Perhaps the greatest power shareholders have is their ability to appoint board directors and, in many jurisdictions, their auditors. The problem is we rarely see board directors being fired by shareholders. This is true despite examples of corporate failure in many arenas.
Where shareholders have deep concerns over a company’s strategy and ability to deliver sustained returns into the future, they can vote for new leadership. Where shareholders believe a company’s annual report and accounts is failing to provide the unvarnished truth about expected risks and likely future losses, they can seek to replace audit committee members. Shareholders would also be right to vote to replace the auditor for failing to sound the alarm.
Effective accountability provides the foundation on which efficient capital markets are built – it underpins the very notion that capitalism can deliver for society. Where shareholders back away from their responsibility to replace failing boards and auditors, the system will malfunction. Harmful boards will remain in situ, management teams will continue to misallocate capital. Asset managers, on behalf of their clients, carry a vital oversight responsibility on their shoulders.
Voting for net zero
One of the most concerning today relates to climate change. The global Paris Climate Agreement commits signatory nations to seek to keep temperature increases to ‘well below 2°C’ and make efforts to limit warming to 1.5°C above pre-industrial times. The Intergovernmental Panel on Climate Change (IPCC) sets out a number of scenarios for emission pathways to deliver these goals. Overall, this work indicates that the world must achieve net-zero carbon emissions by 2050.
In the face of the accelerating climate crisis, investors have the power to effect change by aligning their voting policies with achieving a net zero by 2050 outcome. For example, a company’s strategy sets out how it plans to reach its goals and deliver value.
Given the gravity of the threat posed by climate change, investors should expect all directors to make an explicit commitment to align their company strategy with the Paris Climate Agreement goals and set out how they will deliver on this commitment. Shareholders must carefully consider how they will vote if these expectations are not met.
However, companies are collectively failing to re-orient their strategies to deliver sustainable long-term wealth creation in line with the 1.5°C temperature pathway that scientists tell us we need to be on to secure our futures.
The IPCC’s latest assessment outlines in graphic details the future that we are building if we continue with our current consumption and production patters. At a company level, the CA100+ initiative finds the vast majority of the largest listed global carbon emitters are nowhere near aligned with a 1.5C pathway.
‘Tepid shareholder oversight’
Given this background, why are investors continuing to reappoint the same leadership to these companies? We know, for example, that Exxon – one of the world’s largest listed oil and gas producers – is far away from a 1.5°C aligned pathway – and yet all bar one of its directors were reappointed with at least 90% support. The outlier director received 89% support.
Exxon’s auditor received 97% support, despite over 50% of shareholders voting for a resolution seeking better disclosure of how their financial position could be impacted by a 1.5°C pathway – because this was not sufficiently covered in their annual report and accounts. The same picture of universal support exists for other oil and gas majors and indeed virtually all the heavy emitters, whether we look at auto producers, airlines, heavy industry, materials or mining companies.
Capitalism is malfunctioning and at least part of the fault lies in tepid shareholder oversight. While many asset managers are discussing their concerns with boards, it is time they voted in a way that ensures they are listened to. This must go beyond occasional support for shareholder resolutions on climate change. This must be part of routine voting determining core governance practices at businesses.
Climate change is a core strategic and operational concern for carbon-intensive businesses and it should, therefore, be a factor in determining routine voting decisions. We therefore ask fellow shareholders to use their votes during AGM season in 2023 to hold company directors and auditors to account for climate governance failures that put capital at risk.
