In the latest installment of the Salzburg Questions for Corporate Governance, professor at Simon Fraser University's Beedie School of Business and the founder of Embedding Project, Stephanie Bertels, reflects on a question posed to participants at the latest program of the Salzburg Global Corporate Governance Forum
This article is part of the Salzburg Questions for Corporate Governance series by the Salzburg Global Corporate Governance Forum
The question above was posed to participants on the second day of our recent Salzburg Global Corporate Governance Forum program - Responsible Leadership: How Do We Make Businesses More Accountable? - where over 60 leaders in corporate governance from around the world spent three days in conversation.
Our theme on Day 2 was motivated by the pressure and momentum building around activist stewardship. Activist investors have always been top of mind for management teams and boards, but traditionally, most of the action played out behind closed doors. Of late, though, a new breed of activist investors is starting to shake things up through heightened and targeted engagement that increasingly includes taking their action into the public realm through proxy campaigns. This session brought together leaders in the field of governance in conversation with investors at the forefront of the emerging activist stewardship movement.
Is your financial performance lagging? Has your management team been failing to recognize the importance of environmental, social, and governance (ESG) risks? Has your organization been ignoring investor efforts to engage on these issues? Your company could be the next target for a new breed of activist investor.
ExxonMobil fell prey to just this situation when a tiny new activist impact fund called Engine No. 1 launched the Reenergize Exxon campaign that included proposing an alternative slate of four board directors. Despite owning only 0.02% of the shares, they were able to garner support from big pension funds like CalSTRS and CalPERS and large institutional investors like Blackrock that were already frustrated with underperformance and a lack of action on the energy transition. Ultimately, Engine No. 1 was successful in placing three of its four candidates on the board.
But, perhaps more importantly, they also demonstrated the feasibility of activist stewardship. And as individuals increasingly look to align their investments with their beliefs (whether that is addressing the climate crisis or improving worker well-being) and make these priorities known to their asset managers, activist stewardship is only likely to grow.
Our participants had some sage advice for directors as they navigate these new waters, starting with making sure that management is regularly engaging with investors, understands their priorities, and are being responsive to their concerns. As our participants pointed out, it’s not that hard to understand where their priorities may lie. Several, like CalSTRS, are even quite open about their stewardship priorities and their approach to activist stewardship.
It was also pointed out that long-term institutional shareholders and pension funds benefit from investments in companies whose governance also takes a long-term view that supports the success of society. Does your management team understand the evolving environmental, social, and governance expectations of the business? Does the strategic plan that they are sharing with the market include a credible plan for how the business will navigate the energy transition and address societal concerns and systemic risks around inequality and employee well-being? Are they taking investor concerns about excess compensation seriously?
And as one wise participant noted, most engagements don’t start out as combative, but if your management team is failing to respond, don’t be surprised when investors start flexing their influence by authoring public letters and collaborating with other investors, NGOs, and foundations to come knocking at your door next proxy season.
Stephanie Bertels is the director of the Centre for Corporate Governance and Sustainability at the Beedie School of Business of Simon Fraser University in Vancouver, Canada. She founded and leads the Embedding Project, where she works with dozens of global companies to help them embed sustainability into their operations, governance and decision-making. Her most recent work draws upon a review of over 3200 board position statements and interviews with over 200 global CEOs and board chairs to explore how corporate governance and corporate strategy processes are shifting to account for environmental and social constraints. She has previously worked as an environmental engineer and is a trustee and chair of SFU's Academic Pension Plan. She has a Ph.D. in strategy and global management and sustainable development from the University of Calgary, an M.Sc. in petroleum engineering from Stanford University and a B.Sc. in geological environmental engineering from Queen's University. She is a Fellow of Salzburg Global Seminar.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director Charles E. Ehrlich: cehrlich@salzburgglobal.org. To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter