Historically, socially responsible investing (SRI) has been about a fundamental decision: whether to hold a “traditional” diversified portfolio, or to screen out companies for various environmental, social, or governance (ESG) criteria in order to meet an SRI mandate. The end result has been an endless debate about whether a portfolio that used ESG screens will subsequently produce returns that are better, worse, or the same as the traditional portfolio.
Yet the reality is that an SRI approach doesn’t have to be a choice between traditional portfolio investing or using ESG screens. An alternative approach is to try to shape the stocks in a traditional portfolio to better adhere to an SRI mandate, by leveraging the proxy voting and shareholder engagement process to steer the company’s management itself in a more SRI-focused direction.
In this guest post, Justina Lai and Ria Boner of Wetherby Asset Management share how they implemented an ESG shareholder engagement initiative within their own advisory firm, leveraging the outside resources of an external non-profit called “As You Sow” that works with institutions (including advisors) to mobilize shareholder resolutions.
The end result of their ESG shareholder engagement initiative was a deeper engagement with clients themselves, for what was ultimately a fairly modest financial and logistical cost for the firm. However, because there are specific requirements that must be met for clients to vote proxies, including owning individual securities directly, affirming their ownership, and delegating proxy voting authority to a third party, advisory firms must be certain to implement a proper process to ensure their shareholder engagement efforts with clients are successful!
(Michael’s Note: This guest post was written by Justina Lai and Ria Boner of Wetherby Asset Management.
As Director of Impact Investing, Justina Lai provides targeted and strategic leadership to the firm’s impact investing efforts and adds further breadth to our impact offerings. Prior to Wetherby, she was a Director and Senior Investment Analyst at Sonen Capital, and before that she helped manage the Rockefeller Foundation’s Program Related Investments portfolio comprised of domestic and international impact investments in private equity and private debt. In addition, she has held positions with Legacy Venture in Palo Alto, CA and Rwanda Ventures, a business incubator launching and operating sustainable agricultural companies in Kigali, Rwanda.
As a Business Development Associate, Ria supports the firm’s efforts in relationship development by streamlining internal processes and identifying strategic business opportunities which create long-term value for the firm. Ria chose to follow a long-term personal interest in economics and capital markets by returning to graduate school, after which she transitioned to the financial services industry in pursuit of a value-driven independent firm, joining Wetherby in 2016.)
The Rise of Environmental, Social and Governance Initiatives in Shareholder Engagement
Shareholders of publicly traded companies – particularly long-term investors – have a powerful opportunity to represent material interests to corporate management. Through active shareholder engagement, investors can encourage management action on critical issues that could impact a company’s long-term financial performance.
Accordingly, environmental, social and governance (ESG) initiatives are growing in prominence, as the business case for these practices continues to build. In their 2016 report, The Forum for Sustainable and Responsible Investment estimates that $2.56 trillion in US-domiciled assets were engaged in filing shareholder resolutions on ESG issues. This year, even the index behemoth Vanguard took a stance on climate risk disclosures at ExxonMobil’s annual meeting, joining a monumental shareholder turnout of nearly 70% of votes in favor of better transparency about the financial risks of climate change. Glenn Booraem, Vanguard’s investment stewardship officer, said recently, “Our support for these proposals is not a matter of ideology, it’s a matter of economics. To the extent there are significant risks to a company’s long-term value proposition, we want to make sure there is long-term disclosure of those risks to the market.”
Effective shareholder engagement does require substantial resources and expertise. First, a solution must be identified that, should it be implemented, could result in material benefits to the company. Next, a strategy must be developed to approach the company. This strategy may include letter writing, meeting participation, coalition building, as well as resolution filing and proxy voting at annual meetings (Figure 1). Campaigns may range from complex, multi-year engagements, to succinct conversations with more immediate results. Done well, the process can be collaborative and productive, as corporate management can gain insights on critical and emerging risks and opportunities by incorporating input from a broad range of stakeholders.
Historically, non-profit organizations have played a critical role in advocating for social, environmental and governance initiatives through shareholder engagement. More recently, large institutional investors have dominated the shareholder engagement arena, particularly following a 1988 DOL interpretation requiring proxy voting from ERISA fiduciaries. These stakeholders have often developed sophisticated internal resources to orchestrate engagement approaches and build productive relationships with the companies they seek to influence. They can also mobilize substantial assets. CalPERS, who declared that diversity, proxy access and climate risk reporting topped their 2016 engagement agenda, manages over $270 billion in assets.
