What Good Is Shareholder Advocacy?

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By Marc Gunther. 

Last week, ExxonMobil added Susan Avery, a physicist, atmospheric scientist and former president of the Woods Hole Oceanographic Institutions, to its board of directors.

Shareholder advocates, led by the Interfaith Center on Corporate Responsibility (ICCR), which has been organizing shareholder campaigns at ExxonMobil for nearly two decades yes, two decades welcomed the appointment.

Tim Smith, the director of environmental, social and governance (ESG) shareowner engagement at Walden Asset Management, said in a news release: “This action by the board is encouraging for shareowners and we want to commend Exxon for this prudent and forward-looking decision.”

For shareholder advocates investors who represent public pension funds, socially-responsible money managers, unions and church groups, and exercise their rights as owners to try to influence corporate behavior this is about as good as it gets. ICCR and its allies have for three years called on ExxonMobil to elect an independent director with climate change expertise. They’ve won.

But will the planet notice? Of course not. No new director, not even a climate scientist –and there’s a difference between being a scientist and an advocate will persuade the board or top executives of ExxonMobil to turn a company that says it is “committed to being the world’s premier petroleum and petrochemical company” into, say, a wind or solar firm. In a long profile of ExxonMobil published just this week, Steve LeVine of Quartz concluded: “Exxon is, and will long continue to be, foremost an oil company.”

Shareholder advocates will continue to push ExxonMobil, and the company will continue to do what it chooses to do, a dynamic that underscores the problem with shareholder advocacy: It’s all about persuasion. Those hundreds of shareholder resolutions that are filed every year with big companies? They are all precatory a fancy legal term that means expressing a wish or request and so corporate managers are free to ignore them, and often do, even in the exceedingly rare cases which a majority of shareholders vote for a resolution.

I say this not to disparage shareholder advocates. I’ve long admired such titans of the shareholder advocacy movement as Robert A.G. Monks (who I profiled in 2002 for FORTUNE) and Nell Minow, as well as Tim Smith, who led ICCR for many years, and their allies at nonprofit As You Sow, . But in these times, it’s important for social-justice advocates, nonprofit groups and those who fund them to take a hard-headed look at their strategies, to see what’s working and what is not. As Kevin Starr, who heads up the Mulago Foundation, argued recently:

That means that you get absolutely clear on what you’re setting out to accomplish, identify the outcome(s) that would signify impact, connect the dots from your work to all the way to impact, and strip away all the stuff that doesn’t get you there. You measure what’s critical to delivery, behavior change, and eventual impact, and you continually iterate based on what you measure.

How many social-justice advocates, nonprofits and foundations do this? Not enough, I’m certain. Which brings us back to shareholder advocacy.

It’s hard to measure the impact of shareholder advocacy, or any advocacy, for that matter. Often, shareholder advocates work on issues that also attract attention from politicians, regulators, activist groups, business-friendly NGOS, corporate social-responsibility insiders and consumers. When change happens, it’s hard to tease out cause and effect.

Some notable achievements

That said, shareholder advocates have notched some notable achievements. In the 2000s, first at Dell, later at Apple, and eventually through much of the computer industry, they persuaded companies to take back and recycle electronics. According to The Shareholder Action Guide, a new book from Andrew Behar of As You Sow, the group wangled a meeting in 2007 with Steve Jobs, then Apple’s CEO. Jobs was, no surprise, caustic and negative at first, but he eventually conceded that Apple did not want to be seen as an environmental laggard. Not long after, Apple announced a broad set of environmental commitments known as “A Greener Apple.” Score one for engaged owners.

More recently, Natasha Lamb, who leads shareholder engagement at Arjuna Capital, a sustainable investing firm, led a series of successful engagements with technology companies, including Apple, Intel, Amazon, Expedia, and eBay, around the issue of gender pay equity. All have promised to close the gap between what they pay men and what they pay women. This year, Arjuna will take the campaign to finance and consumer products firms. “There’s a critical mass of companies that are doing it, and the other companies see the writing on the wall,” Lamb told me.

Such victories have led As You Sow’s Behar to declare, with some exuberance:

We believe that most of the world’s environmental and human rights issues can be resolved by increased corporate responsibility and that shareholders are the single most powerful force for creating positive, lasting change in corporate behavior.

Say what? Shareholders are “the single most powerful force” for changing companies? More powerful that governments, activists, consumers and workers? Forgive me, but I’m skeptical.

