Voting at company shareholder meetings is perhaps the most direct way an investor can make their voice heard and exercise responsible stewardship. Because dissent levels are relatively low (around 4 per cent on average at European companies[1]), even a modest level of opposition can lead to action by a board. 

But what voting offers investors in clarity of communication, it risks losing in nuance. Transitioning to a more sustainable corporate environment is no easy feat, and companies’ progress can’t always be reflected in a simple ‘yes’ or ‘no’ vote on board proposals. 

Box-ticking

At the same time, investors know that they too must evidence how they’re holding their portfolios to account. The temptation is to rely on easily quantifiable measures like voting practices as a signal of their own stewardship. That can mean voting for the sake of voting. Unsurprisingly, boards are beginning to tune out the noise.

The Capital Markets Industry Taskforce (CMIT), a body comprising some of the UK’s most influential chief executives, recently called for a reset of the country’s approach to corporate governance. 

“Good stewardship is now assumed to be a measurable output,” it says. “[One that is gauged by the] number of votes cast against board resolutions [...] Too often the current regime, particularly in the stewardship space, is set up by default to be antagonistic to demonstrate challenge and such a regime cultivates mistrust”.[2]

That antagonism risks undermining the delicate nexus of collaboration between various stakeholders, including regulators, corporates, and investors, which will drive a successful transition to a more sustainable environment.

The crises of confidence in the UK’s fragile business landscape, outlined by CMIT, have seen several high-profile companies recently shun the FTSE. A continuing focus on voting over engagement may encourage more companies to retreat from the limelight of shareholder scrutiny. Alternatively, governments might be tempted to water down investor protections, including shareholder voting rights, in a bid to stem the exits or encourage leavers back. 

Of course, it doesn’t have to be like this. We know that companies are still engaged on ESG. In Fidelity International’s latest annual survey of our 170-plus research analysts, four in five reported that companies’ emphasis on ESG had not fallen in the past 12 months.

Those companies are willing to listen to shareholders too. While calling out antagonistic stewardship practices, UK companies do still recognise the place of investor engagement: “Good stewardship should revolve around committed long-term shareholdings and consistent and balanced conversations”, claims the CMIT.

Respect the complex

The focus here is on long-term engagement at the expense of short-term demonstrations of stewardship. This approach is not always the easiest, but it is often more effective, especially when it comes to complex issues like decarbonising the mining sector, for example. For years miners have been trying to work out what to do with their thermal coal assets, which many investors now view as unsustainable blots on their portfolios. One solution is to spin off those assets, but doing so risks them falling into less responsible, less transparent ownership.

Another option is for miners which are clearly committed to decarbonisation to retain their thermal coal assets, and wind them down over time. This is where active investor engagement can play a role and encourage the company towards a responsible decommissioning of unsustainable parts of the business. 

While shareholders can use voting to communicate their preferred approach, there’s a risk that voting bluntly on a shareholder proposal might fail to capture that nuance and inadvertently incentivise companies to spin off dirty assets just to get them off their books. Doing so does not solve the longer-term issue of how to end thermal coal production - it simply pushes the problem elsewhere. That’s why we supported the decision of BHP, an Australian mining giant, not to sell its Mount Arthur coal mine, but rather wind down production between now and its closure in 2030.

‘Say-on-climate’ resolutions, which grant shareholders the chance to vote on a company’s climate policy, pose a similar problem. They encourage companies to keep their environmental pledges front of mind and provide one way for investors to hold them to account. But they also whittle complex problems down into a binary judgement. Not all shareholders have the expertise to scrutinise climate policies, leading some simply to rubber-stamp companies’ plans. There’s also no guarantee of further action: most say-on-climate votes have been one-offs, according to MSCI, with no public commitment to follow-ups.[3] 

Where voting works

None of this means that voting doesn’t play a role in stewardship; rather, it should complement active engagement, which draws on different tools for different contexts as they shift over time. For example, collaborative efforts between different investors can be effective when seeking progress across an industry or on a particular theme. Or for broad, system-wide change, investors are engaging more and more with policymakers themselves. 

In this context, voting by shareholders that have cultivated a reputation for mindful stewardship can send a serious message to boards that respect the views of such investors. It can also serve as a method of escalation when dialogue hits a wall. 

It’s understandable that in the absence of more readily available measures of shareholder progress, voting draws so much attention. But investors risk an all-stick-and-no-carrot approach to stewardship by using voting behaviour as the barometer of quality for asset manager stewardship and, critically, effectiveness. It places too much focus on the means, rather than the ends. 

[1] ISS Voting Analytics 

[2] Capital Markets Industry Taskforce, in an open letter on “Resetting the UK’s approach to corporate governance”

[3] https://www.msci.com/www/blog-posts/say-on-climate-investor/03014705312