And as the field continues to mature, the opportunity for shareholder engagement is expanding to new groups of “smaller” investors (e.g., small-to-mid-sized foundations and endowments), thanks to a growing group of non-profit organizations providing support. For example, the non-profit As You Sow works directly with foundations, endowments and even individual shareholders to mobilize shareholder resolutions to support their engagement campaigns. Proxy Impact provides foundations and socially responsible investors with ESG proxy voting guidelines and voting support services, as well as customized shareholder engagement services. Ceres’ Investor Network on Climate Risk and Sustainability serves more than 130 institutional investors in building corporate engagement strategies and policy solutions.
With the growth of such support organizations, though, the expanding reach of shareholder engagement isn’t just about institutional investors. Now, financial advisors can also find expert support and access to campaigns, without the need to employ substantial internal resources, and help their clients engage directly in shareholder activism efforts.
The Opportunity for Individual Investors (And Advisory Firms) in Shareholder Engagement
Simply put, shareholder engagement strategies no longer need to be limited to institutional investors; there is active interest, ability and demand among individual investors, including existing and prospective investment advisory clients.
The key is to recognize that in addition to just “growth” and investment returns, many individuals seek intangible value from their wealth, hoping to make a positive impact using their assets. This is especially true for both Millennials, and many high net worth individuals. The 2017 U.S. Trust Insights on Wealth and Worth survey found that 45% of high net worth individuals surveyed either own impact investments, or are interested in adding them to their portfolios, with Millennials leading in interest. 52% of these individuals think corporations must be held accountable for their actions. Shareholder engagement can offer a productive outlet for those clients who hold individual stock positions, allowing them to be responsible stewards of their assets (with the support of their advisors) while advocating for positive change.
So how can one shareholder make a difference? There are a few key areas within larger shareholder engagement campaigns in which an investor that holds individual stock positions can have the greatest impact.
For instance, with as little as $2,000 worth of shares, held for at least a year prior to and leading up to the company’s annual meeting, individual shareholders can file a resolution suggesting a change in corporate practices. Listed on the company’s proxy statement, these brief, 500-word proposals are then formally presented and voted on by shareholders at the company’s annual meeting. To be included, resolutions must address a material concern for the company and meet certain guidelines set by the U.S. Securities and Exchange Commission (SEC).
Although nearly always non-binding, shareholder resolutions represent a powerful public platform to voice concern and propose changes to both management and other investors. The results are publicly reported, with outcomes calculated as favorable votes divided by the total votes cast for and against the proposal (abstentions are not counted). Typically, outcomes around or over 10% send a clear signal of shareholder support to a management team, but even limited voter support can still lead to adoption of thoughtful proposals. For example, a 2015 resolution for Abbot Laboratories encouraging them to avoid genetically modified organisms in baby formula was successfully implemented with only 6% of voting shares. In addition, subject to certain conditions, resolutions may be re-filed and voted on in subsequent years, allowing shareholder awareness of the issue to build over time.
Of course, not all proposed resolutions make it to the annual meeting. In some cases, companies are motivated to satisfy a resolution in advance of the proxy vote, based on the merit of the proposal and the desire to avoid public exposure on poor practices. In other cases, companies may challenge a proposal based on SEC standards to disqualify it from inclusion on the proxy statement. Sophisticated shareholder engagement programs maintain a continuous and constructive dialogue to reach consensus between investors and management on their shared interest: improving the long-term financial performance of the company.
Some recent success stories of individual investor impact from our own offering include:
Antibiotics & Factory Farms: Overuse and misuse of antibiotics in the meat industry is contributing to the rise of antibiotic resistance globally; antibiotic-resistant infections cause over two million illnesses and 23,000 deaths each year in the US, costing $55-$70 billion. In 2015, McDonald’s adopted a policy to source chicken raised without antibiotics important to human medicine in the US, but did not create a similar policy for pork, beef or chicken sourced outside the US. This year, an individual investor supported a larger shareholder engagement campaign by acting as lead filer for a resolution requesting McDonald’s extend this policy throughout the global supply chain, enabling the resolution to be listed on the annual proxy statement. 30% of shares voted favored the resolution, representing approximately $30 billion of shareholder support.
Carbon Asset Risk & Climate Change: Developing high-cost, high-carbon reserves demands intensive capital expenditures for a resource that may never be economical to extract, potentially wasting investor capital. Individual investors joined a larger shareholder engagement campaign with Southern Company to directly support a resolution requesting better reporting on stranded asset risks related to climate change and associated coal demand reductions. Rather than put the resolution to a vote at the annual meeting, Southern Company agreed to report on their distributed energy resources, modernization of technology, and coal reduction efforts, and the resolution was withdrawn.
