Returns or Virtue?

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Allow shareholders a say in how companies approach ESG initiatives.

Shareholders have so many clashing viewpoints that boards and managers need to create more direct lines of communication to help determine a company’s mission.
For example, many shareholders, particularly institutional money managers and pension funds, urge companies to put more money behind environmental and social causes, such as cutting emissions and increasing diversity. Others, particularly individual and employee shareholders, continue to prioritize financial returns.

While many managers stress that they already make investments that help environmental and social causes when the financial returns are attractive, some outspoken institutional investors — and quite a few boards — seem to support pursuing environmental and social causes even with weak or negative financial returns.
Since large public companies typically have tens of thousands of shareholders, thousands of employees, hundreds of managers and perhaps a dozen directors, it is not only difficult to generate a consensus but also impossible to please everyone. Some shareholders put proposals forward for a vote of the shareholder body at company annual meetings, but the procedure tends to be convoluted and opaque. 

For instance, proposals generally lack estimates of financial returns compared to their value to an environmental or social cause. In addition, corporate voting rules enable institutional money managers and pension funds to hide behind such opacity, and many get to cast votes solely by virtue of managing the money of others rather than managing their own money.

Many boards yearn for a clearer mandate regarding how to respond to complex shareholder signals and overcome the limitations of voting protocols.

A Modest — If Radical — Proposal

Consider this: At next year’s annual shareholder meetings, a board could sponsor a publicly disclosed poll regarding whether and to what extent the company should invest its pretax profit in environmental and social initiatives. The poll would be simple and nonbinding to provide a cheap, clear way to gauge preferences.

The poll would state a proposed percentage of pretax profits that the shareholders might wish to allocate to environmental and social causes, such as 10%. The board would commit to target an allocation based on the percentage of shares voting yes. For example, if 50% voted yes, the board would commit to allocating 5% (i.e.,10% of 50%) of the current year’s pre-tax profits to such causes during the following year.

The board could poll the shareholders as to any proposed profit percentage — from 0% to 100% — that makes sense given a company’s specific circumstances in terms of shareholder base and current levels of environmental or social investment.

As an extreme, a board could ask what percentage of shareholders favored allocating 100% of pretax profits to environmental and social causes without regard to financial returns. If 20% of the shares voted yes, the board would target an allocation of 20%.

Benefits of the Experiment

This exercise would enlighten boards about their shareholders’ priorities, particularly whether they desire environmental and social investments independent of financial returns. Boards have limited direct experience doing so, though they may have some experience with direct charitable giving and evaluating the environmental and social impact of more traditional capital allocations. The polls would enable the board to determine the extent of research needed to understand such environmental and social investing.
The appeal of this approach to discerning shareholder preferences is both to clarify those preferences and to accommodate clashing views. One drawback of such an approach is that a subgroup of pure altruists may end up effectively requiring a subgroup of pure capitalists to donate along with them. An obvious benefit is that it enables everyone to go on the record publicly to declare priorities. Overall, such a poll would be a step toward direct communication between shareholders and boards in an increasingly divided and cacophonous world.

Lawrence Cunningham is vice chairman of the board and director of Constellations Software Inc., founder of Quality Shareholders Group and professor of corporate governance at George Washington University.

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