The Problem with Proxy Ballots
Many people assume that engagement with public companies through proxy voting and resolution filing is the best—if not only—way to see positive environmental, social and governance (ESG) outcomes from your investments. But for me, this approach misses a fundamental point of market-based solutions: You make investments in the most compelling ideas that reflect what you think is likely to grow; where you think the economy is headed; and yes, outcomes you support. That means using investments to favor firms that are already making innovative sustainable contributions to the global economy—not trying to Frankenstein aging, destructive, legacy companies into healthy new citizens.
Consider the recent case of a major advocacy victory with ExxonMobil. After years of effort, a shareholder advocacy coalition in January succeeded in persuading the company to place prominent atmospheric scientist and climate change expert Dr. Susan K. Avery on their board of directors. The theory is that surely Avery’s appointment signifies a change in attitudes at Exxon, and her expertise will encourage the company to incorporate climate change into its corporate strategies. Meanwhile, Exxon Mobil Corporation announced in February that its “proved reserves were 20 billion oil-equivalent barrels at year-end 2016.” That’s 20 billion barrels of oil they fully intend to extract for purposes of being sold and burned. This is what Exxon is; no new board member is going to change that. Speaking to Inside Climate News, Jamie Henn, spokesman for 350.org said, “It’s hard to believe this is little more than a PR stunt meant to pave over the decades the company spent deceiving the public about the crisis.” A cynic could conclude that shareholder activism’s largest victory to date vs. ExxonMobil adds up to a PR coup for the firm under fire.
Further, a lot of advocacy is ineffectual. For example, State Street Global Advisors has recently made news with a plan to use its proxy voting power to encourage Russel 3000 companies to place more women on their boards. What’s the plan, and will it work? Slate Money’s Felix Salmon explored this from the perspective of a Russel 3000 company with zero women on the board: “In a year’s time …if you still have zero female board members and you can’t persuade State Street that you have made moves to get more female representation on your board, then, if and when the chairman of your nominating committee gets re-nominated for a board seat, they will vote against that individual. I mean, come on.”
I’ve written elsewhere that real impact depends upon voting with your dollars for the future economy, for the actual catalysts of change, for the viable growth areas that we can reasonably expect to earn good equity growth in this era of rapid change. This means a higher level of due diligence that avoids the trap of thinking public equities are “set it and forget it.” It’s not that public equity portfolios can’t have impact, it’s just that they usually don’t.
So how do we measure the impact of a portfolio if not by activism? I say it’s about looking at the economic impact of your investments. Invest in the firms that are earning more revenue from creating environmental and social solutions; employing more people; and gaining market share from riskier and less efficient competitors. Although this may be harder to quantify than tallying up shareholder proposals, these business and economic factors have dollars behind them, and that means they equal impact at scale. At the end of the day, an economy driven by products and services that address the environmental and social risks confronting the global economy has much greater positive impact than an economy of ExxonMobil’s touting its lone climate scientist board member. The traditional metrics of business are the metrics for a reason: They measure real results. Investing in solutions providers exhibiting the best of these metrics is simply the most powerful message we can send.
Clearly, it’s more environmentally, socially and economically meaningful to vote with dollars rather than proxy ballots, but it also has greater financial potential. Today, business-as-usual investing in S&P 500 companies means buying a flat 12-month-forward earnings-per-share (EPS) estimate average, paired with a high average price-to-book valuation. On the other hand, many solutions—such as renewable energy, organic farming practices and water management—are growing EPS more rapidly, yet many of them remain undervalued. Investors can send the market a powerful signal about which investments matter and have quantitatively better odds at superior returns by opting for these solutions-creators, rather than the overvalued companies of the old economy. Faster growth at a cheaper price? This is what investment managers are supposed to be seeking, but it’s almost absent from major benchmarks.
It’s easy to keep investing in stalwarts of the old economy like the S&P 500, then reassure ourselves that shareholder engagement aimed at a few key companies within the portfolio will solve our problems. But it won’t. Let’s be honest with ourselves: We know it is time is stop making lazy and, ultimately, destructive investment decisions based on the inherited wisdom of indexing or for fear of not tracking our benchmark, and then justifying those investments by citing engagement. Addressing systemic risks—such as climate change, resource scarcity and widening inequality—means buying companies that are solving big risks and avoiding firms contributing to risk.
Shareholder advocacy can certainly have positive impact, but there’s an important caveat to remember. In the end, companies only care about shareholder proposals when they identify ones that already align with the firm’s self-interest and end goals. Limiting fossil fuel use and climate change is not in ExxonMobil’s short-term self-interest, and no number of resolutions, proxy votes or polite letters is going to change that. As such, shareholder engagement can initiate positive change within the existing goals and structures of a company, but not in a company’s fundamental reason to exist. Advocacy is most effective when practiced on firms already engaged in a business that lends itself to the goal favored by the activist. You can work with a solar company to help it improve its supply chain or to have more minority representation in leadership, but you can’t persuade an oil company not to drill.
To illustrate, join me in a short thought experiment. Imagine you’re the CEO of an oil major, say ExxonMobil. What concerns you more: A world where everyone keeps buying index funds that bump your stock price every time they do, but occasionally people file resolutions that you largely ignore? Or a world where everyone has decided simply to skip that and invest instead in what’s next, eschewing fossil fuels altogether? I know for sure which of these worlds the CEO of Exxon most fears, and that tells me all I need to know about how to have impact.