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Holly Testa, CFP®, AIF® | Business Development Consultant

Few investors think of themselves as part owners of large multinational companies, but many of us are. We may work with an investment advisor who helps us invest our money in portfolios of stocks or mutual funds, or we might contribute to a 401(k) plan that owns stock or stock funds.

The idea that a small shareholder can influence the behavior of a behemoth corporation may seem like an idealistic pipe dream, but all shareholders have the right to have their voices heard in the corporate boardroom. Think of it as democracy in action in corporate America.

Shareholder Advocacy Basics

Shareholders exerting influence on corporations is known as shareholder advocacy. It is simply a process of effectively and persuasively communicating with corporate management, other stakeholders, policy makers, and customers. There are several ways in which this communication takes place.

Proxy Voting. Shareholders of publicly traded corporations may vote on resolutions presented at the annual general meeting. They may attend, but most choose to vote “by proxy,” via mail, phone, or online. Proposals are placed on the ballot by management or by shareholders. Management proposals typically cover “routine” items, such as electing directors and approving auditors. Shareholder resolutions often cover environment, social, and governance matters.

Many investors delegate proxy voting responsibility to an investment advisor or mutual fund. If you do, find out how proxies will be voted on your behalf. Mutual funds are now required to disclose to their clients how they vote each proxy. Some institutions, including First Affirmative, have developed proxy voting guidelines that focus on key issues of corporate governance and social responsibility.

Many investment managers, including large institutional and mutual fund managers, go along with company management, or don’t vote at all. An un-cast ballot is automatically voted in favor of the management recommendation, effectively stacking the deck in favor of management.

Voting your proxy is important! However, reading through complex proxy documents and voting shares can seem an overwhelming chore. Many shareholders throw out the materials in frustration, thus giving their vote to management.

Individual stock owners may feel that their vote could not possibly make a difference, but it is estimated that individuals own around 30% of all stock shares, representing a significant voting bloc. There are now several websites available to help individuals understand proxy issues and vote their stock and mutual fund shares effectively. Proxy Democracy, Shareowners.org, and MoxyVote provide shareholders with access to information on how like-minded investment managers, non-profit organizations, and unions plan to vote. These sites offer proxy voting support and opportunities for getting involved directly in issues by teaming up with other activist groups.

Dialogue. Shareholder advocacy starts with the most human of approaches—a conversation! Corporations seem unapproachable, but they are made up of people, after all. Dialogue avoids the confrontational approach of shareholder resolutions, and many corporations see the wisdom of working with shareholders to improve policies and procedures. Investment managers representing large blocks of stock can have significant influence. Management will often meet in person to negotiate, particularly if investor concerns are shown to affect financial or reputational performance.

Shareholder Resolutions. When dialogue fails, it’s time to bring concerns to the shareholders. Most shareholders have the right to put resolutions on the company ballot. Shareholder resolutions can address any issue that can adversely impact the long-term well being of the company, its stakeholders, communities, and the planet. Resolutions may also propose changes to company practices or policies.

Unfortunately, virtually all shareholder resolutions are non-binding, meaning that companies can choose to ignore the direction provided by shareholders. However, companies recognize the consequences of ignoring shareholder input, so non-binding resolutions—especially when they represent a large percentage of the vote—can be a powerful tool in the process of changing corporate behavior.

Divestment. When all else fails, investors may sell their shares. This technique has been used to help stop companies from doing business with repressive governments, such as in South Africa in the 1980s and, more recently, in Burma and Sudan. Divesting means losing your voice as a shareholder, so in order to be most effective, divestment needs to be accompanied by publicity that brings pressure to bear on the company and encourages others to divest.

Public Policy Engagement

The behavior of corporations is governed by many rules formulated by government bodies and agencies. Public policy makers at all levels have a tremendous impact on the development and enforcement of environmental regulations and the establishment of long-term public policy objectives. Advocates work to advance public policies that support their goals. Campaigns include letters, petitions, position papers making specific recommendations, and face-to-face conversations with legislators and government agency personnel.

Public policy engagement is a long-term commitment, as policy makers hear many competing voices—corporations, business trade organizations, non-profits, and the public—all advocating for different policies. Elections change the political landscape and alter priorities set by government agencies, sometimes very quickly.

An example of successful public policy engagement that had a direct effect on shareholder rights was a recent campaign to reverse the SEC position on “risk evaluation” shareholder resolutions. The SEC had routinely disallowed resolutions that asked companies to address the risks associated with significant social and environmental issues. This prevented shareholders from even asking companies to address these issues and allowed companies to avoid disclosing relevant information about risks to financial and reputational health. The SEC was persuaded to change course and now shareholders can file resolutions asking for management to disclose risks to the company associated with a broad range of issues—from climate change to human rights to health care.

Coalitions Can Make All the Difference

A single shareholder can indeed feel like “David” when faced with a “Goliath” multinational corporation. Forming a coalition can increase the impact of a shareholder proposal and improve the chances of success. Coalitions bring together the legal, technical, and communication expertise necessary for a successful campaign.

These formal coalitions establish priorities, coordinate letter writing campaigns, file resolutions at targeted companies, and manage campaign publicity. The Advocacy and Public Policy Group of the Social Investment Forum, The Interfaith Center On Corporate Responsibility (ICCR), and Ceres have differing priorities and memberships, but all focus on corporate sustainability by demanding accountability, disclosure, and continuous improvement of environmental and social performance. The Investor Environmental Health Network encourages companies to reduce and eliminate toxic chemicals in their products.

What Does Success Look Like?

Shareholder advocates used to feel like the proverbial voice in the wilderness; but today, more investors are evolving from passive holders of stock to determined shareholder activists. There is growing awareness that public companies have not been accountable to shareholders. Short-term desire for quick profits is endangering the long-term viability of many companies and the global community in which they operate. The recent mass failure of banks due to lax lending practices, weak corporate governance, and weak regulatory oversight illustrates the problem.

Corporations are becoming more responsive to shareholder demands. In 2009, a record 722 requests for action were gathered in the ICCR activism database. From those requests emerged 390 resolutions that were ultimately filed by ICCR members; the rest led to meaningful dialogues with companies. In 332 cases, company management took decisive enough action that it was not necessary to file a resolution.

Moving Into the Mainstream

Particularly gratifying for long-time shareholder advocates are the votes from mainstream investors in favor of shareholder resolutions rather than with company management. The majority of shareholder resolutions dealing with corporate governance issues, such as executive compensation, received more than 40% of shareholder votes last year. Some resolutions are even garnering a majority of votes. Collectively, the voices of shareholder advocates are becoming a powerful force for positive change.

The views expressed in Deeper Thinking are those of First Affirmative and may not be consistent with the views of individual investment advisors, broker-dealers, or RIA firms doing business with First Affirmative. Mention of a specific company or security is not a recommendation to buy or sell that security. For information regarding the suitability of any investment for your portfolio, please contact your financial advisor.