Once an investor group has identified one or more ESG issues and agreed to engage collaboratively to address them, the process of collaborative shareholder dialogue with companies typically follows a series of stages.
Stage 1: Preparation
Research and education
Research is essential to develop a strong business case to support the engagement by identifying the alignment between the concerns of investors (with their financial interests) and those of the target companies (focused on competitive advantage, reputation and survival). Where group members have different levels of expertise on a topic, doing research or having calls with external experts can be a valuable way to build common understanding before initiating dialogue. As part of the research process, the group should:
- Collect information from all relevant sources (i.e., experts, service providers, brokers, academics, NGOs, and media covering the topic) to gain a full picture of the issue.
- Reach a common view on the importance of the topic, its materiality for companies and investors, and which companies are leaders and laggards.
- Review existing material from companies and any external benchmarks or indices to determine what each company is already doing with respect to the issue.
- Identify appropriate benchmarks or examples of good practice by peer companies to draw upon during dialogues.
- Determine what the group will ask companies to do - for example, adopt a policy in line with international standards or guidelines, set objectives and targets to improve performance, or disclose more information.
It is essential for the investor group to set clear short, medium and long-term goals for improvements in target companies’ ESG performance and/or disclosure that it expects to result from the dialogue, and to review those goals regularly to assess its progress. Once an investor group has set its goals, it should establish a clear action plan and timeline, including all process milestones and engagement strategies.
Identifying the right corporate representatives
Depending on practices within the local market and whether or not members of the group have existing relationships with companies, investors may be able to have a direct dialogue with senior or executive management, or may have to start by contacting the investor relations department. Regardless of who the first point of contact is, investors should identify an internal champion who is able to effectively communicate investors’ views within the company.
While the seniority of company representatives is undoubtedly a consideration in the engagement strategy, it is also important that the company representatives have extensive knowledge of the ESG issues being raised in order to ensure that the dialogue is meaningful and productive. Managers with specific technical expertise on the topic can often provide useful information on operations, available data and current practices. However, it is also important that the issues raised are communicated to senior company executives. This is sometimes achieved by the investors’ interlocutors following up internally or by the investors themselves having subsequent meetings with top management or board-level representatives with decision-making power.
Normally mainstream investors do not ask questions on sustainability topics. If they do, it is connected with business, efficiency, competitive advantage. In contrast, dedicated SRI analysts are only interested in sustainability data and do not ask any questions related to the company’s financial performance. Ideally, both questions would come together as business questions. The trend to integrate these two type of questions is emerging.
Mattias Olsson, Vice President, Investor Relations, Atlas Copco
Stage 2: Dialogue
After acquiring enough information and knowledge about the target companies and the issues of concern, the investor group can embark on dialogue with company management.
Groups of investors often opt to make initial contact with companies by sending a joint letter on behalf of the group. In other instances, investors may produce a group position paper on an issue, using that as a basis to make contact with companies. Investor groups may also agree on common talking points, set out in an email or phone call to a company representative, as the basis for a meeting request.
Where a group opts to make contact via an initial letter, it is important to ensure that the letter is customised to address the individual company fs specific situation and context, and to show awareness of the companies f existing policies and practices in relation to the issue.
To enhance the effectiveness of a letter to a company, investors should consider the following:
Consider the appropriate audience for the correspondence given the particular request and relevant practices within the market. Recipients may include individuals at different levels of the company depending on circumstances:
- CEO or Board Chairperson and/or board members
- Investor Relations department
- Individuals in senior decision-making and strategic oversight capacity
- Practitioners at the implementation/operational level
- CSR/sustainability department
- The group’s purpose in contacting the company should be succinctly stated, whether it is to request information, a meeting, or an action.
- Establish why the issues raised are of concern, and how they relate to shareholder value and company interests.
- Recognise any actions the company has previously taken.
- Demonstrate knowledge of the issue at hand.
- Incorporate recommendations alongside requests for information.
- Ensure the tone and format of the correspondence are appropriate to the local market.
