Effective Engagement: Why and How Shareholders Engage
Engagement is much more than just reviewing a portfolio. Today, it also includes ensuring board diversity, modifying corporate policies, and defining an ESG strategy.
Shareholder engagement is essential to staying in touch with the board of directors and managers, to effectively develop sustainable practices and policies. Engagement matters related to ESG have become more crucial in the last few years.
In this article, we discuss why engagements take place and their effectiveness in bringing about positive change.
Shareholder engagement refers to the methods shareholders use to influence companies in their investment portfolios. There are three main methods used for shareholder engagement, including proxy voting, shareholder dialogue, and shareholder proposals.
These methods allow shareholders to exercise their rights and privileges while having a direct impact on corporate policy. Their main goal is to encourage businesses in their portfolios to adopt and maintain sustainable development practices while also creating value and managing risks.
Shareholders engage with companies to understand their strategies and to adapt their business models to ensure they continue to succeed. Shareholders own a part of the company, and it’s in their best interest if the business earns a profit. So, they have an influence on business activities that portfolio companies participate in.
Shareholder resolutions have grown some 20%, with most of these centred on climate change. This is an example of the positive changes that shareholder engagement can bring, especially when considering ESG. But how does this process work?
Engagement strategies are much different than they were decades ago. According to a 2017 survey by Ceres[SV2] , there are three main reasons why this has happened:
- Investors are more interested in understanding their shareholders’ views.
- Shareholders are using specialist ESG teams to prepare against corporate pushback
- Individuals and society are now more likely to not consider investing in companies that do not follow ESG standards
The report continues to discuss the ways shareholders engage, including the following:
With this shareholder engagement method, individual letters are used when an issue closely aligns with a company’s priorities. These are easy to send.
Collective letters are longer and involve several investors that have crucial interest and want to share the financial risks involved.
In-person meetings involve meeting with the company directly, usually with the CEO and the CFO. The goal is to maintain long, productive relationships based on core issues.
Shareholder meetings notes are usually used to gather information about ESG issues, which are considered a lower level commitment.
The notes may involve a short discussion with an industry expert on the specific topic.
This method is used to bring focus to ESG initiatives across social media and other platforms. Shareholders do this to raise more awareness with consumers and to communicate their message externally.
In addition, the issues of shareholders within a business are also broadened. A report by Georgeson[SV3] , an investor intelligence company in the US, showed that governance proposals focused more on issues that separate the board chair and CEO roles compared to past years.
The report shows that while ESG plays a significant role, shareholders are taking the initiative to bring about changes with regard to governance.
What Does Effective ESG Engagement Look Like?
The answer depends on several factors, such as the scale of ownership in the target company and the investors’ perceived market power.
According to a report by ABI[SV4] , says that shareholder members agree that each “engagement approach depends on the specific circumstances of the company in question and that their approach can vary extensively from case to case.” This means that engagements vary from business to business.
Furthermore, factors can influence the method used by an investor, including:
- Their beliefs about what shareholder responsibilities look like
- The interest from clients or others to whom they are accountable
- Their investment time frame
Each of these factors are considered engagement by some investors because it falls under the communication category. However, others define engagement more strictly as an intention to bring about change in a business’s behaviour. No matter the case, there are various perspectives on how to effectively engage, considering the interactions with companies and the complexities of corporate policies.
Even so, one strategy that’s become more valuable for shareholder engagement is voting. Voting makes it possible for institutional investors to discuss their concerns with companies that do not abide by ESG metrics while also making dialogue possible between concerned parties. Shareholder voting, especially with those who own more shares, is a powerful way to gain influence on the topics companies focus on.
Methods for Choosing Companies for Engagement
For this process, it’s necessary for shareholders to choose the same review period each year for the portfolio in regard to ESG performance where it may be possible to influence change. The review factors include the following:
- Financial performance
- ESG ratings (How do they measure compared to their industry?)
- Ownership structure
- Which ESG practices are more concerning for the companies?
- Has there been a controversial proxy vote or any controversy at all?
- Has the company worked against shareholder rights?
The level of engagement is then considered, along with the strategies and methods that are most appropriate. Choosing the right engagement strategy is essential and can be challenging.
New Solutions to Improve ESG Engagements
While shareholder engagement can maximise their influence through collaboration and voting, tracking the engagements can be difficult. However, technology developments are now available for ESG, making shareholder engagements more efficient.
The new technologies make it possible to collect data, organise ESG metrics, and record each interaction with portfolio companies. This is necessary to maintain a digital data trail to demonstrate evidence of the shareholders’ impact.
There’s no question that effective shareholder engagement is necessary, especially when it comes to influencing businesses and their boards of directors.
Shareholders have several strategies to use to engage these businesses. The key is to choose the right engagement strategy to gain the influence they seek.
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