What are ways shareholders can engage with companies?

What is shareholder engagement?

Individuals who own shares of stock in a company are shareholders. If you are a shareholder, you are a partial owner of that company. Shareholders may want to use their position as partial owners to engage with the companies for different reasons, such as ensuring that the company that they’re invested in treats their employees fairly or that it is being responsible with natural resources, as these practices can affect the long-term viability and success of the company. 

Shareholders may engage companies on issues that affect both the company they are directly engaging with and their broader investment portfolio. For example, shareholders might demand a  company develop a credible plan to reduce greenhouse gas emissions because it would reduce risks to the company itself and help avoid the more catastrophic effects of climate change, which pose a significant risk to the financial system upon which investment returns depend.

What is the difference between an individual shareholder and an institutional investor?

While individuals can own shares and/or manage their investments individually through individual retirement accounts like 401(k)s, in some cases, individual savings are pooled together into one centrally-managed system that makes investment decisions on behalf of the entire pool of investors. This is the case, for example, with public and private pension funds. These funds are considered “institutional investors.” University endowments and sovereign wealth funds are other examples of institutional investors. These institutional investors often contract with various asset managers that invest portions of their money on their behalf.

How can shareholders push companies to operate responsibly?

Workers whose life savings are invested in retirement funds collectively represent a powerful force that can push corporations in the direction of long-term, sustainable value creation through their pension funds. As shareholders, pension funds can file shareholder resolutions, which are written statements asking a company to change a specific position or take a specific action. If an agreement is not reached between the shareholder who filed the shareholder resolution and the company, shareholders resolutions are later voted on by all shareholders, providing the collective base of partial company owners to weigh in on and decide on crucial company matters.

For decades, shareholders voted on a variety of issues: to get companies to provide more information to the public about climate-related risks or plastic pollution; to ask companies to change their workforce practices; to ask companies to conduct an independent racial equity audit; to keep board directors and senior leaders in a company accountable to rules around conflicts of interest or responsible business behavior; and to request companies take other actions shareholders viewed as beneficial to the long-term success of the company and its role within society. These votes play a critical role in how companies operate and how they adapt to a dynamic risk landscape.

Who’s stopping shareholders from engaging with companies on ESG issues?

Lawmakers in 18 states, including Arizona, Missouri, and Texas, have proposed anti-ESG bills that  jeopardize the ability of shareholders and asset managers to engage companies on environmental, social, and governance risks. 

While anti-ESG bills have been proposed by Republican lawmakers, not all Republican lawmakers see this new anti-ESG push as the right path forward. In states like Missouri, South Dakota, and Nebraska, lawmakers have decided against supporting a number of bills after hearing from pension funds, local banking associations, and local Chambers of Commerce that the new bills would cost their states’ teachers and government workers billions in lost pension returns, and limit investors’ ability to make sound investment decisions. Some Republicans also see these new measures as a threat to the party’s long-standing relationship with business. In the past, Republican state funds have supported shareholders’ ESG resolutions because they believed they were in the best interests of the business.

The asset management industry is heavily concentrated, with four U.S. asset managers — BlackRock, Vanguard, State Street, and Fidelity — managing about $25 trillion in assets. These four institutions own a significant amount of public companies’ stock and hold significant power in voting for their directors and approving their business strategies. When compared to everyday shareholders, these four largest asset managers have an outsized amount of power in compelling public companies to address long-term risks and opportunities. These asset managers were already lagging behind on driving responsible investing practices, and now anti-ESG lawmakers and others are applying pressure to large asset managers to discourage them from pushing companies to manage their long-term risks. This puts the long-term savings they manage for their clients at risk.