Shareholders nowadays have so many clashing viewpoints that boards and managers need to create more direct lines of communication to help determine a company’s mission.
For example, many shareholders, particularly institutional money managers and pension funds, urge companies to put more money behind environmental and social causes, such as cutting emissions and increasing hiring of minority personnel. Others, particularly individual and employee shareholders, continue to prioritize financial returns.
While many managers stress that they already make investments that help environmental and social causes when the financial returns are attractive, some outspoken institutional investors, and quite a few boards, seem to support pursuing environmental and social causes even with weak or negative financial returns.
Since large public companies typically have tens of thousands of shareholders, thousands of employees, hundreds of managers and perhaps a dozen directors, it is not only difficult to generate a consensus but impossible to please everyone. Some shareholders put proposals forward for a vote of the shareholder body at company annual meetings, but the procedure tends to be convoluted and opaque.
For instance, proposals are almost never detailed enough to enable seeing estimates of financial returns compared to their value to an environmental or social cause. In addition, corporate voting rules enable institutional money managers and pension funds to hide behind such opacity and many get to cast votes solely by virtue of managing money of others rather than managing their own money.
Many boards yearn for a clearer mandate about how to respond to complex shareholder signals and overcome the limitations of the voting protocols.
Consider this modest, if radical, proposal: At annual shareholder meetings this spring, a board could sponsor a publicly disclosed poll regarding whether and to what extent the company should invest its pretax profit in environmental and social initiatives. The poll would be simple and non-binding to provide a cheap, clear way to gauge preferences.
The poll would state a proposed percentage of pretax profits that the shareholders might wish to allocate to environmental and social causes, such as 10%. The board would commit to target an allocation based on the percentage of shares voting yes. For example, if 50% voted yes, the board would commit to allocating 5% (that is 10% of 50%) of 2021’s pre-tax profits to such causes during 2022.
The board could poll the shareholders as to any proposed profit percentage — from 0% to 100% — that makes sense given a company’s specific circumstances in terms of shareholder base and current levels of environmental or social investment.
As an extreme, a board could ask what percentage of shareholders favored allocating 100% of pretax profits to environmental and social causes without regard to financial returns. If 20% of the shares voted yes, the board would target an allocation of 20%.
This exercise would enlighten boards about environmental and social investing without regard to financial returns. Boards have scant direct experience doing so, though they may have some experience with direct charitable giving and evaluating the environmental and social impact of more traditional capital allocation exercises. The polls would enable the board to determine the extent of research needed to understand such environmental and social investing.
The appeal of this approach to discerning shareholder preferences is both to clarify those preferences and accommodate clashing views. One drawback of such an approach is that a subgroup of pure altruists may end up effectively requiring a subgroup of pure capitalists to donate along with them. An obvious benefit is that it enables everyone to go on the record publicly to declare priorities. Overall, such a poll would be a step towards direct communication from shareholders to boards of increasing appeal in an increasingly divided and cacophonous world.
No board is likely to do this without at least some sense of likely shareholder reactions. In that spirit, readers are invited to provide some informal input in the comments section below. Please leave your opinion on this hypothetical poll. Suppose you are a shareholder in a company generating a return equivalent to the median S&P 500 SPX, -1.42%. What portion of 2021 pretax profits should the board allocate to environmental and social causes during 2022, without regard for financial returns?
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” For updates on Cunningham’s research about quality shareholders, sign up here.
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