Week of 8 March 2021
Investors: vote on shareholder resolutions as a way of communicating expectations – and develop voting principles to help guide you
According to the Principles for Responsible Investment’s (PRI) new report on principle-based voting, we have seen a “noticeable increase in support for environmental and social shareholder resolutions over the last few years”, and “a record number passed with majority support” in 2020. PRI urges investors to see voting on shareholder resolution as a normal means of communicating expectations as opposed to a form of escalation, and recommends investors use clear voting principles to help guide them. While a principle-based voting approach is increasingly applied to climate change and environmental priorities, PRI provides an example of how principle-based shareholder voting could also support investors’ ability to incentivize company implementation of the UN Guiding Principles. To find out more, click here.
The Principles for Responsible Investment–an initiative in partnership with the UN Environment Programme Finance Initiative and the UN Global Compact, comprising more than 3,000 financial institutions with around US$100 trillion of assets under management—launched guidance for assets owners, investment managers and proxy voting service providers on taking a “principle-based” approach to voting on shareholder resolutions. The report, Making Voting Count: How Principle-Based Voting on Shareholder Resolutions Can Contribute to Clear, Effective and Accountable Stewardship, “sets out how investors can develop and apply high-level principles to govern their use of voting on shareholder resolutions” and outlines what these principles are and why they are important.
- “The Value of Voting”: Voting on shareholder resolutions is a key channel for shareholders to communicate their values to company management. According to PRI, it strengthens company engagement by adding “accountability and effectiveness” to other communication channels like engaging in direct dialogue. While a dialogue-driven approach “allows for nuance and clarification and can help to build a rapport” with management, it can also lead to ambiguity when different shareholders express diverse perspectives—leading to uncertainty for company management on what action to take, at best, and at worst allowing companies to evade investor scrutiny and pressure to take real action.
- “Why Use Voting Principles?”: Voting principles (defined by PRI as high-level statements of investors’ voting philosophy and active ownership priorities) can help investors to advance their environmental, social and governance (ESG) principles. PRI’s guidance underscores that these principles “enable investors to consider, consult and gain buy-in for the positions they will take; they communicate clearly with companies and resolution-filers as to what kind of resolutions an investor will vote for.”
- “Applying Voting Principles”: Investors can wield their voting power in three ways to shape company behaviour: they can vote to inform, to affirm or to advise. Voting to inform is “an avenue to provide feedback on a particular issue in line with an investor’s voting principles,” while voting to affirm can demonstrate “investor interest in an issue, rather than a criticism of the company overall, and this interest can shape a company’s internal priorities and resourcing.” Voting to advise happens in cases where resolutions are non-binding and can serve as opportunities for investors to “consider the substance and directionality of the resolution, rather than spend time focusing on the intricate details.”
- “Escalation”: According to PRI, the use of escalation (i.e. voting against the election of board members, proposing new directors, voting against annual reports, and litigation) can serve as powerful tools to “address issues that are especially urgent.”
Next steps for investors
PRI recommends a few steps for investors to develop a robust principle-based voting approach:
- “Consider establishing public voting principles (or if necessary, update existing principles), making clear how they will exercise their right to vote.”
- “Seek to align their voting principles with [PRI’s] Active Ownership 2.0 [standard]– ensuring that they prioritise systemic sustainability issues and the maximisation of overall portfolio value, as well as client and beneficiary interests.”
- “Apply voting principles consistently” and “see voting on shareholder resolutions as a normal means of communicating expectations as opposed to a form of escalation.”
- For asset owners, use investment managers’ voting principles as “part of the selection, appointment and monitoring process to ensure that voting is used effectively to maximise overall value for the ultimate beneficiaries of the investment system.”
Sample principles developed by PRI