Where to next for shareholder advocacy?
More openness from companies to shareholder resolutions could herald a new age of improved engagement and governance.
Shareholder advocacy on sustainability issues has reached new heights in Australia. How effective is it and how will these trends evolve? Recent high-profile cases point to shareholder interventions coming reactively after the damage is done. Yet the current system does not lend itself to more proactive engagement, particularly for director elections. Similarly, while the shift in support for shareholder resolutions offers promising signs, more openness from companies to such resolutions could herald a new age of improved engagement and governance.
According to the Australian Centre for Corporate Responsibility (ACCR), shareholder support for environmental, social and governance (ESG) resolutions among the ASX 200 has steadily increased since 2018. Increase in support for shareholder resolutions reached new heights in April this year when for the first time a majority of shareholders supported a climate change related resolution at Woodside Petroleum’s AGM. However, to date, every company has recommended shareholders vote against these resolutions no matter how reasonable.
Take for example the AGL. It would have been easier for the company to plot a sustainable long term strategy if it had recommended that shareholders support the 2019 shareholder resolution on climate change. If that resolution, with the company’s support, had achieved 90 instead of 30 per cent of votes, the company would have been in a stronger position to argue for the replacement of the Liddell power station in the face of government pressure, and accelerate the development of its low carbon strategy. Why are companies recommending shareholders vote against resolutions which are in their interests?
In addition to voting, shareholders’ active role in recent board and executive departures at AMP and Rio Tinto, demonstrate that expectations regarding ESG issues have increased while tolerance for poor performance has declined.
Actions taken by AMP and Rio Tinto shareholders were positive, but both came after events which caused enormous harm to the people and heritage sites involved, as well as the companies’ reputations. Could these events have been prevented by earlier and more active shareholder engagement?
Despite AMP’s experience at the Financial Services Royal Commission the new chair, David Murray AO, with a long history of criticising corporate governance standards, became a vocal opponent to the ASX Corporate Governance Council’s proposal to incorporate social licence to operate and social responsibility in its principles.
Despite this, David Murray was elected by shareholders in May 2020, and soon after oversaw the controversial sale of its life insurance business without seeking shareholder approval and the appointment of Boe Pahari to head one of its most important divisions, despite sexual harassment allegations. These unpredictable but unsurprising events have caused enormous harm to all involved.
Similarly, Rio Tinto shareholders had cause for concern long before the destruction of Juukan Gorge. Rio Tinto’s 2016 divestment from the Panguna copper and gold mine in Bougainville, PNG, saw it walk away from more than a billion tonnes of waste leaving residents with a contaminated water supply and toxins in the land and crops. Controversies in Madagascar and Mongolia were also notable. Perhaps most strikingly, the Bribery scandal in Guinea, stands out as senior executives including the company’s CFO were terminated. However, the company’s board were under little pressure from these issues with directors elected in subsequent years all receiving levels of support above 95%.
As the saying goes, the standard you walk past is the standard you accept. In the cases of AMP and Rio Tinto, earlier action was warranted by shareholders. Lessons for other companies abound. In this context and if past lessons are learned, what is next for shareholder advocacy?
One area requiring improvement is director elections. Currently, shareholders receive limited information about directors and almost universally accept the nominations provided by the board. It may be that trends in shareholder advocacy lead to more votes against director nominations.
However, while important for accountability, votes against directors would still often happen after the fact and seed more adversarial relationships between shareholders and companies. What if instead shareholder groups representing institutional investors and the ASA were to screen and provide a list of new and diverse candidates to company nomination committees? Such a list need not be binding but shareholders could expect an explanation for why suggestions are not accepted.
This process would open the field to a more diverse talent pool, give shareholders greater input into who will represent them, and reduce the risk of group think that can cause boards to nominate or renominate inappropriate directors.
Another positive evolution of shareholder advocacy could be to change the adversarial perception of shareholder resolutions, with resolutions being more regularly supported by both shareholders and companies. This evolution requires shareholders to signal support before the notice of meeting is issued, and for companies to recognise that shareholder resolutions are an opportunity to receive transparent and collective views from their shareholders on important issues.
Santos may well be the next test in both these regards. This year it had more than 40 per cent shareholder support for two climate change resolutions. Yet since then, it has continued its pursuit of the Narrabri coal seam gas project, which risks leaving shareholders with a stranded asset and significant potential liabilities. How shareholders react will offer a strong signal as to the evolution of recent advocacy efforts.
The different and distinct roles of boards, shareholders and management are important. Together, they form an ecosystem of accountabilities which are essential for the company’s health and performance. Improving the process for electing directors, along with the right to express non-binding views through resolutions, can serve to better balance the ecosystem and ultimately support boards to govern Australian companies for the better.
About the authors
Sanaya Khisty is an Altiorem mentor, an experienced policy adviser and project manager, who has worked across multiple policy areas in politics and consulting. She recently led a policy reform to improve corporate governance practices among Certified B Corporations in Australia. Sanaya is on the Board of Climate for Change and is confident about the potential gains to be made by improving sustainability in business and finance.
Pablo Berrutti is Altiorem’s founder, he has deep investment and financial services experience including responsible investment, risk management, marketing, communications and strategy. He is currently a senior investment specialist for Stewart Investors Sustainable Funds Group and was formally the Head of Responsible Investment, Asia Pacific for Australia’s second largest fund manager.