Curiouser and Curiouser – the Changing Dynamic of Shareholder-Corporate Engagement
POMERANTZ MONITOR | MARCH APRIL 2024
In the world of corporate governance and stewardship, change is becoming the new status quo. We are witnessing significant shifts in how shareholders engage with corporations and how those companies respond. To paraphrase Alice in Wonderland, it’s becoming curiouser and curiouser as market participants adapt to the new normal. I outline below some recent developments that illustrate this evolving dynamic, in no particular chronological order.
Holding companies to account for climate change commitments
There is a growing realisation that the road to net zero under the 2015 Paris Climate Agreement will be rocky, even if a firm has prepared a detailed plan. This is, to a large extent, due to assumptions built into many such corporate plans, such as an expected presence of supportive government policies and customers’ capacity to deal with the transition. Such assumptions may be built on misplaced optimism, lack of proper due diligence, or some of each. As a result of the ever-changing context, there is an increased challenge for companies in terms of their corporate climate commitments, particularly where these are not backed up by adequate plans and policies.
Indeed, a recent study by USS and University of Exeter outlined four narrative climate scenarios out to 2030 based on a framework that embraces the radical uncertainties surrounding the potential positive as well as negative tipping points. The scenarios focus on the vicissitudes of politics and markets and, to a lesser extent, on the climate itself, in the form of extreme weather events. Only in the most optimistic of the four scenarios does it seem possible that global emissions will be halved by the end of the decade despite the best intentions – and perhaps due to the lack of best intentions – of market participants.
It should therefore come as no surprise that, as companies step back from their previous commitments, we are seeing an escalation of engagement approaches being employed by shareholders to hold management to account.
In January 2024, twenty-seven institutional investors backed a resolution against Shell plc filed by the Dutch shareholder activists at Follow This; the resolution will be voted on at Shell’s May 2024 Annual General Meeting (“AGM”). The resolution calls for the oil company to align its medium-term emissions reduction targets with the Paris Climate Agreement. It was co-filed by influential investors from Belgium, France, the Netherlands, the UK, the USA, Sweden, and Switzerland. These include, among others, Europe’s largest investor, the French asset management firm Amundi, as well as the Rathbones Group, Scottish Windows, and NEST.
Another interesting feature with this filing is that, despite the fact that the 27 investors manage assets with a combined value of $4.2 trillion, the investors collectively hold only 5% of Shell’s stock.
In mid-March, after the resolution was filed, Shell backtracked on its climate targets, lowering its emission reduction targets from 20% to 15-20% by 2030 and scrapping its emission reduction targets of 45% by 2035.
“With this backtrack,” stated Mark van Baal, founder of Follow This, “Shell bets of the failure of the Paris Climate Agreement … only Shell’s shareholders can change the board’s mind by voting for our climate resolution at the shareholders’ meeting in May.”
A similar resolution at Shell last year was supported by only 20% of shareholders.
A comparable proposal which was filed against Exxon Mobil in the U.S. by Follow This and Arjuna Capital was met with an unprecedented and worrying response in the form of a lawsuit by the company that targeted the investors who filed this resolution. Exxon Mobil is justifying their litigation by alleging the SEC’s inability to enforce rules that govern when investors can resubmit shareholder proposals. According to ExxonMobil, a court “is the right place to get clarity on SEC rules,” adding that “the case is not about climate change.” To date, despite the proposal being withdrawn, the company is going forward with their lawsuit. It remains to be seen if this will have a dampening effect on the filing of shareholder resolutions in the U.S.
Challenging companies’ decision-making processes
Another interesting development in the U.S. was seen in a recent successful lawsuit by an individual shareholder who challenged the process by which Elon Musk’s $55 billion pay package was approved by Tesla’s board of directors. The Delaware judge overseeing the case voided Musk’s compensation package, stating that Musk controlled the board through his personality and influence and the board could therefore not demonstrate that the share grant had been executed at a fair price or through a fair process. In the judge’s words, “Musk was the paradigmatic ‘Superstar CEO and dominated the process that led to board approval of his compensation plan.’”
According to corporate experts such as Professor Charles Elson at the University of Delaware, a case such as this “has not happened before. It is extraordinary.” Although other academics have questioned whether it will set a precedent, there are likely to be significant reverberations felt in other boardrooms that may indeed lead to a review of the independence of board chairs of other companies. It also remains to be seen if Musk follows through with his threat to move Tesla from Delaware to Texas, the irony of which will not be lost on those who remember companies such as NewsCorp relocating to Delaware because of the state’s perceived light touch of protections for investors.
Whatever the reverberations of the Tesla case, the perception by detractors that securities litigation simply serves to drain corporate funds has lost credibility. It is increasingly recognised that the two main goals of active and responsible shareholders that participate in securities litigation are a) to recover money lost as a result of corporate malfeasance and b) to increase the long-term value of the defendant companies through positive changes in corporate governance and corporate behaviour.
Indeed, securities litigation can be seen as an additional tool in shareholders’ engagement armoury by addressing corporate wrongdoing through the implementation of corporate governance changes. The reality is that, under the proper circumstances, shareholder litigation can bring about significant changes which will protect investors that wish to remain invested and increase shareholder value over the long term.
Looking forward
Another development we are beginning to see in markets such as those in the UK and Italy, is a perceived regulatory race to the bottom as listing regimes seek to find ways to attract IPOs by diluting hitherto sacrosanct investor protections as a way of enticing companies to list in their respective markets. This can only result in companies with poor governance standards taking advantage of these reduced standards by listing in these markets. If that is the case, then we are only likely to see an increased use by shareholders of tools such as securities litigation and shareholder proposals as a way of holding management to account and deterring other companies that might be tempted to follow a path that is not in their shareholders’ or stakeholders’ interests.