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July 28, 2012
Emphasis on Engagement Seconded by Mainstream
    by Robert Kropp

A report from Ernst & Young analyzing the 2012 proxy season agrees with observations by sustainable investment organizations that increased shareowner engagement represents the most dramatic development.


According to two of the nation's most influential institutional investor organizations—Ceres and the Interfaith Center on Corporate Responsibility (ICCR)—the most notable development of the 2012 proxy season has been a markedly increased number of successful engagements with corporations.

Ceres reports that of the 110 shareowner resolutions filed by members of its network, almost half have been withdrawn following engagement. And for the first time in its 40-year history, the number of corporate dialogues engaged in by ICCR members outnumbers shareowner resolutions.

That the trend toward engagement has been noted by mainstream observers as well is borne out by a recent report by Ernst & Young. Entitled Four key trends of the 2012 proxy season: Engagement drives change, the report "reviews the emerging trends coming out of the 2012 season and how these trends compare with the historical governance landscape."

The most significant trend observed by Ernst & Young? "It is clear that the most dramatic shift this year has been the rise in company-shareholder engagement, and engagement has been a significant component of each of the top trends," the report states. "Boards are using engagement to address investor concerns, secure support for proposals put to a shareholder vote and mitigate potential exposure to activism by increasingly well-coordinated and vocal investors."

Ernst & Young tracked some 800 shareowner resolutions filed this year, and found that 15%—approximately 120—of them were withdrawn following engagement. If one subtracts the 30% of resolutions filed by individual investors—who rarely engage with corporations—the percentage easily surpasses 20% of resolutions filed by institutions.

"Proposals submitted by public pension and SRI funds were most commonly withdrawn following agreement," Ernst & Young observed. "Further, withdrawals were most likely to occur for proposals focused on board and environmental or social topics."

While the report identified increasingly successful shareowner engagement as this proxy season's most significant development, it did make other observations as well. Say-on-pay proposals continue to win overwhelming approval from shareowners; but the number of proposals that failed to win majority support increased, from 41 in 2011 to 49 thus far this year.

Furthermore, nearly all S&P 500 companies that received less than 70% support for their executive compensation proposals in 2011—a level at which shareowners are expressing "a significant level of dissatisfaction with the way compensation is being handled at the company," according to GovernanceMetrics International (GMI)—"made changes in connection with shareholder outreach efforts," Ernst & Young found.

Additionally, board accountability measures such as annual elections and a majority voting standard won overwhelming support from shareowners this year, and resolutions addressing board independence gained significantly as well.

"Shareholders' increasing influence in the boardroom…increases the pressure on boards to demonstrate that board composition is dynamic, supports corporate growth priorities and addresses chief areas of stakeholder concern," the report concludes. However, along with their increased power, institutional investors also have governance obligations of their own.

"The steady increase of investor influence is compelling institutional investors to strengthen their governance programs and be more accountable for their own role in shaping the capital markets," the report states.

 

 
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