This paper guides investors as to how they can use shareholder proposals to drive improvements at investee companies on matters related to environmental, social and governance (ESG) issues.
Country-specific factsheets have also been developed to provide an overview of the key legal and technical processes related to filing a shareholder proposal in Australia, Canada, France, Germany, Japan, South Africa, the UK and the US.
A shareholder proposal is a resolution that is put forward by a single shareholder, or group of shareholders, to a company board, asking for a matter to be voted upon at the company’s Annual General Meeting (AGM). It is an important stewardship tool that focuses efforts on a concrete call to action.
Shareholder proposals are an important corporate engagement mechanism. They allow investors to use their formal rights as owners to publicly and transparently escalate important matters, and directly interact with a company’s board.
The number of shareholder proposals focused on ESG issues has grown dramatically and is part of a wider trend of growing investor stewardship. There are several drivers, including the increase in stewardship codes requiring investors to disclose how they have exercised their voting rights, and pressure on investors to be responsible stewards of their beneficiaries’ capital.
Filing a shareholder proposal usually entails the following steps:
Shareholder proposals: part of a stewardship strategy
Filing a shareholder proposal should be in line with an investor’s overall stewardship strategy, objectives and voting principles / policies. This means determining when, how and why filing a shareholder proposal will meet or contribute to the investor’s broader stewardship objectives.
Filing shareholder proposals is just one of the many stewardship tools or uses of influence available to investors. Investors looking to influence a company’s ESG policies and practices should decide which combination of tools are most likely to influence a company’s behaviour and / or drive progress on sustainability outcomes.
When filing shareholder proposals, investors’ contribution to positive sustainability outcomes can be maximised where there is alignment between:
- the issue / topic (prioritising ESG issues that relate to systematic risks or those where their portfolio generates the most significant sustainability outcomes)
- the target company / companies (identifying target companies where there is the greatest opportunity to trigger significant improvements in sustainability performance)
- the level of ambition (considering how a proposal can mitigate systematic risks and drive progress on sustainability outcomes rather than only seeking improvements on disclosures and current practice)
- the tools (considering whether a shareholder proposal is the right tool, and where it may need to be supplemented by a combination of other levers)
Shareholder rights and eligibility
Investors wishing to file a shareholder proposal should be aware of aspects including: the investors’ right to file; the constraints on the scope and content of proposals; the rules set by securities regulators and exchanges; the company’s articles of association / incorporation and any other constitutional documents that shape how the resolution can be presented; and where relevant, case law that may define shareholders’ powers and rights in their interactions with company management.
Legislative frameworks can typically be divided into two categories: 1) flexible frameworks in which shareholders have a clear right to submit a proposal and relative freedom to present a matter to the board; and 2) restrictive frameworks, in which shareholder proposals must take the form of amendments to the company’s constitution or ‘bylaws’ via special resolution. Generally, these proposals require higher levels of shareholder support to pass, because if passed they often take binding effect as part of the company’s constitution or articles of association.
Voting on resolutions can create binding or non-binding outcomes for the company. Any special resolution passed by shareholders becomes part of a company’s constitution and creates binding commitments. Binding votes are the most forceful form of driving change as a company is legally bound to act if the vote is passed.
Non-binding advisory votes, which are most commonly used for shareholder resolutions in the US and Canada, are less forceful as companies are not legally bound to implement the proposal (regardless of the level of support for the resolution). However, wilfully ignoring a strong vote on a non-binding resolution is a signal of poor shareholder relations. It carries reputational risks for the company and can result in investors and stakeholders deploying escalation measures in the following proxy season.
Once investors understand the legal pathway for filing a shareholder proposal, investors must verify that they are eligible to file. This includes understanding what the threshold is at which a shareholder may file a proposal (with reference to their shareholding) and whether there are any rules regarding the time period that the investor must have held their shares.
Drafting a shareholder proposal
The importance of drafting a procedurally correct, comprehensive and persuasive proposal cannot be underestimated. Whilst the approach taken will be adapted to the market in which the target company operates, some general guidelines are set out below.
- Understand the legislative requirements for the relevant market and company
- Connect the proposal ask to the company’s circumstances
- Back up the proposal with thorough research and understanding of the issue
- Review investment peers’ positions to understand how they will examine ESG proposals and the type of proposal wording they tend to support
- Convey investor affirmation by ensuring the proposal language is constructive and collaborative
- Have one clear focus and consistent ask throughout the proposal with a clear narrative
- Set out the case for why the proposal is relevant and important to investors
- Make the ask achievable and balance the achievability of the ask with the urgency and severity of the issue at hand
- Understand the investor role and take care to avoid overstepping these boundaries
Filing a shareholder proposal
A shareholder proposal submission must be received by the company in good time. Circulation of the AGM notice varies across jurisdictions and company constitutions. So, it is important to seek confirmation of filing dates from company documentation (e.g., the company’s previous year’s proxy statement) and through contact with the company.
