Shareholder groups, activist investors, proxy advisors and passive investors are increasingly engaging in advocacy efforts to advance their environmental, social and corporate governance (ESG) goals through shareholder proposals. Regulation governing the shareholder proposal process enables these activist groups to hold companies hostage to their whims, putting forward items that have little relevance, or are outright detrimental to, a publicly-traded company’s bottom-line. In this way, these groups hijack both the shareholder proposal process and the broader ESG movement to force the company to bend toward their view of sustainability while in some cases calling for company changes that would harm profits and ultimately decrease the worth of shareholders’ assets.
Shareholders who have owned at least $2,000 in market value or 1% of stock of a publicly-traded company listed on U.S. stock exchanges for at least one year can put forward resolutions to be voted on at the company’s annual general meeting. These resolutions are called “shareholder proposals.” The amount of stock that shareholders need to own is miniscule in comparison to the size of the publicly-traded companies that they target. For example, YUM Brands, which has raised concerns about the shareholder advisory process, has a market capitalization of $34.83 billion. Owning $2,000 worth of shares only represents .0000057% of the company’s market value.
However, not every shareholder proposal is put to vote. Companies can submit a no-action letter to the U.S. Securities and Exchange Commission, which can then decide whether the company may exclude the proposal from voting or if the proposal must remain. The SEC may exclude proposals if they seek to micro-manage the company or if they call for the company to implement a new program that ends up replicating actions it’s already taking. During the period between October 1, 2017 and June 1, 2018, the SEC approved of 64% of no-action requests.
Shareholders can also withdraw the proposals they submit if, for example, they meet with the company and come to a separate agreement. Often, proposals from higher-profile shareholder groups earn significant media coverage and that in turn exerts further pressure on the company.
Hundreds of these proposals are submitted to American companies every year. For example, in 2018, shareholders submitted 788 proposals, spending a record $65 billion on campaigns. Too often, these proposals contain egregious errors, seek to implement something the company is already doing, or would counter productively cut the company’s profits. Nonetheless, the company is then forced to spend time and money requesting “no-action,” which wastes valuable resources instead of advancing efforts that will best support growth.
Shareholders of public companies have a right to make sure the company is performing reasonably well and posting satisfactory profits. As a result, shareholders are able to offer suggestions through shareholder proposals. Sometimes, though, certain shareholders take advantage of their rights and push a company down an unproductive path. They make the shareholder proposal process political and force their preferences on to companies. These shareholder activists have little regard to the company’s other shareholders who might not share their political views. Oftentimes, these proposals purport to advance environmental, social, or governance interests in ways that are not directly tied to supporting the company’s profits and show little regard to the company’s existing sustainability efforts.
This behavior, while detrimental to many shareholders, does not have many supporters. Only a small number of activists engage in most of this activity. In 2018, the top five activists accounted for almost 25% of all campaigns launched, with just one activist responsible for a full 10% of all campaigns. On the climate and environmental front, groups like As You Sow and Ceres have led the charge in generating these types of proposals. Unsurprisingly, both groups get their funding from larger, wealthy, anti-fossil fuel foundations.
Sometimes, shareholder activists introduce proposals that could fundamentally alter how a company legally manufacturers its products or distributes them to consumers. For example, People for the Ethical Treatment of Animals (PETA) purchased just enough shares of Levi Strauss & Co. when the company debuted on the stock market in 2019 to file a shareholder resolution that would have the company replace its trademark cow-skin leather patches with vegan leather.
At times, shareholder proposals driven by environmental activists may seem frivolous, but they can harm companies without increasing shareholder value. A paper by Harvard Professor Joseph Kalt found that the adoption of social and environmental shareholder proposals did not enhance shareholder value. Indeed, such proposals impose extra costs—sometimes to the tune of millions of dollars—on the company, which must respond to the proposal.
On May 31, 2017, ExxonMobil shareholders approved of a resolution asking the company to report on how climate change policies would impact its business. The resolution was co-sponsored by the New York State pension fund and the New York Common Retirement Fund. The proposal itself was modeled after a draft report by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, led by Michael Bloomberg, a vocal climate activist who has used his wealth to fund special assistant attorneys general who focus on climate litigation.
Initially, ExxonMobil opposed the measure because it was duplicative—the company already divulged the information shareholders wanted. A great deal of this information was already included in the company’s “Outlook for Energy,” a document ExxonMobil publishes annually on its long-term global view of the energy market. The proposal underscored the sponsors’ conviction that this information that ExxonMobil already provided to shareholders was inadequate. Though the resolution was nonbinding, the company promised to consider the proposal.
A year before, the same proposal only received 38% of shareholder votes. But this time around, major investors who are now mainstays of shareholder activism signed on, including BlackRock, Vanguard and State Street. These “Big Three” passive investors index their stocks to a major index, such as S&P 500, manage nearly $11 trillion worth of assets and, combined, are the largest shareholder in 40% of all publicly-listed American companies. Together, the three own over 18% of ExxonMobil’s shares. The ExxonMobil proposal ended up passing with 62% of votes.
Shareholder activism is also related to ongoing litigation against ExxonMobil in New York State. At the time of the 2017 vote on the shareholder proposal asking the company to create redundant documentation of the effects of climate change on its business, then-Attorney General of New York Eric Schneiderman was already investigating ExxonMobil, claiming it misled the public and investors of climate risks.
Schneiderman’s arguments against the company were scattered and oftentimes contradictory. While he first argued that the company downplayed the risk of climate change to investors and the public, two days later he reversed course, claiming that ExxonMobil’s publicly-presented 2030 carbon price assumption was higher than the assessments the company used internally.
The initial investigation against ExxonMobil and subsequent lawsuit demonstrate a similarly misguided mindset that influences how shareholder activists try to use proposals to harm companies’ business practices and profits. Shareholder activists and the NY AG use deliberately narrow information about the companies their target, attempting to harm them for conducting lawful behavior that maximizes profits for their shareholders. It’s unsurprising then, that many third-party witnesses for the NY AG are affiliated with some of the same shareholder activism groups that target ExxonMobil and other companies.
Such behavior from shareholder activists and the NY AG does nothing to change the laws governing a company’s behavior while at the same time harming shareholders and jeopardizing companies’ abilities to fulfill their responsibility to their shareholders.
