It is autumn in the US. The leaves are changing colours, football season has begun and active shareholders are prepping their target lists in anticipation of the shareholder proposal submission rush which typically takes place every year from September to mid-November.
With so much talk about no-action letters, precatory filings, settlement negotiations and AGM showdowns originating from this process and carrying through to next year’s voting season, it is worth taking a step back to set the record straight about what all this chatter actually means.
A shareholder proposal is quite simply a resolution sponsored by an investor (the proponent) to be discussed and voted on at a company’s annual general meeting. But what does it really mean? For instance, is it bad for a company to receive lots of shareholder proposals? Can anyone submit a proposal? Can a shareholder ask for anything they want in a proposal? If a proposal wins majority support, does the company have to do something? And will this actually make a difference?
So, answers first: Sometimes yes, sometimes no. Just about anyone. No, it must be specific with a strict 500 word limit. No, the company does not need to do anything – usually. If executed properly – undoubtedly.
Some might be surprised to learn that in the US eligibility requirements for submitting shareholder proposals are quite accessible even to modestly endowed retail investors. Generally speaking, holding $2,000 of a company’s shares for a one-year period will get your foot in the door. While many of the highest profile proposals are sponsored by large institutional investors, others are sent in by special interest groups, social activists, civic organisations and everyday citizens with a few shares and something to say.
Shareholder proposals are often motivated by a range of factors from the sophisticated (leverage to gain board access) and tactical (to raise public awareness for a specific cause) to the downright simplistic (simply stating that company X is bad).
While this level of accessibility is an emblem of shareholder democracy at work, it needs to be taken with a grain of salt.The proponent of a proposal can often reveal as much about its merits as its subject matter or corporate recipient. Because some proponents will be more interested in dialogue, while others are most concerned with capturing headlines, each company’s approach for dealing with a proposal will differ vastly. This is part of the reason the overall number of shareholder proposals a company receives is by itself meaningless. However, the volume of submissions can be an indicator of company-specific challenges or a lack of willingness to engage by either the company or proponent.
What has to happen when a shareholder proposal gains majority support? Well, most of the time nothing. Nearly all shareholder proposals filed are precatory in nature, meaning that the company is under no legal requirement to implement them regardless of the level of investor support received. A company can just ignore it and some do just that. In practice, however, even a strong minority of votes can give a proposal enough momentum to trigger serious consideration and movement from the board.
So if you are not guaranteed to get what you want when you win, how do you win? Many shareholder proposals never even go to a vote. In fact, a large percentage is withdrawn well before the annual meeting arrives. This is often the product of a compromise reached behind closed doors between the proponent and company in exchange for withdrawal from the ballot. In our view, this is almost always the preferred outcome. Often more real progress is achieved as a result of the proposals we settle than the ones which go to a vote and make headlines. We are not looking for a fight and both sides want the same thing – what is good for the company. Once most companies realise this, far greater change can be effected via diplomacy than slinging accusations across various news networks.
Will this actually make a difference? YES!
No single element of our work in the US results as consistently or effectively in precipitating rapid and significant corporate responsiveness. Despite all of the wrangling and uncertainty that surrounds the process, when utilised in a skilled manner with a focused purpose, shareholder proposals can be one of the most effective catalysts of corporate change available to investors.