There are some reasons why companies may be permitted to reject or appeal a shareholder proposal from being included on the ballot papers, besides procedural errors in the filing. In some markets, it is possible to appeal when a company rejects a proposal.
Co-filing a shareholder proposal
Co-filing involves shareholders working together to file a proposal. Reasons to co-file can include to meet the legal threshold for filing a proposal; to reduce liquidity constraints where share ownership or share-blocking rules exist; to help first-time filers navigate the challenges of drafting and filing a proposal; and to demonstrate that a proposal has wide-scale support, and possibly endow the proposal with more legitimacy. Some general guidelines for co-filing are set out below.
- Obtain funding early on and understand how co-filing group members can contribute to costs such as those associated with legal drafting
- Be clear on rules regarding acting in concert and anti-trust in the respective jurisdictions
- Go above and beyond the threshold level required to allow for any changes in stock market values or challenges to demonstrating share ownership
- Target credible co-filers with a demonstrable track record of preparing and submitting thoughtful shareholder proposals, and organisations with experience mobilising support for resolutions
- Co-ordinate and agree on the detail of a draft resolution
- Ensure every co-filer has the correct relevant paperwork well in advance of deadline dates
Companies often look to negotiate an agreement with filers in return for the proposal being withdrawn. Companies may simply agree to the requested action, look to negotiate on a reduced action, or offer an alternative such as submitting a management-sponsored proposal on the topic. Whether investors are prepared to negotiate, and what they are prepared to accept in return for withdrawing a resolution, depends on their engagement intentions and desired outcomes.
Investors who agree to withdraw a resolution following a corporate commitment should track the company’s progress and be prepared to escalate if the company fails to deliver on its commitment. It is advisable that investors request that any commitments made during private negotiations are made public so companies can be held accountable.
Gathering support for a shareholder proposal
Investors can consider adopting some of the below recommendations to gather more support for a shareholder proposal, whilst also considering market rules and legislation (such as proxy solicitation in the US) that may restrict the use of some these recommendations.
- Prepare and circulate supplementary material that provides investors with more background to the proposal
- Use investor platforms, such as the PRI’s collaboration platform and resolution database to promote shareholder proposals amongst a large group of investors
- Engage with proxy advisers to ensure they are informed about the proposal and its relevance to investors, and that they make a recommendation based on this information
- Engage directly with individual shareholders and consider prioritising outreach to the company’s largest shareholders
- If available, publicise the views of beneficiaries where this is relevant to the ask of the proposal
- Develop a media plan early and aim to engage with all relevant outlets and channels
- Work with other proponents who are filing on a similar topic at other companies
At the annual general meeting
A company’s AGM is where the board and management engage with shareholders in a public forum to present a summary of the company’s performance and strategic plan. For those filing shareholder resolutions, AGMs provide the opportunity to promote their resolution, raise the profile of the issues underpinning the resolution and engage directly with the board. Investors should, therefore, incorporate the AGM into their engagement strategy. The meeting documents generally set out full instructions on how to attend an AGM. The filers of resolutions may also consider contacting the company beforehand to confirm due process for attending and presenting a question.
In some markets, the proponents of a proposal (or an authorised representative of a proponent) are required to attend the AGM to authenticate the submission. Proponents may also be asked to make a short statement in support of the proposal. Filers should be clear on these rules.
After the vote
After the AGM, the company will publish the voting results. The filers of a shareholder resolution should have a post-vote engagement plan, which includes tracking the company’s progress in implementing the proposal ask if the vote is successful or deciding on next steps if the vote is unsuccessful. Filers should also consider having a media plan, which includes commenting on the outcomes achieved and the next steps. This post-vote outreach is important to maintain the momentum of the proposal, to continue gathering support on the issue and hold the company accountable to investors’ expectations.
Investors may also consider filing a similar shareholder proposal at the company in following years. Whether this is possible depends on the jurisdiction.
CREDITS | Authors: Lyndsey Hurley, Dr Rory Sullivan, Chronos Sustainability, Chloe Horne, PRI | Contributors: Emmet McNamee, Paul Chandler, Carly Greenberg, Nogoye Dieng | Editor: Rachael Revesz | Design: Alejandro De La Peza
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