment opportunity/diversity (16)
- Energy extraction techniques/waste (8)
- Global human/labor rights (3)
- Operational safety (2)
- Community/environmental hazards (1)
- Internet issues (1)
The 96 proposals with the lowest levels of support (less than 3 percent of votes cast) included 31 proposals on animal testing/animal welfare; 16 on tobacco risks; 11 on global human/labor rights; and 10 on EEO/diversity.
So how do targeting, timing, and sponsorship factor in?
IRRC found that proposals seemed to amass more support when they were targeted at companies where investors have also questioned board performance. “At companies with the highest supported E+S shareholder proposals, average director opposition was twice as high as at companies with the lowest supported proposals” the paper states.
The timing of proposals in connection with current events and trends also appears to matter. Take the U.S. Supreme Court’s 2010 Citizens United v. Federal Election Commission ruling, for example.
“Between 2010 and 2011, the number of proposals on political spending/lobbying—already one of the most heavily submitted proposal topics—rose 40 percent to 53 proposals,” according to the study. “At the same time, average support rose from 25 percent to 28 percent.”
References to regulatory developments and to actions taken by peer companies also tended to show up in proposals that gained stronger levels of support, the study found.
The third major characteristic associated with support was who sponsored the proposal. “Socially Responsible Investors” (SRI) and public pension funds were not only “the most prolific filers” of E+S proposals from 2005 to 2011, but they also captured “the highest average support levels” in comparison to other sponsor types.
“Nearly 60 percent of the highest supported proposals were filed by SRI and public pension funds,” according to the paper. “In comparison, only 2 percent of proposals by special interest groups, and none of those filed by individual investors, received more than 40 percent votes.”
“By contrast, those proposal topics with low levels of support tend to be associated with a broader investor view that the company has sufficiently addressed the issue,” says IRRC, “or has already made commitments to do so, or that the topic may be better addressed through other remedies, such as legislation.”
But even the factors surrounding those low support levels could change, the paper warns, while proposals that have already gained high levels of support should be monitored. “The momentum behind the most prominent proposals reflects shifting investor priorities and potential changes to company practices,” the paper concludes.