Challenges for Individual Investor Involvement
Given this opportunity to hold corporations accountable, what is limiting individual investors from getting involved in shareholder engagement, and how can the investment advisory industry help to address these needs? Some potential limitations to individual involvement may include:
Lack of Awareness
Challenge for individual: Many individual investors remain unaware of their leverage as shareholders, and the role they can play in the responsible stewardship of their assets.
How advisors can help: Advisors are in a key position to understand client values, educate clients about the various opportunities available to them, and provide encouragement about how individuals can and have made a difference in this space.
Limited Resources to Engage
Challenge for individual: Given the substantial resources and expertise required to initiate even a single campaign with a single company, many individual investors are unlikely to pursue this avenue on their own.
How advisors can help: Expert organizations run multiple shareholder engagement campaigns and seek additional shareholder support for their efforts. Sometimes, an individual’s support can directly impact these larger strategies. Advisors are in a key position to facilitate access to existing campaigns and connect clients with diverse opportunities.
Challenge for individual: Individuals may feel that lower commitment opportunities, such as simply voting their shares, may seem insignificant when compared to the total market capitalization of a company.
How advisors can help: Advisors and their expert partners can assist individuals in accessing campaigns at strategic points – such as filing a shareholder resolution – where an individual’s contribution can be most impactful.
Limited Access to Individual Stock Positions
Challenge for individual: Opportunities within shareholder engagement, such as proxy voting, are limited to direct shareholders of that company.
How advisors can help: Individuals who do not directly own a stock position in the company in question can find alternate methods of advocacy. For example, if the individual owns a mutual fund or ETF, they may choose to express their interest to the fund manager. Advisors can also educate individuals on the shareholder engagement activities and proxy voting guidelines of various funds.
The Opportunity for Financial Advisors on Client Shareholder Engagement
Financial advisors can and should support our clients through many of these limitations. A well-designed program can not only protect the value of client assets and strengthen client-advisor relationships, but can also enable clients to derive personal and financial value from the investments they hold.
Responsible shareholder engagement can also be a good and proper exercise of fiduciary duty, especially as parts of the process, such as proxy voting, are specifically required by the SEC for other fiduciaries in our industry. Registered investment advisors may also choose to exercise proxy voting authority on behalf of their clients, following the guidelines set by SEC’s Rule 206(4)-6 on Proxy Voting. Votes must reflect the client’s best interest and the process must be open and transparent.
(Note: Rule 206(4)6 requires registered investment advisors with voting authority to do so in the client’s best interest, adopt written policies and procedures specifically addressing potential conflicts of interest, make available to clients their policies, procedures and voting results, and keep certain records related to voting client securities.)
Shareholder proposal filings require that investors have direct ownership of individual stock positions. Thus, prior to creating a shareholder engagement program, an advisory firm should assess their investment composition and determine if their clients hold sufficient individual stock positions to justify enhancing their service offering. Nearly all external organizations draft resolutions based on pressing social and environmental corporate concerns, rather than the reach of client portfolios, so you may find such services to be of greater value if you have a diverse set of positions throughout your managed holdings. With that said, many external organizations are still in the process of developing their offerings and, as such, may have the ability to tailor their services to more concentrated positions or portfolios. Advisors who compose portfolios predominately from funds can still play a key role by evaluating the shareholder engagement programs of fund managers and encouraging additional accountability on ESG measures.
Filing resolutions is only one part of the process. While not required, you can further support these shareholder engagement efforts by voting a client’s shares in favor of the resolutions s/he supported as a lead or co-filer. As discussed earlier, proxy voting is regulated by the SEC; as such, your practice must have certain policies and procedures in place. Wetherby has long voted proxies on behalf of clients; as such, we have established policies and procedures to ensure that we represent our clients’ best interests and comply with these SEC requirements. Many investment advisors choose to follow independent proxy voting guidelines; most third-party proxy advisory firms offer socially responsible proxy voting policies and guidelines which align with resolutions related to ESG issues in most, if not all, cases.
Developing an ESG Shareholder Engagement Service Offering
By working with expert organizations, Wetherby Asset Management has enhanced our offering to include ESG-related shareholder engagement initiatives – without adding significant internal resources. Our firm’s strategy is to work with third-party organizations and initiatives that are running their own shareholder engagement campaigns. We can thus develop a diverse assortment of initiatives aligned with individual stock positions held by our clients and facilitate the client’s involvement in them. Clients need not be explicit impact investors to benefit. Instead, each individual or family can curate their own approach from their existing investment positions, based on their personal motivations and values.
