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Shareholders press boards on social and environmental risks - Is your company prepared? - EY - United States

Shareholders press boards on social and environmental risks

Is your company prepared?

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Shareholders are asking boards to mitigate risks tied to evolving regulations, shifting global weather patterns and heightened public awareness of climate change issues.

Summary: Proposals from shareholders reveal that investors find their company's social and environmental policies correlated with its risk management strategy — and ultimately its financial performance. We estimate that half of all shareholder resolutions in 2011 will center on social and environmental issues.

The likely focus of shareholder proposals in 2011

In 2011, shareholder proposals are expected to focus on the following issues:

  • Social/environmental. Expected to make up the largest portion of proposals this year, these proposals will focus on political contributions and lobbying, human rights and labor practices, sustainability and greenhouse gases, environmental risk and toxic chemicals.
  • Board-focused matters. Expected to represent the second-largest category of proposals, these initiatives will center on board composition, independent leadership, majority voting to elect directors and board declassification.
  • Strategic and antitakeover-related-issues. Typically these proposals seek to eliminate supermajority vote requirements, and to allow shareholders to call special meetings or act by written consent.
  • Executive compensation. As this is the first year for mandatory say-on-pay provisions giving shareholders the right to vote on executive pay, fewer proposals will relate to compensation arrangements.

More shareholder proposals and more support than ever before

It's not just that there are more of these proposals than there have been previously.

Rather, the degree of support for these types of resolutions is growing among mutual funds and other important investors.

Partly, this is because investors and regulators such as the Securities and Exchange Commission (SEC) are becoming more aware of the reputational and financial risks associated with social and environmental issues.

Shareholder proposals are increasingly prescriptive in asking boards to mitigate risks tied to evolving regulations, shifting global weather patterns and heightened public awareness of climate change issues — any of which can affect a company's business.

These developments place pressure on companies to show that they appreciate such risks and are taking steps to manage them.

Your shareholders' environmental concerns are your concerns too

Board members and senior management need to understand requests for information related to environmental subjects. Just as important, they must work actively to mitigate shareholders' concerns about environmental issues. Increasing support on shareholder proposals will put pressure on boards to respond.

Further, failure to respond to a shareholder proposal that receives 50% or more of votes cast may result in votes against directors in the following year.

First steps toward addressing shareholder concerns related to environmental risk include:

  • Understanding their investment philosophies and voting policies
  • Knowing who is responsible for key voting decisions
  • Becoming familiar with shareholders' history of activism with other target companies


Environmental concerns soar as most prominent issue among shareholders

Shareholder proposals are important because they shape the corporate landscape and often frame conversations that take place in corporate boardrooms. Resolutions linked to corporate social responsibility (CSR) historically have been skewed toward social issues.

But now the environment has become the fastest-growing and most prominent issue area, as more institutional investors begin questioning the potential financial impact of CSR issues on their investee companies.

A 2010 survey conducted by Institutional Shareholder Services, a proxy advisory firm, shows that 83% of investors now believe environmental and social factors can have a significant impact on shareholder value over the long term.

This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues.

The following table shows that the number of CSR-related shareholder proposals rose from 150 in 2000 to 191 in 2010. Moreover, those proposals garnered average voting support of 18.4% of votes cast, vs. just 7.5% a decade earlier.

Trends in shareholder proposals on corporate responsibility

  2000 2005 2010
Number of proposals voted 150 155 191
Average voting support 7.5% 9.9% 18.4%
Percent proposals receiving >10% support 16.7% 31.2% 52.1%
Sources: Investor Responsibility Research Center (2000 data); EY

Broader support means that proponents gain more traction with investee companies and put greater pressure on their boards.

This is especially true if the proposals reach critical thresholds. For example, many boards take note once support levels reach the 30% mark.

In 2005, only 2.6% of all shareholder resolutions related to social/environmental issues received average support of more than 30% of votes cast, according to EY. Last year, more than one-quarter of proposals reached the critical 30% support threshold.

Support thresholds as a percentage of total social/environmental proposals

2000 2005 2006 2007 2008 2009 2010
Not available 2.6% 8.9% 15.7% 15.2% 18.4% 26.8%

Source: EY

Although shareholder proposals are generally nonbinding, the 50% support threshold is also important. At that level, many institutional shareholders will vote against director nominees in the following year for not responding to a majority-supported shareholder proposal.

Regulatory changes are also driving broader support for resolutions linked to environmental risks.

In late 2009, the SEC began to allow shareholder proposals to include the phrase “financial risk” in discussing environmental and other issues. In February 2010, the agency issued guidance reminding companies of their responsibility to disclose their material risks related to climate change.


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Content

What is the triple bottom line

Today's shareholders expect organizations to meet standards of social, environmental and economic performance.

Below are the items that fall into each of these areas and comprise the triple bottom line.

Environmental

Energy-fuel, oil, alternative, Water, Greenhouse gases, Emissions
Waste reduction: medical; hazardous; non-hazardous; construction
Recycling, Reprocessing/re-use, Green cleaning, Agriculture/organic foods
Packaging, Product content, Biodiversity

Economic

Accountability/transparency, Corporate governance, Stakeholder value
Economic performance, Financial objectives

Social

Public policy and advocacy, Community investments, Working conditions
Health/nutrition, Diversity, Human rights


Shareholders press boards on social and environmental risks

Related content

  • For more information on how climate change risk can affect vital business functions, please visit ey.com/climatechange.

Contact

  • Steve Starbuck
    Americas Leader,
    Climate Change and Sustainability Services
    Ernst & Young LLP
    +1 704 331 1980

  • Ann Brockett
    Americas Assurance Leader,
    Climate Change and Sustainability Services
    Ernst & Young LLP
    +1 403 206 5016

  • Allie Monaco Rutherford
    Corporate Governance Group
    Ernst & Young LLP
    +1 703 747 1729 

  • Kellie Huennekens
    Corporate Governance Group
    Ernst & Young LLP
    +1 703 747 1736 


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