Stakeholder Focus Expands Proxy Voting Agendas

29 March 2021
8 Minute Read

ESG in Action

Shareholder activism through proxy voting will be essential to help steer management teams in the right direction as companies face diverse challenges in the recovery from the pandemic. At AllianceBernstein, our integration of ESG factors in investing processes will guide our proxy voting efforts to enhance long-term company value amid a growing commitment by companies to benefit all stakeholders, including shareholders.

The Issue
US proxy voting agendas will feature more motions on climate change, diversity and inclusion, and lobbying transparency, as well as a growing focus on benefits to a broader group of stakeholders.
The Investment Case
Investment managers need to begin considering a wider set of variables that affect companies’ ability to improve financial performance and shareholder value.
Engagement Goals
Our proxy voting policies reflect ongoing engagement with management teams on an array of ESG issues that enables us to effect value-enhancing change at companies.
Authors

As the 2021 proxy season opens, the scope of shareholder activism is broadening. More companies are being asked to redefine themselves to benefit all stakeholders—including customers, employees, suppliers and communities. Investor efforts to enhance long-term shareholder value via proxy votes will need to be adjusted for this changing environment.

In a landmark Business Roundtable statement in 2019, major US companies announced a sea change in the conceptual purpose of a corporation. Companies don’t only exist simply to serve shareholders, the statement said, but to benefit all stakeholders. By considering the interests of all stakeholders, we believe companies will be better positioned to succeed and create long-term value for shareholders.

The COVID-19 pandemic helped propel this material shift away from shareholder primacy, as companies were pressed to show that they were ensuring the welfare of their staff and attuned to the needs of the communities in which they operate. Now, as companies begin to recover from the pandemic-induced recession, shareholder activism will be key to helping steer management teams in the right direction while getting their businesses back on track.

Although shareholders are not required to consider the interests of other stakeholders, they hold the power to do so through proxy voting. And, in some cases, investment managers who vote on behalf of shareholders are beginning to think about how to wield this power, as benefiting stakeholders more broadly can drive improved financial performance, increasing shareholder value. Some shareholders are even asking companies to change their governance structure, including changing their legal status to public benefit corporations. While we don’t anticipate the legal entity topic to dominate shareholder proposals this year, the theme of purpose may surface in other ways.

Shareholders Are Demanding Increased Inclusion

Inclusion themes have become pervasive. Management teams’ accountability has been reflected through proposals that aim to expand shareholder inclusivity via proxy access and the right to call special meetings, as well as align pay and performance. In US company annual general meetings (AGMs), we expect to see more shareholder proposals on key topics from prior proxy seasons, namely diversity and inclusion (D&I), climate risks (Display 1) and greater transparency in political lobbying expenditures. A new topic that is emerging in 2021 focuses on conducting racial equity audits at major US banks to evaluate whether they are providing equal access to finance. For example, banks are being pressed to show whether minimum balance requirements and other business guidelines are restricting access for underserved communities.

Display 1: Inclusion and Purpose Will Lead 2021 US Shareholder Proposals on Social Issues
Number of 2021 Shareholder Proposals on Social and Climate Topics (US AGMs)
Display 1: Inclusion and Purpose Will Lead 2021 US Shareholder Proposals on Social Issues

As of March 2021
Source: Institutional Shareholder Services

Environmental, social and governance (ESG)-related proposals are not one size fits all. At AllianceBernstein (AB), rather than automatically supporting all ESG- or climate-related shareholder proposals, we critically evaluate whether each request will enhance shareholder value. For example, we assess the materiality of the ESG issue, the company’s current practices, the prescriptiveness and context of the proposal, and whether we believe that the proposal will generate long-term value. This long-standing approach has been the cornerstone of our proxy-voting framework.

Company engagement is an integral part of our proxy-voting and research process. Instead of relying on third-party ratings to guide our votes, we rely on our in-house fundamental company analysis to better assess the materiality and potential impact of each proposal.

Engagements Are Not a Check-the-Box Exercise

ESG issues can have a material impact on a company’s financial performance. For example, increased corporate consciousness of carbon footprints and human rights–related risks in supply chains enables more comprehensive risk oversight. This, in turn, can create value for shareholders, employees, customers and communities alike. Indeed, ESG-focused investment strategies have outperformed non-ESG portfolios globally by about 5% annualized since 2010 even after adjusting for style biases (Display 2).

