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In Defense of Shareholder Influence: The More (Perspectives), the Merrier

Christopher Berry | State Street Corporation

October 04,2018

Diversity is good for business.

Multiple studies have found that companies with female board members generate better returns. A recent study by McKinsey found that companies with the most culturally and ethnically diverse leadership teams were 33 percent more likely to outperform their industry peers.

Diversity helps the bottom line because individuals with different backgrounds can offer a variety of ideas and perspectives. In other words, having diverse backgrounds at the table helps achieve diverse thinking. Diverse viewpoints are shaped by tangibles that we can all see, like race and gender, but also the more intangibles like childhood experiences, educational background and even socioeconomic status.

But there’s another source of diversity that companies are increasingly overlooking: their shareholders.

Several firms have begun instituting dual-class voting structures that provide company founders more voting rights, while simultaneously diminishing the influence of other shareholders. During its IPO last year, Snap Inc. offered only non-voting shares, preferring to exclude shareholder input entirely. While other firms have yet to follow Snap’s extreme example, there have been additional efforts to diminish shareholder influence, with some calling for measures that would make it considerably more difficult for investors to put forward shareholder proposals.

The motivations driving company founders’ and executives’ attempts to limit shareholder influence vary. While the term “activist investor” has historically referred to aggressive investors seeking to maximize short-term returns, this term is beginning to reflect the diverse group of investors increasingly focused on long-term returns reflected in environmental, social and governance (ESG) factors. With the proliferation of ESG data and the groundswell in demand for quality data, investors of all sizes have better transparency into how the companies in which they invest are truly run. In 2017, State Street Global Advisors engaged over 700 public companies on the thematic issue of gender diversity, and ultimately voted against more than 500 companies that took no action to improve board diversity despite this engagement. In the first year of the outreach campaign, more than 150 companies that previously had no women on their boards appointed a woman.

By virtue of being outsiders, shareholders can bring fresh perspectives.

But the approach of limiting shareholder voting power for the sake of fending off empowered shareholders is shortsighted. By virtue of being outsiders, shareholders can bring fresh perspectives, particularly when it comes to addressing ESG challenges that entrenched leadership is reluctant to tackle. And while shareholders can reach out to a company’s management to share their perspectives whether they have voting power or not, the leadership will be more likely to return their calls if they know they’re talking not just to investors, but to voters.

Research supports the notion that it is in a company’s interest to provide robust voting rights to shareholders. Just this year, researchers at Cornell University published a study of more than 900 firms with dual-class voting structures.[1] They found that as the firms matured, their operating margins, labor productivity and pace of innovation all declined relative to their single-class competitors. The market, meanwhile, is quick to applaud steps toward shareholder empowerment. In 2014, the New York City comptroller’s office announced a Boardroom Accountability Project, highlighting 75 companies with shareholder proposals for proxy access. On the day of the announcement, those 75 firms saw their valuations jump an aggregate of $10.6 billion, according to a study released the following year.

For many shareholders, the ability to have some say in a firm’s management and direction is a key reason to invest in that company in the first place; otherwise, one might as well become a creditor rather than an investor. As Lynn Blake, executive vice president of State Street Global Advisors (SSGA) and CIO of Global Equity Beta Solutions, told Institutional Investor last year, limiting and eliminating voting power raises questions of whether a firm should consider itself a public company at all.

Firms should also recognize that maintaining shareholder voting power isn’t just the right thing to do; it’s also the smart thing to do. It is especially valuable when shareholders are deeply committed to the long-term success of the companies they are invested in. These are the people who don’t lose the forest for the trees, and tend to keep an eye on the future as opposed to focusing more on immediate gains. Shareholders bring more than just capital to the table. They bring distinct ways of thinking, which adds a value all its own.

1. “Delivering through diversity”, January 2018, McKinsey & Company. Copyright (c) 2018 McKinsey & Company. All rights reserved. Reprinted by permission. https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity

2. Webber, D. H. (2017, April 13). Big corporations are trying to silence their own shareholders. The Washington Post. Retrieved July 9, 2018, from https://www.washingtonpost.com/opinions/voter-suppression--corporate-style/2017/04/13/bbe62880-1ed5-11e7-be2a-3a1fb24d4671_story.html?utm_term=.5a7b59c53754

3. Kim, H., & Michaely, R. (2018, April 12). Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures. Retrieved July 9, 2018, from http://clsbluesky.law.columbia.edu/2018/04/12/sticking-around-too-long-dynamics-of-the-benefits-of-dual-class-structures/

The material presented herein is for informational purposes only and does not constitute, nor should it be considered or relied upon as, investment research or investment, legal, or tax advice nor should it be considered an offer or solicitation to buy or sell any product, service, investment, security or financial instrument or to pursue any trading or investment strategy. It should not serve as the basis for investment decisions. Any views expressed herein are subject to change based on market and other conditions and factors and are not tailored to specific requirements, circumstances and / or investment philosophies.  Investing involves risk including the risk of loss of principal. 

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Topics: Corporate Responsibility


Christopher Berry | State Street Corporation

Chris Berry is a Vice President in the State Street Global Exchange ESG Solutions group, and is responsible for overseeing product and business operations. Chris was also a co-founder of the State Street Environmental Sustainability Employee Network, an internal network comprised of ~ 3,000 employees around the globe. Back in college, Chris managed a state park in Maine.