When working with external organizations, it is crucial to find a credible organization that can provide expert capacity that will resonate with your client interests, as well as a streamlined process that will align with your operations. Some important qualities we seek in and questions we ask of external firms include:
Approach – What is the organization’s approach to engagement? How do they define, plan and measure a campaign? How does the organization select engagement topics/sectors/companies? How does the organization integrate and adapt with additional information gathered through engagement process? Does the organization have escalation strategies for when an engagement is unsuccessful?
Expertise – Does the organization have the expertise to suggest compelling and sound business initiatives? What resources and staff does the organization have to support its research? What is their track record in campaigning, engaging collaborators and building interest in an initiative?
Facilitation – How much effort is required on the part of the financial advisors in your firm? Will this collaboration require substantial resources from your team? Has the organization worked previously with advisors and does it understand your needs?
Diversity of Initiatives – Does the organization offer a sufficient range of initiatives that can accommodate your clients’ individual stock positions and represent their interests? (Especially for advisory firms that primarily use mutual funds and ETFs and only have a subset of clients that hold individual stock positions.)
Education and Reporting – Does the organization offer timely and easy-to-access education and reporting? Are your clients able to engage with material prior to their decision to authorize, as well as throughout the campaign?
For example, our firm relies primarily on As You Sow to enable us to offer impact shareholder resolution opportunities to our clients. As You Sow is a non-profit organization that promotes corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies. Their expert team explores solutions across multiple themes, including energy, environmental health, waste, human rights, and executive compensation issues. As You Sow then launches customized engagement approaches for each company and initiative. Should they choose to draft a resolution as part of their campaign, they look for interested shareholders – such as our clients – to authorize them to submit the resolution on their behalf. For example, in 2017, As You Sow connected with investors to file over 50 resolutions across various themes and companies.
As You Sow has greatly simplified involvement for financial advisors by sourcing resolutions, filing resolutions on behalf of interested clients, and maintaining communication and status updates at key points throughout the process. They charge an annual fee based on the size of the firm’s assets under management, ranging from $5,000 to $15,000 per year. These fees include options for your clients to file or co-file on the available resolutions, access to their content and education, up to three hours of the CEO’s time, and up to three hours of staff time for expert briefings.
The majority of resolutions are filed in November and December, and As You Sow will notify advisors with resolution opportunities prior to these filing dates. While firms may differ in their level of involvement, our firm pursues the following process:
1. As You Sow notifies our firm with a list of resolutions and brief descriptions for each topic and resolution. They provide pre-drafted letters of authorization (see sample) and proof of ownership (see sample) letters to facilitate the advisor-client experience and maintain consistency for their own records.
2. Upon notification, our firm’s Chief Compliance Officer will review the resolution opportunities to ensure that they do not represent a conflict of interest for our clients. This includes verifying that none of our clients hold board or executive positions in the companies represented in the resolution notifications. Should there be any real or perceived potential for conflict, our firm chooses not to present the resolution opportunity to any of our clients.
3. Once reviewed, one Wetherby employee researches the holdings across all client accounts to determine which clients hold individual stock positions that satisfy the eligibility requirements to file a resolution. She then aggregates the available resolutions and eligible clients into an Excel dashboard that is shared with our client service team.
4. Our advisors can then proactively reach out to these eligible clients with the opportunity. Depending on their relationships, this can be as simple as an email, or a larger discussion over the phone or at one of our regular in-person client meetings. The advisors confirm if a client wants to support a resolution, or take no action. Clients may choose to support individual resolutions as a lead filer, where their involvement and name may be featured in the proxy statement, or as a co-filer, where their support is critical but their name is never listed on the proxy statement. Advisors will coordinate with the client in obtaining a physical signature on the letter of authorization.
5. The advisor then sends the pre-drafted proof of ownership letter to the appropriate custodian holding the client’s position for them to complete and return. Next, the advisor ensures that a “do not trade” restriction is placed on the client’s investment position to ensure that at least $2,000 of shares continues to be held through to the annual meeting to satisfy the eligibility requirements. Once complete, the advisor sends the two documents (the client-signed Letter of Authorization and custodian-verified Proof of Ownership) back to As You Sow, who then files the resolution on the client’s behalf.
6. As You Sow follows up with updates throughout the campaign. Advisors can choose to send the communications directly to clients, or repurpose the materials into meeting reports or custom decks. Our firm also produces an annual report on the outcome of all shareholder resolutions that were supported by our clients. Clients can engage with the content according to their level of interest; through As You Sow’s public resources, clients can become deeply knowledgeable on their own time, or they can await periodic updates from their Wetherby team.
