ANALYSIS

Investors have more than just voting in their engagement armoury, study finds

Institutional investors are using just a fraction of the “weapons” they have at their disposal when they engage with companies, and need to use the entire proxy proposal process better, Rob Bauer told attendees at a recent PRI conference.

Bauer (pictured) and other academics from Maastricht University have released research using data from more than 12,000 US shareholder proposals dealing with corporate governance or corporate social responsibility (CSR) topics.

The study, The Determinants of Withdrawn Shareholder Proposals, is the first study to focus specifically on this particular aspect of the proxy process.

Withdrawal of a proposal usually indicates that the management of the company is willing to make concessions to address the concerns raised.

Companies typically withdraw proposals to avoid the reputational damage of a public vote on an issue or because they fear losing the vote.

Delivering the findings of the study at the PRI Mistra Conference held recently in Sigtuna, Sweden, Bauer said that the filing of shareholder proposals was a key component of engagement between institutional investors and the management of a company.

Bauer argues that institutional investors should move beyond just exercising voting rights and develop a more comprehensive and critical approach, which aims to use the filing of a proposal as a key tool for negotiation over corporate governance and CSR improvements.

The study looked at the proposal process, noting it can be used as a starting point for negotiations between the sponsor of the proposal and the company. The filing of a proposal can also result from a breakdown in private negotiations between a shareholders and management.

“Institutional investors are not at all using all the weapons they can deploy in the filing of shareholder proposals,” he says.

“On average about 200 shareholder proposals are filed annually by institutional investors in the last few years, and there are more than 10,000 institutional investors in the US, and there are more than 3000 companies that you could easily vote on. So they are not using this, but it is increasing.”

The study found that during the sample period, from 1997 to 2009, approximately 20 per cent of all filed shareholder proposals in the US were withdrawn.

The proposals were compiled by RiskMetrics, which tracks annual meetings of all S&P 1500 companies.

The research done with Maastricht University academics Frank Moers and Michael Viehs found that proposals sponsored by unions or institutional investors were more likely to be withdrawn than proposals by activist or individual shareholders.

The ownership structure of a company was also significant. Where management had a greater equity share, companies were less likely to withdraw proposals.

While off a low base, institutional investors were becoming more prepared to file proposals, with the number of proposals filed doubling from the 1990s.

It was more likely a proposal involving corporate social responsibility would be withdrawn than a proposal dealing with a corporate governance concern, the study found.

Just 16.8 per cent of all corporate governance proposals were withdrawn, compared to 31.2 per cent of all CSR proposals.

Bauer says this is likely to be because CSR proposals have the potential to create negative publicity and can be usually more easily compared to the actions of a competitor.

Furthermore, CSR proposals can be easier for management to make concessions on, typically giving room for less specific and more “symbolic changes”.

Over the entire period, labour unions had the highest withdrawal rate (34.6 per cent) while institutional investors displayed the second-highest withdrawal rate, with 33.9 per cent.

This was followed by coordinated activists (27.7 per cent), while individual shareholders virtually never have a proposal withdrawn, with a withdrawal rate of just 4 per cent.

Bauer says there needs to be more data gathered on asset owner engagement, with little information available on the types of engagements being conducted, where they are being conducted and their eventual effectiveness.

While saying he does not have solid information, Bauer says anecdotally it is likely that there is still considerable home bias, with investors more likely to engage with domestic companies.

Bauer says that the researchers are also looking at work that would investigate the eventual outcome of these withdrawn proposals.

But he acknowledges this will be difficult because negotiations are held in private.

The filing of a proposal also provides a useful rallying call for other institutional shareholders in a particular company to join the effort, Bauer says.

This type of more in-depth engagement takes a greater level of resources than merely exercising voting rights in accordance with pre-established principles.

Bauer says collaboration is, therefore, vital to the success of a potential engagement program that aims to utilise the full proxy process.

Investors that just rely on voting records also face the prospect of giving more power to management.

Bauer argues that because institutional investors typically vote in support of 90 per cent of management proposals it is more likely managers could tactically put proposals on the agenda in the knowledge they will likely be successful.

Investors can also benefit from focusing on the withdrawal of proposals, as it may provide information about what issues may be potential risks for the company in question, Bauer says.

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