Having paid on-and-off attention to shareholder advocates for years, my impression and yes, it’s an impression, not a peer-reviewed study is that they have been stymied more often than not. For much of the mid-2000s, for example, shareholder advocates pushed Coca-Cola and PepsiCo to use more recycled content in their plastic bottles. They got some tepid commitments, but as oil prices fell, so did the interest in using recycled instead of cheaper virgin plastic. US recycling rates have been flat for years. Shareholder persuasion can’t overturn economics.

On the issue of CEO pay–long the No. 1 agenda item for many shareholder advocates–there has been scant progress. Just the opposite, in fact: The left-leaning Economic Policy
Institute reported last year that from 1978 to 2015, “inflation-adjusted compensation of the top CEOs increased 940.9 percent, a rise 73 percent greater than stock market growth and substantially greater than the painfully slow 10.3 percent growth in a typical worker’s annual compensation over the same period.”

Nell Minow, who has worked on corporate governance issues since the 1990s, says: “Every effort to contain CEO pay has been (throwing) gasoline on the fire.”

Making the business case

There’s a pattern here, as Arjuna’s Natasha Lamb explained:

Shareholder engagement works when the change requested by the investor is in the company’s self- interest. In the absence of that, if it’s only about the right thing to do, that’s not enough. It’s got to be the smart thing to do. There’s got to be a business case.

To be more specific, there’s got to be a business case that appeals to corporate managers, who have an annoying but predictable tendency to pursue their own self-interest, even when it conflicts with the long-term interests of the company. This is key. You may be able to make a very good business case for curbing CEO pay, but try making it to a CEO. He or she is unlikely to be persuaded.

So what are the chances that shareholder advocacy can move the needle on the all-important issue of climate change? The advocates argue that climate change creates risks to oil companies like Exxon or Chevron, citing global efforts to curb carbon emissions. Says Lamb: “If a cap is put on the amount of carbon we can burn as a planet, and they can’t sell two-thirds of their assets, that’s a detrimental risk to their business.” This is a legitimate worry for long-term investors, particularly pension funds such as CalPERS or CalSTRS that are investing today on behalf of workers who will be collecting pensions a half century from now.

The trouble is, the executives who run ExxonMobil or Chevron don’t operate with a 50-year time horizon, even though they invest capital in oil and gas infrastructure that may be around for nearly that long. They’re thinking about the next five to 10 years, for obvious reasons. (The average tenure of a FORTUNE 500 CEO is about five years.) Boards don’t seem to be any better. And while Shell, Total and Statoil have all invested in renewable energy, they are driven by near-term market opportunity, not shareholder pressure. Short-term thinking may be the biggest obstacle to effective shareholder advocacy.

The other obstacle is that the world’s biggest institutional investors vote no or abstain on the vast majority of the environmental, social and governance resolutions filed by the shareholder advocates. BlackRock, Vanguard, Fidelity all support management, and not the advocates, just about all the time.

This may come has a surprise because Larry Fink, the CEO of BlackRock, which the world’s largest asset manager, loves to pontificate about corporate sustainability and long-term thinking. What’s more, in a recent report, the BlackRock Institute recommended that “all investors should incorporate climate change awareness into their investment processes.” Yet, as The Times recently reported, Block Rock “voted against every shareholder proposal relating to diversity, environment, governance and social concerns over the last year, according to Proxy Insight.” Every single one.

Resolutions about resolutions

Shareholder advocates have taken notice, so they are now filing resolutions at Black Rock (as well as at other big asset managers) that accuse BlackRock of putting its reputation at risk because of its “perplexing and troubling” votes on environmental and social issues, as the Financial Times reported.

Resolutions about resolutions, in other words. It brings to mind a cat chasing its own tail.

[BlackRock’s behavior is perplexing only if you overlook the fact that big-company CEOs are among its big customers. BlackRock manages corporate pension funds and 401-K plans. When there’s business to be done, why annoy a customer or potential customer over a trivial matter like global warming?]

In fairness, the new set of shareholder resolutions at asset managers won’t do any harm, and they could do good. If BlackRock worries about its reputation, it may begin to align its proxy voting with its sustainability rhetoric. And then, the fossil fuel companies may pay more attention to shareholder resolutions. And then? Well, I’m not sure what is supposed to happen after that.

Someday we’ll find out, I suppose. It could be a long wait.

Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.


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