- At this early stage investors are often recommending consideration of certain policies or practices, and the tone should be polite and nonconfrontational.
- It may also be useful to invite the company to an open dialogue and to offer its feedback.
- Have representatives from each member of the investor group sign the letter. Include signatures of high-level representatives from the collaborating organisations, such as CEOs or department heads.
- The investor group should indicate their assets under management and, ideally, their total holdings in the company.
- Provide a contact point on behalf of the group (i.e., a representative from a lead investor or third party coordinator).
Writing letters alone has limited impact. Concerted and punctual followup is almost always a prerequisite to securing change from companies. This usually takes the form of phone calls or requests for meetings with company representatives. From the start of the dialogue, it is important for investors to:
Speak with one voice
- Prepare prior to meetings, and share opinions on the issues to be raised in order to form an agreed position.
- Appoint a person in advance who can steer the dialogue during meetings with management.
Ensure the right company representatives join the meeting
- Once the group has identified the most appropriate people with whom to engage, emphasise the importance of those people attending.
Set and maintain a clear and polite tone
- Begin with positive recognition of previous company action and show appreciation of their willingness to engage.
- Maintain cultural sensitivity to the market in which the companies operate.
Allow for exchanges of views
- Always provide companies with the opportunity to raise questions, ask for feedback and receive suggestions from investors.
- Consider joining roundtable discussions or more formal investor-company working groups run by third party organisations (e.g. the UN Global Compact) to exchange opinions and find common solutions on specific ESG issues. Using the Chatham House rule may facilitate a more open conversation.
In addition to the follow up activities above, engagement with policymakers in the investor or company’s country can be a useful tactic for investors to consider alongside company dialogues. Government policies, legislation and formal endorsements can enable companies to adopt relevant changes.
Stage 3: Escalation
If dialogue does not lead to a satisfactory response, the collaborating investors can consider taking further measures. When escalating, collaborators are able to leverage their collective power. Initially this can be articulated subtly, but if unsuccessful, it can be done more overtly to push companies to consider the ESG issues under discussion. Beginning with smaller steps, there are various tactics that can be considered:
One of the initial actions that can be taken is simply applying or reiterating deadlines in requests to companies. This can increase the perceived level of urgency and encourage a response from management.
Being increasingly assertive
The tone of the dialogue can also become more assertive to reflect the importance of the issue for investors. If initial contacts with the companies have been between ESG specialists or fund managers and investor relations, the group could raise the issue with the Chair or a board representatives, or seek a peer-to-peer meeting, for example between senior representatives of the investor group and the companies.
Withholding support from the board of directors or management recommendations through proxy voting can help gain the attention of unresponsive companies and express investors’ discontent. The intention to vote against or abstain on management recommendations can be conveyed to a company in advance of its AGM as a means to stimulate dialogue ahead of the meeting.
Asking a question at the AGM
As with proxy voting, raising a question at companies’ AGMs attracts attention to the issue. Investors may want to share the question with companies prior to the AGM, to enable a more informed response and better dialogue.
Filing a shareholder resolution
- Filing resolutions at AGMs attracts the attention of companies’ management in a more formal and public way. The threat of filing a resolution may be more effective than doing so; many resolutions are withdrawn after management commits to further dialogue. Before moving ahead with this tactic, consider the following:
- Local knowledge is important. Filing shareholder resolutions may be a common practice in some markets while in others it can be perceived as confrontational and aggressive.
- It is important to understand local legislative rules that may hinder the exercise of shareholder powers and determine the power of proxy voting (for example, binding versus advisory votes).
- Letting companies know of the intention to file a resolution can stimulate dialogue. Companies are often keen to ensure that there are not unresolved issues on the agenda at their AGM.
- Investors can publicise shareholder resolutions or the intention to vote against management to build further support outside of the investor group.
- As with divestment, where one or a few members of a group file a resolution with a company, this may negatively impact the dialogue of group members choosing not to file. This should be carefully discussed within the group and communicated to the company.
