Shareholder power and responsibilities and Engagement policies with active institutional investors
The power of shareholders varies by country based on a country’s laws and regulations. While the specifics vary by country, in general shareholders can exercise power by proposing resolutions and directors, engaging in proxy fights, and how they vote. Moreover, with short holding periods and high ownership rates of index funds and EFTs, many shareholders are not interested in governance.
However, there are still engaged, responsible shareholders who behave as owners by holding stocks long term and by actively engaging with firm management.
The power of shareholders varies by country, by company and by shareholder
A common view is that shareholders are passive and have lost power, and that power has transferred to boards. While in certain cases this may be true, in some countries shareholders have greater legal protection and also more power. Ways that shareholders can exercise power include:
- In private: Shareholders can meet with management, raise difficult questions and express their views.
- In public: Shareholders can use the media, engage in proxy fights and submit resolutions on topics such as say-on-pay.
- Voting: Shareholders can propose and vote for resolutions; it is easier to oppose management by proposing resolutions than vote against management-sponsored resolutions, as about 95% pass. They can also try to build alliances to vote for/against a resolution.
- Proposing directors: Depending on the country, shareholders may be able to nominate directors.
Changes in market conditions require rethinking the rights and obligations of shareholders
The OECD has published a study on the election and remuneration of directors in various countries. This study shows that while shareholders can express dissatisfaction in several ways, it is rare for shareholders to exercise voting rights, and a proxy fight is difficult and expensive.
As a result, what is left to shareholders is to approve or reject the board. However, rules vary from country to country: in some, shareholders can nominate directors, in others shareholders are not allowed to nominate directors and in others still, the ownership threshold to nominate may be up to 10%. In addition, contesting the election of directors is rare. Changes in the market require rethinking the rights and obligations of shareholders.
Key shareholder areas include:
- Board profiling: A trend among companies in selecting directors is to create a specific profile for the skills and experiences desired in a new director.
- Lack of voting: Increasingly, asset owners are index funds, ETFs or foreign investors that have little interest in a company’s governance. In some countries asset owners are actually not allowed to vote.
- Shorter holding periods: Contributing to the lack of interest in voting and governance is shorter holding periods by investors, who aren’t behaving as interested long-term investors. Mr. Lehuedé said that the average holding period of a stock in 1991 was 2‒3 years; today on average, an NYSE stock is held for just five days.
Deeply engaged asset owners can have much power
Caisse des Dépôts et Consignations invests $11 billion in European equities, which it holds long term, for an average of 5 – 7 years, with fund managers taking a bottom-up approach, conducting industry analysis and engaging in thorough due diligence. While the firm remains a minority owner, fund managers still meet once yearly with the top management of every company they own. These occasions are not always friendly, as fund managers, accredited with the right to vote and attend shareholder meetings, do ask hard questions.
This “soft engagement” positions the firm as a responsible investor, pushes companies to incorporate corporate governance as a value and promotes the firm’s own values.
And what about active institutional investors?
Institutional investors, who care about good governance and are increasingly factoring governance into their investment decisions, engage with the companies they own through direct interactions and by voting. Moreover, it is in the best interests of companies to engage with their shareholders, actively getting to know who their shareholders are, building a relationship with them and explaining their governance practices and customizing communication.
NBIM sees corporate governance as an important part of its investment decisions
Norges Bank Investment Management (NBIM) is the asset manager of Norway’s sovereign wealth fund, with $650 billion in assets, 60% of which are invested in equities, 30% in fixed income and 5% in real estate. NBIM is a long-term investor with a goal of building and safeguarding value over the next 30 years. NBIM seeks moderate risk and high returns.
As a long-term investor, NBIM buys companies that its fund managers believe in and strives to build trust-based relationships with its companies. Given that fund managers evaluate companies, they are expected to integrate corporate governance into their analysis.
NBIM is a top 5 shareholder in 800 companies and a top 10 shareholder in 2,400 companies, and, overall, owns shares in 8,000 companies worldwide. Because of its size and prominence, NBIM sees its responsibility to be an engaged investor.
Key factors for NBIM are:
- Transparency: NBIM is a transparent investor and discloses in its own quarterly reports on how it voted. It demands transparency in the companies in which it invests.
- Board accountability: NBIM expects to see high levels of accountability at board level in the companies in which it invests.
Once NBIM owns shares in a company, it exercises its rights as a shareholder primarily through voting and all funds at NBIM that own shares in a company come together to decide how to vote. In deciding how to vote, NBIM makes its own decision and does not rely on checklists from an organization such as ISS. NBIM attends shareholder meetings and engages with companies directly where appropriate. Moreover, when interacting with a company, NBIM expects to hear from the company why they should vote a certain way.
There are many steps that corporations can take to improve their corporate governance and how their governance is perceived by investors
John C. Wilcox, CEO of Sodali, remarks that companies that do not engage with shareholders get the shareholders they deserve. For him, engagement is not rocket science and recommends several simple, though effective steps to take:
- Benchmarking corporate governance against peers
- Explaining the business rationale for governance
- Analyzing who the firm’s shareholders are. Know your audience and listen to them.
- Developing a holistic investor relations program and viewing the shareholders meeting as a governance event.
Professor Patricia Charléty, ESSEC Business School
Mr. Bernard Icard, Head of Equity Proprietary Investment, Caisse des Dépôts et Consignations
Mr. Hector Lehuedé, Senior Policy Analyst, OECD
Professor B. Espen Eckbo, Tuck School of Business at Dartmouth
Mr. Vegard Torsnes, Ownership Policy Group, Norges Bank Investment Management (NBIM)
Mr. John C. Wilcox, CEO, Sodali
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