A high-level overview of the shareholder resolution process is included below:
For the 2017 annual meeting season, Wetherby clients authorized As You Sow to file and co-file 21 shareholder resolutions with 17 companies focused on issues related to coal, genetically modified organisms, pharmaceutical waste, consumer packaging and nanomaterials in food. A full overview of our 2017 season can be found in our annual report.
Insights From Our Firm’s Experience
Enhancing our services with a Shareholder Engagement process has resonated with clients, and has been well worth the limited procedural effort and costs necessary to establish and implement the program. In fact, for an annual cost of $5,000 to $15,000 for a service like As You Sow, the cost of establishing a partnership with an external partner to support shareholder engagement, is actually less than the cost of what many advisory firms spend on far-less-impactful initiatives! And the process itself is highly conducive to being systematized, once initially rolled out and formalized.
In addition, by formalizing our program two years ago, we have increased participation substantially – both in terms of the number of clients supporting resolutions as well as the number of resolutions supported by each individual client. Armed with a simple solution for interested clients, our wealth mangers have found it easy to proactively broach the topic with clients. What was previously an ad hoc activity for a small number of clients of a single wealth manager has grown to include over a dozen clients of more than half of our advisors and we expect that group to continue to expand as we approach our third season of filings. While initial adoption has been driven by our impact clients, a more diverse set of clients has expressed interest in becoming involved. In fact, for some clients, experience with shareholder resolutions has sparked an interest in some of our other services and related fields, including both impact investing and strategic philanthropy, further deepening the client-advisor relationship.
Many aspects of the program appeal to our clients. By focusing on a single initiative, clients can better understand their potentially catalytic role in the process, and witness the amplification of their impact as other shareholders vote in favor of their sponsored resolutions. Clients can also customize their involvement, and engage deeply with the content and follow the campaign in the news, or simply receive updates from our team. Many clients enjoy seeing how solutions can scale across companies within an industry, or are empowered by watching support for their resolution build over multiple years. Clients that participate in a filing in one year are often eager to support a resolution in following years.
In building out a collaborative shareholder engagement service offering, we identified some important themes that could be helpful for firms considering a similar program:
Third-party expertise is key: Managing a shareholder engagement initiative is no small task. Experts must adeptly build productive relationships between the two parties, and be both sensitive and strategic with how they approach companies. Realistically, most independent advisory firms will lack this internal capacity and expertise, which makes trusted third parties invaluable as an effective alternative to support interested clients with high-quality initiatives backed by research and led by experts. While As You Sow is our primary and longest-standing relationship, we have also worked with other experts including Proxy Impact and the Thirty Percent Coalition.
Keep it simple: Our clients are often pleasantly surprised by how easy it is to become involved in shareholder resolution initiatives. By focusing on the resolution filing process, our clients can follow a few relatively simple steps at a key point in the process where their engagement is the most impactful. Clients new to the process often choose one campaign initially, and then seek additional opportunities after realizing how effortless and enriching this facilitated process can be.
Education and communication enrich the process: Periodic reporting and communications can maintain client interest and support, or help build confidence for clients who are interested but want to learn more prior to participating. The education component truly enriches the client experience, building awareness and empowering clients to generate greater impact.
Manage expectations: Shareholder engagement initiatives are not always successful, and some take years to produce material results. Maintaining open communication with clients and supporting them through both the highs and lows of the proxy process is an important part of delivering a positive and sustainable shareholder engagement experience. Transparency and education help maintain the authenticity of the process.
Be intentional: An offering like this can be highly flexible. At a minimum, advisors may utilize the offering to accommodate interested clients in an ad-hoc manner. However, we believe that advisors can and should be intentional with shareholder engagement opportunities and understand how this type of offering can enhance your client satisfaction and financial stewardship. This type of offering can be scaled up as firms work with additional partners to source more initiatives depending on the capacity of the firm and the interests of the clients.
As shareholders, our clients occupy a powerful position to effect positive change in corporate practices that can improve long-term financial performance. We are in a unique position to facilitate client involvement in shareholder engagement initiatives by enabling and simplifying the process. By working with external parties to enhance our shareholder engagement program with impact offerings, our staff and clients can work together to curate a truly customized engagement strategy, allowing clients to participate in initiatives that address social and environmental challenges that are most important to them.
So what do you think? Would you consider launching a Shareholder Engagement problem to your clients as a value-add? Please share your thoughts in the comments below!