Post financial crisis, shareholder resolutions are emerging as an underestimated risk management tool. Mainstream investors are finally waking up to the power they have to influence dangerous firm policies via shareholder action. While shareholder votes are notorious for hypo-participation (getting 5% of shareholders to vote is a feat), activists that focus on deploying proxy votes effectively have produced impressive results.
Recent wins build momentum
Corporate accountability nonprofit As You Sow recently achieved some stunning shareholder resolution wins on coal ash disposal (waste resulting from coal incineration). The campaign was a success, garnering the votes of 43 percent of CMS Energy shareholders and 40.5 percent of MDU ’s shareholders, among shareholders who participated. A third resolution filed by Green Century at utility giant Southern Energy garnered 21 percent yes votes. While these results are excellent, they do not force management action. Still, the outcomes do send the strongest message on environmental protection shareholders have ever communicated, and they often result in policy changes anyway.
What was new? Are investors particularly passionate about coal ash? Galland explained that the outcomes resulted from As You Sow’s tenacious education of the major proxy firms –Riskmetrics, Glass-Lewis and Proxy Governance– about coal ash’s financial risk resulted in all three recommendeding that their clients vote for the resolutions. The business case for proper disposal was made when a 2008 coal ash sludge dam failure buried the Tennessee Valley in over a billion gallons of toxic muck, causing a billion dollars in damage. Just last week, the disaster cost the Tennessee Valley Authority $11 million more in fines, with dozens of claims still in litigation. As You Sow’s analysis showed that internalizing the costs of such catastrophes will negatively effect coal’s risk profile and increase capital costs, something no shareholder wants to hear.
Financial regulations offer hope for new proxy powers
Shareholder resolution participation is growing just in time for proxy powers to be expanded by the SEC. Although early versions of the financial reform bills included delightful “say on pay” shareholder rights for executive compensation oversight, these have been tabled for SEC study and rulemaking in 2011. Nonetheless, the movement to expand shareholder rights is a hopeful indicator for future shareholder powers and reflects a widespread demand for transparency.
Passive is passé
Unfortunately, most efforts to expand proxy powers are still met with resistance by many large institutional investors, and most index funds support company management by default. Further, most individual investors still don’t participate in proxy votes. However, the record-setting support for coal ash disclosure rules does suggest progress in the business community. Instead of using exotic financial instruments to hedge risk, shareholders indicated a preference for the transparency that will help remedy underlying risky business operations.