Institutional Investors and Shareholder Resolutions – A useful tool of engagement?

On 31 May 2017, Ceres.org reported that a 62% majority voted in favour of a shareholder proposal calling on ExxonMobil to ‘assess and disclose how it is preparing its business for the transition to a low-carbon future.’  This proposal was co-filed by institutional investors, including the New York State Common Retirement Fund and the Church Commissioners for England.

Similar resolutions have recently succeeded in the general meetings of Occidental Petroleum[1] and PPL Corporation.[2]  These resolutions came the month before the decision by the United States government to ‘pull out’ of the 2015 Paris Agreement.  Institutional investors were significant in all three resolutions, with large retirement funds such as the New York State Common Retirement Fund and the California Public Employees’ Retirement System dominant figures.

Under agency theory, the separation of expert corporate management from those contributing the capital of the company includes an inherent risk of self-interested behaviour by the managers of the company.  The shareholders, in addition to contributing the capital, take up a monitoring role in this system.  The realities of this economic theory are somewhat more limited.  The constitution of the company, the legislation governing incorporation or the exchange rules for publicly-listed companies may provide decision-making functions to the shareholders, but their capacity to influence the business and affairs of the company outside of those circumstances has generally been considered as extremely limited.  This corresponds to the limitations on their obligations to the company – if it is a limited liability company, the shareholder will have a defined limit to their financial obligation to the company’s creditors should the company be wound up, and do not generally owe duties to the company itself, unlike directors and officers.  Shareholders have various rights to information, and if they meet a significance threshold as set by statute (5% under the Corporations Act 2001 (Cth) s 249D), they may requisition meetings of the company or propose votes on resolutions.  Part 2F.1A of the Corporations Act also permits the shareholders (among other) to bring an action on behalf of the company, with the leave of the court.

With empirical studies suggesting that the statutory derivative action has not been a significant source of power to shareholders (31 applications across 2000-2005),[3] the shareholder resolution has risen to be a tool of engagement with the board and upper management of the company.  Large institutional investors may traditionally have had an ability to gain access to one-on-one meetings with senior management, which has attracted the interest of various jurisdictions in relation to their role in corporate governance.  The Cadbury Report explicitly recommended that ‘[i]nstitutional investors should encourage regular, systematic contact at senior executive level to exchange views and information on strategy, performance, board membership and quality of management’.[4]  The institutional investors’ use of the shareholder requisitioned meeting and shareholder resolutions is on the rise, on the basis of the examples above, particularly in market sectors such as oil and resource industries under pressure from significant public concerns about climate change.

 

Contributed by Dr Beth Nosworthy

 

[1]               See reporting at http://www.reuters.com/article/us-blackrock-occidental-climate-idUSKBN1882AA

[2]               See reporting at http://www.mcall.com/business/energy/-mc-ppl-shareholder-annual-meeting–20170517-story.html

[3]               Ramsay & Saunders, Litigation by Shareholders and Directors: an Empirical Study of the Statutory Derivative Action (Centre for Corporate Law and Securities Regulation, 2006) 24.

[4]               Financial Aspects of Corporate Governance (1992, ‘the Cadbury Report’), 6.11.  The Myners Report (2001), Myners Review (2004) and Walker Review (2009) all focused on the role of the institutional investor.

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