PMC Weekly Review - January 26, 2018

A Macro View: Are Investors Becoming Fully Engaged?

Engagement is a term we’ve been hearing more and more in the investing world these days, and it seems as though shareholders’ voices are only getting louder. The practice has typically garnered thoughts of activist investors and hostile takeovers aimed at obtaining seats on the board to represent new visions within companies. But a push is growing from firms and investors aligned with environmental, social, and governance (ESG) and impact investing, as well as some of the largest asset managers in the world, to engage with companies to advocate for positive outcomes for both companies and their shareholders.

To take a step back and define what engagement entails, shareholders have a few avenues to persuade management to listen and work with them on perceived issues. Annual proxy voting resides on the formal side of the spectrum and is typically held in conjunction with a company’s annual shareholder meeting. Proxy voting is most commonly used for electing individuals for board member seats, but is increasingly including votes on ESG reporting and practices. In fact, a growing number of firms offer reporting, research, and voting support to institutional and individual investors. Shareholder resolutions also offer to any investor holding $2,000 in common stock for at least one year the ability to submit a resolution for a vote. Although shareholder resolutions are nonbinding, the publicity and dialogue they can generate are often enough to enact changes, or at least further discussions. Even though these two options are available to any investor, they generally occur only once a year. Large or institutional investors, on the other hand, can use their leverage successfully to engage in less formal talks, but directly with company management.

The latter form of engagement was recently given a boost in a letter from BlackRock CEO Larry Fink that called on fiduciaries to hold companies accountable for both financial and societal obligations. Fink stated, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” The letter was addressed primarily to company CEOs, but also spoke to public policy makers, and addressed stakeholders’ need to engage responsibly with companies and leaders on their long-term vision and ensure they pay adequate attention to more than just their firms’ financials.

Although this sentiment is just starting to gain wider acknowledgement, smaller firms and voices have been advocating for such a viewpoint for the last several decades. Maybe the most prominent instances of engagement came in the wake of the disastrous 1990 Alaska and 2010 Gulf of Mexico oil spills, which highlighted the need for company management to have plans in place not only to mitigate the environmental impacts, but also to avoid the financial and headline impacts that resulted from these accidents.

Whether we continue to see more leaders in the finance industry speak up about their firms’ responsibilities outside of financial considerations remains to be seen. However, it is clear that a select number of large asset managers are beginning to align their engagement practices with those of smaller firms and groups of investors. 

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