Display 2: Considering ESG Factors Is Associated with Better Investment Returns

As of June 30, 2020
*Idiosyncratic alpha generation controlling for differences in factor exposures. Strategies are tracked by Morningstar and eVestment and are benchmarked against MSCI World or MSCI ACWI.
Source: Bernstein Research, eVestment, FactSet, Morningstar, MSCI and S&P

For a portfolio team to effectively integrate ESG in its investment process, engagement with management is a key ingredient for change. Consequently, we are demanding action from management teams and will vote against relevant board members in AGMs if companies fail to meaningfully respond to our engagement requests. During 2020, we conducted over 800 engagements with management on a variety of ESG issues.

Environmental Issues: Addressing Climate Impact and Employee Safety

Masonite, a door manufacturer based in Tampa, Florida, has a spotty record on climate-related policies. We targeted Masonite as part of our 2020 thematic engagement campaign due to its lack of carbon-emissions or climate-change targets. Ongoing engagements with Masonite revealed a recognition of the importance of the topic and a willingness to take concrete steps to address the issue.

At our first meeting, we shared our benchmarking of the company versus peers and explained why addressing carbon and employee safety is important for Masonite over the long term. The company’s controller agreed to raise the matter with the board. Follow-up meetings showed that Masonite made considerable progress, including incorporating ESG metrics related to employee engagement and safety in executive compensation.

Masonite has also engaged a consultant to establish its baseline carbon emissions, with the hope of crafting an improvement plan and upgrading its disclosure in 2021. Meaningful progress from Masonite provided us with greater conviction to support the board and management.

Social Issues: Improving Diversity and Inclusion

In contrast, Charles Schwab’s board needed a shake-up. Since May 2017, we’ve engaged with management from Schwab on governance issues, specifically on what we viewed as an entrenched board. Most of the financial services company’s board members had served more than 10 years. Our ESG engagements with Schwab were focused on advocating for board refreshment with members that could offer a new perspective and diverse set of experiences.

The company has responded. Three board directors didn’t stand for reelection and two new directors were appointed. But that wasn’t enough. In May 2019, we tussled with Schwab over its refusal to refresh three more board members whose terms expired in 2020. As a result, the company also added two new directors who bring technology experience and gender diversity to the board. We believe our consistent message regarding Schwab’s board composition influenced the company’s decision-making.

Governance: Establishing Better Governance Structures

While Charles Schwab was established 50 years ago and is entrenched in its practices, earlier stage companies often offer more open avenues for engagement. For example, Floor & Decor is a small-cap growth company that sells hard surface flooring and accessories, founded in 2000. It is younger in its lifecycle, suggesting that our engagement might have a bigger impact as the company is still in the early stages of shaping its governance structure.

Floor & Decor, based in Smyrna, Georgia, has a classified board and supermajority voting requirements for charter/bylaw amendments. It also lacks shareholder rights to call special meetings or act by written consent. AB’s policy is to vote against a company’s governance committee if no sunset provision—a commitment to removing certain initial governance structures in a specified time frame—is in place in the second year after the company’s initial public offering. Floor & Decor had no such provision in 2019.

We continue to engage with management on the company’s governance structure, executive compensation metrics, D&I efforts and supplier oversight. Although many of Floor & Decor’s direct nominees received relatively low support at the 2020 AGM, management would not commit to changing anything besides reviewing their governance structure. On executive compensation, they acknowledged our view that performance-based metrics should be incorporated into long-term incentive-based compensation, but did not commit to any imminent changes. Over time, we believe that persistent engagement with company management and escalation through our voting policies will help effect shareholder value-enhancing change at the company.

Engagement Outcomes Will Inform Our Vote Decisions

This proxy season, engagement outcomes will continue to inform our vote decisions—with increased focus on accountability. Our priorities in 2021 include addressing unequal voting rights from multi-class share structures, increasing the diversity of boards (including requiring that Japanese boards include at least one female director) and scrutinizing companies that have been flagged as having high human rights or modern slavery–related risks based on our proprietary screening system.

Board gender diversity is an increasingly important focus. Outside the US, we are extending our requirement for board gender diversity to Japan this year after implementing a global ex Japan policy in 2019. In 2019, fewer than 30% of Japanese boards had at least one female director. By 2020, that percentage increased to approximately 40%, suggesting that meaningful progress is possible and that it is time for greater effort to further push Japanese boards. This new requirement means that AB will be voting against approximately 31% of our Japanese holdings, demonstrating how seriously we take this issue.

The independence of Japanese boards is another issue of growing importance. We will require that Japanese companies without a three-committee board structure (nominating, compensation and audit) have majority independent outsider representation starting in 2021. This represents a step up from our efforts to communicate this preference to companies during engagements in recent years.

Shareholders will be considering new themes as they vote during the 2021 proxy season. We believe active, case-by-case evaluation of proposals married with company engagement to effect positive change is the best approach to create long-term value for shareholders and stakeholders alike.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

Past performance does not guarantee future results.

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