Issuing media statements
Statements to the media about a company’s relatively poor ESG performance in comparison to its peers– and how it is of concern to investors – applies pressure to unresponsive companies and can be a trigger for them to take action.
However, some companies may react poorly to negative media statements, impeding further dialogue.
Concerns may also be raised through alerts or communication with other investors or investor groups in order to build a broader base of interest among shareholders. In either instance, it is important to ensure any media or public statements regarding the company are based on sound information. In some cases, it may make sense to first seek legal advice to ensure statements do not run the risk of being defamatory.
Calling an extraordinary meeting
In some countries, a major investor or group of investors that owns more than a certain percentage of the company’s shares (usually between 5% and 20%) can call an extraordinary meeting to discuss a major issue with management or attempt to vote out some or all the members of the board.
Making a formal complaint to a regulator
If the investors believe the company has breached a law or regulation, they can raise a complaint with the local regulator. Because of the gravity of this approach, this tactic would typically end the engagement with the company, regardless of whether or not the regulator decides to pursue the issue.
Communicating an intention to divest is the final step in the escalation process. Once divested, shareholders lose their rights and influence, though investors may retain some influence if they are willing to re-invest if and when the company has addressed the issue.
Divestment has the potential to send a very strong signal to the market if the rationale for divestment is clearly communicated. Where individual members of a group opt to divest, this should be communicated carefully to the company to avoid damaging trust between the company and other investors in the group who may wish to continue dialogue.
Stage 4: Conclusion
Investors might opt to conclude a collaborative engagement once the desired outcomes have been achieved, if persistent attempts at dialogue have proven unsuccessful or where changes in external circumstances allay investors’ concerns (for example, following implementation of a new regulation).
As the engagement concludes, the investor group should identify whether the companies have fulfilled the steps laid out at the beginning of the engagement in terms of policies, implementation activities and transparency on the ESG issues of concern.
Evaluating evaluating engagement outcomes
As engagements can span several months or years, it is useful to measure progress and outcomes during and after an engagement. This should cover both the investor group fs planned activities as well as the companies f response and, if all goes according to plan, its relevant improvements on the ESG issue.
For the investor group, the work plan and relevant timeline define the process milestones for the engagement. The progress of the initiative can be measured against those milestones to identify any delay. Outcome measurements related to company performance should be based on clear, measurable objectives set at the outset, for example, adopting a policy, setting targets, improving performance or improving disclosure. External indices or disclosure initiatives such as CDP or CDP Water Disclosure can also provide evidence of whether the companies have improved their performance. In some cases, outcomes may not be as easily quantifiable. More processorientated and qualitative evaluation questions during the engagement may include:
- Is the company open to dialogue?
- What is the company willing to discuss?
- What steps is the company willing to take?
- Has more public information been provided on the company fs current practices?
Regularly reviewing companies’ commitments and, ultimately, improvements in ESG performance can help assess progress over time.
Engagement outcomes and share performance
Some investors measure the outcomes of shareholder engagement by share price performance of target companies. This can be valid where the engagement results in major changes to governance or strategy. It can also be valid over the longer term. However, it is important to acknowledge that a range of factors affect short term share prices, and direct correlation with ESG performance is not often evident. Many ESG issues are drivers of long-term value, or relate to risks that need to be managed better. Therefore, it is often more appropriate to define the success of engagement in relation to the change in corporate ESG performance or disclosure that the investors set out to achieve, as described above.
Notwithstanding the sensitivities associated with ‘going public’, sharing the engagement’s outcomes with the broader investor and corporate communities has several benefits. Highlighting the issue and positive outcomes can demonstrate to other companies in that sector that investors take these issues seriously, which itself encourages companies to improve their performance. Sharing what has worked in one area can also encourage and inspire investors to engage in other areas. The PRI Clearinghouse typically summarises outcomes against the elements of its evaluation framework. While in some cases this information would be confidential, in other cases investor groups may feel it is appropriate to release the overall results of the engagement, findings and lessons learned to the media and the broader community.
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