August 25, 2021

Beta Stewardship: How “Universal Ownership” Could Affect Proxy Season

Companies appear to remain committed to shareholder primacy: delivering a profit to shareholders in either the short term or the long term. But is that still what shareholders want? Since shareholders aren’t a monolith, there are mixed messages.

While traditional shareholder activists still seem poised to push for maximum shareholder returns from individual companies, big asset managers and pension funds have been signaling that they’re maybe less focused these days on returns from individual companies, and more concerned with the performance of their overall portfolio. That means “ESG” performance takes on more importance, because it reduces systemic costs & risks that could result from irresponsible behavior by an individual company. Even if that company is outperforming financially, its negative actions drag down the returns for the rest of the portfolio.

This inaugural annual report from The Shareholder Commons calls that phenomenon “beta stewardship” – and it walks through shareholder engagement campaigns and proposals that are advancing the concept. It is a perspective to keep in mind during off-season engagements, and means that it’s more important than ever to monitor and understand your shareholder base. Here are some additional points from the report to know as you prepare for your next proxy season:

TSC supported 24 shareholder resolutions at 23 companies during the 2021 proxy season. One proposal was withdrawn after reaching an agreement with the company. Of the remaining 23 proposals, three received at least 10% support from shareholders, six were excluded by the Securities and Exchange Commission (SEC), and seven reached the 3% threshold necessary for us to be able to provisionally file again in 2022. The complete results of these resolutions are included in the chart on page 10.

We worked on two distinct types of shareholder resolutions:

1. Disclosure of the costs imposed by society (i.e., externalized) by a company’s contribution to specific systemic risks. These risks include antimicrobial resistance, inequality, corporate governance failures, public health threats, and inadequate voting policies.

It’s our hope that these disclosures will provide the basis for a “gap analysis,” in which companies compare their ability to reduce a negative social or environmental impact under the constraint of optimizing their internal financial returns with their ability to reduce that impact if optimizing for systemic health. The goal behind disclosure is to provide investors, regulators, and policymakers with information needed to address systemic risks and to illustrate the gap between current investment perspectives and what could be achieved under a systems-first model.

2. Conversion to a “public benefit corporation” structure. PBCs are a type of for-profit entity that allows the directors of a company to better serve the interests of diversified shareholders by prioritizing impacts on society, workers, communities, and the environment when those impacts are more likely to be important to such investors than the financial returns of that company.

We specifically targeted companies that were signatories to the Business Roundtable Statement on the “Purpose of a Corporation,” which suggested corporate America is refocusing on the interests of stakeholders. The goal behind these proposals is to demonstrate that investors can be aligned with a more stakeholder-oriented management style, but that such a re-alignment requires understanding the fiduciary duty to shareholders as encompassing the full range of their interests, including as diversified investors.

The report includes case studies of engagements on these proposals and says that TSC will continue its work in the coming year. TSC also notes that because its proposals are focused on portfolio-level effects, neither ISS nor Glass Lewis supported any of them in 2021.

Last week, United Therapeutics filed this proxy statement for a special meeting to approve the company’s conversion to a public benefit corporation. I taped a podcast earlier this year with Meaghan Nelson about Veeva Systems’ conversion.

Liz Dunshee