The Art (and Science) of Shareholder Engagement

Until 1970, the only shareholder resolutions permitted by the Securities and Exchange Commission (SEC) addressed corporate governance. But when a federal court allowed a resolution addressing the sale of napalm to be included on the proxy ballot at Dow Chemical, the decision unleashed a flood of resolutions taking up social and environmental issues. In the 45 years since, the waters have only continued to rise, and such resolutions now number in the many hundreds every proxy season. 

Out of this cauldron of change was born the Interfaith Center on Corporate Responsibility. In 1971, the Episcopal Church filed a resolution with General Motors, requesting that it cease doing business in apartheid South Africa. Not surprisingly for a groundbreaking initiative, the resolution received little support from shareholders accustomed to rubber-stamping the position of management; but it did contribute to the global social movement that eventually helped end the apartheid regime in that country. 

Tim Smith, the first Executive Director of ICCR and now the Director of ESG Shareowner Engagement at Walden Asset Management, said of the early years of ICCR’s corporate engagement, “For the most part, we really filed the shareholder resolution and then had no contact with the company until we went to the stockholder meeting. And in many cases, it was just giving your speech and waiting for the results.”

But now, as current Executive Director Laura Berry commented, “The only real win is withdrawn resolutions, when companies look to us as a focus group for risk management.” How ICCR members have been so successful in conducting corporate dialogues is the subject of a research paper, aptly titled “Why Talk? A Process of Model of Dialogue in Shareholder Engagement”, co-authored by Fabrizio Ferraro and Daniel Beunza.

Ford Motor is now generally recognized as the most sustainable of car manufacturers headquartered in the United States; but in 1993, when ICCR members began their engagement with the company, Ford was funding the Global Climate Coalition, an organization that denied the reality of climate change. That year, Sister Patricia Daly of the Dominican order of Caldwell, NJ, filed a shareholder resolution asking Ford to endorse the Ceres Principles, a code of corporate environmental conduct. Meaningful dialogue did not begin until after the 1998 proxy season; in 1999, Ford announced it was leaving the Global Climate Coalition.

“ICCR’s dialogue with Ford Motor Company,” the authors state, “suggests that successful dialogue entails a genuine commitment to long-term engagement, and that dialogue is effective by producing a synthesis between the activists’ and the company’s position.” 

By examining ICCR’s engagement with Ford and other corporations, the authors discern several consistent factors leading to successful outcomes. As the dialogue of members with Ford demonstrates, “a genuine commitment to long-term engagement,” often lasting for several years, substantially lessens the likelihood of engagement defaulting back to an adversarial relationship.

The long-term engagement arising from the commitment of ICCR shareholders encourages two developments that contributes to the many successful dialogues conducted over the years. First, over the course of time, ICCR members succeed in raising awareness of the issues among their corporate partners, “voicing their concerns in a setting of civility and mutual respect.”

“By adopting a strategy of awareness rather than persuasion,” the authors state, “shareholders can set in motion internal debate within the corporate polity that they can subsequently shape.” The internal debate leads to a second benefit of commitment, in that over time there develops a synthesis between shareholders and actors within the corporation itself. Referring to ICCR’s dialogue with Merck over access to medicine in developing countries, the authors note that one challenge for members was to initiate a discussion of the issue within the corporation. “By finding internal champions and echoing the concerns, ICCR helps a process of internal transformation.” 

In the case of Merck specifically, and in many more instances as well, ICCR demonstrated what it refers to as its “convening power.” As ICCR’s Cathy Rowan described it, “We don’t have a personal interest to gain here. People recognize that.” What ICCR undoubtedly does have is a moral voice, based largely on its reputation as a faith-based organization. Yet, “much of their discussions were on the business merits of addressing the activist’s issue,” the authors found. 

Reframing their argument in business terms, the success of which is owed in part to the status of ICCR members as shareholders, allows for actors within the corporation to consider the issues in a manner consistent with the goals of a largely profit-driven entity. Doing so also “gives ICCR members the chance to voice disagreement in a less tempered, more coordinated and better-targeted form than employee activists,” the authors observed.

ICCR members in a dialogue with representatives from Johnson Controls regarding supply chain risk and responsibility.

Continued Berry, “When you use language around transformation and collaboration, it starts to leave the field of adversarial conversations and pushes us toward everyone having a stake in transformation.” One question that remains is, can the successful template developed by ICCR be duplicated by other investment organizations? Can such effectiveness be quantified to an extent, and thus be deployed by others as well?

One initiative seeking to do just that is the Impact of Equity Engagement (IE2), a coalition of institutional investors that includes several ICCR members. “IE2 seeks to develop a framework that can inform how the impact of public equity engagement activities are tracked and reported,” the coalition, which formed in 2013, states. “Engagement activities are not tracked in consistent ways,” IE2 stated in a recently published paper,  The Impact of Equity Engagement. 

IE2 describes a number of engagement strategies that ICCR members and other sustainable investors have employed that over time have accumulated definitive signs of success. “Impactful engagement seems to be characterized by 1) collaboration, not only with other investors but also with grassroots campaigns and civil society stakeholders; and 2) escalation, or deepening engagement over time.”

An example of collaboration among investors and other civil society groups occurred following the collapse of a building with five garment factories in it in Bangladesh, killing more than 1,100 workers. The Rana Plaza building collapse was a tragic reminder of the responsibility of large corporations to monitor human rights conditions in their supply chains.

A coalition of institutional investors organized by ICCR released a statement in which 134 investors, representing more than $4 trillion in assets under management, stated, “While companies that haven’t met their human rights responsibilities face clear legal, financial and reputational risks, the moral mandate for increased human rights due diligence inherent in these principles transcends ordinary business concerns.”

ICCR members engage representatives of ConocoPhillips in dialogue.

“Engaged investors did not initiate or even lead the campaign asking American companies to sign on to the Accord on Fire and Building Safety,” IE2 reports. “However, by buttressing the efforts of grassroots organizations and labor unions in Bangladesh and their international NGO partners, engaged investors contributed towards the goal of sustainable and substantive change in working conditions for Bangladeshi factory workers.”

Acknowledging that “efforts to document the ultimate impact of engaged public equity investing have remained largely anecdotal,” IE2 has set out to develop a system that accounts for collaboration and escalation (described as a deepening of the engagement process over time). The standardized reporting framework being developed by IE2 will ultimately help shareholders monitor the progress of their own engagements while identifying best practices to increase effectiveness and maximize leverage. Designed to complement the reporting framework of the United Nations’ Principles of Responsible Investment (PRI), the IE2 system seeks to “improve investors’ future efforts by maximizing their impact opportunities.” 

When fully developed, the standardized reporting framework envisioned by the IE2 coalition is likely to demonstrate the positive impacts of shareholder engagement on environmental, social, and corporate governance (ESG) issues. It is also anticipated that the framework will help identify those factors that contribute to successful engagement. Given ICCR’s status as a respected pioneer in the art and science of long-term shareholder engagement, one can expect that the template for engagement issued by the IE2 coalition will expand even further the leadership role that ICCR has assumed for nearly half a century.