Monday 20/05/2019

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Exercising one’s voting rights: a responsible action creating value?

Responsible Investment Strategist

Following a season awash with general shareholder meetings, we found it relevant to take stock: what is eventually the added value – if any –of voting as a shareholder? Loic Dessaint, General Manager of Proxinvest, was so kind to share his long-standing expertise and specific knowledge about corporate governance issues during a debate on the financial marketplace in Paris. Proxinvest is one of the major voting consultancy firms, helping many French and European institutional investors with their voting decisions during shareholder meetings.

The figures demonstrate it clearly: shareholder democracy is on the rise. At the same time, Degroof Petercam Asset Management has substantially increased its participation to shareholder meetings.

 

However, in the light of these increasingly rising participation figures, what is the reality behind shareholder democracy? Our objective is to make our voices heard and to advocate best practices with regards to corporate management. As a matter of fact, the number of shareholders contesting management decisions is on the rise. In parallel, DPAM will not hesitate either to be critical towards the recommendations of management and voting consultancy companies it works with.

Therefore, an engagement procedure was put into place in order to foster best practices, to ensure flexibility with regards to the profiles of the companies we vote for. The recommendations will vary according to the company type, such as multinationals, family-owned companies, and legal status, including limited companies or cooperative companies. Although the voting consultancy firms also make these distinctions, of course, the best practice recommendations suggested by organisations such as the ICGN or OECD may have a bias towards multinationals which are limited companies legally speaking.

It is our fiduciary duty as an asset manager to invest in a responsible way and to make our voice heard as shareholders, in order to convey some messages to companies. It is not a blind vote, however, as we do pay attention to voting instruction recommendations, whether they come from management or the voting consultancy firm, and as we contest several resolutions. However, the number of resolutions we contest remains stable as we prefer an engaged dialogue with management to a negative vote without any possibility for appeal. That is why we highly appreciate transparent information and the independency of the board of directors.

However, so-called poison pills, no separation of powers between the Chairman of the Board and the CEO, or any other violation of the ‘one vote, one dividend, one voice’ principles are directly revoked without any appeal on our part. This engaged dialogue is the crux of our voting process and the added value of participating to shareholder meetings.

On the one hand, the dialogue with the management teams on the best practices we should foster ensures the teams become increasingly aware of the importance of corporate governance and defending shareholder rights. On the other hand, dialoguing with management allows to share best practices and to enhance company management in the mid to long term. It is also an opportunity to question the management about other challenges than the ones which are typically on the agenda of shareholder meetings, such as the nomination of the board of directors or capital increases. As a matter of fact, it may for instance be a good time to ask questions about its climate change policy. In particular, that was a topic which tackled the responsibility of asset managers during the general assembly of Exxon Mobil. Indeed, half of the investors which rejected a resolution laid down by the shareholders on climate change risk are signatories to the United Nations Principles for Responsible Investment (PRI). Hence, they are committed to integrating environmental, social and governance criteria into their investment decisions. Several of them were accused of hypocrisy by doing so.

Such topics are still quite rare on the agendas of shareholder meetings. Nonetheless, they become increasingly frequent, which is in the end the result of the resolutions laid down by the shareholders. We should stress that it is difficult for shareholders to lay down resolutions, as regulation varies significantly from one country to another.

Thanks to voting and engaging on corporate governance issues, we may change people’s mind-sets, in particular the perception about shareholder engagement, which is unjustly compared to aggressive activism. It is about exchanging experiences and fostering best practices, to ensure it is beneficial to all geared towards the long term.

Participating to shareholder meetings is also a risk management tool, in particular to shield investors from the dilution risk which may occur during capital increases with cancellation of preferential subscription rights. Also in this case, it is important to keep looking at the propositions of the management and consultancy firms with a critical mind-set. Indeed, each case should be assessed individually even though the principle of defending preferential subscription rights will always be upheld.

Shareholder meetings are always lively debates, as the event which took place last Wednesday demonstrated. That is certainly the case when management remuneration is discussed. The Renault case and the total remuneration of 8.5 million EUR attributed to Carlos Ghosn made for a lively debate. The same goes for the independence of the directors: can they be considered as independent when they are appointed by the managers of the company? As of how many years of tenure will the independence of a mandate become questionable? These are all questions which are not as straightforward to answer.

However, by means of an engaged dialogue, in particular based on the agenda of the shareholder meetings, it is possible to take into account the specific features of each resolution, and to vote in a responsible way, taking into consideration the various stakeholders in the mid and long term.

Bondholders – nothing to say?

The issue of bondholders was also raised during the debate. Shareholders, holding one or multiple voting rights, speaks up during general and extraordinary shareholder meetings. What is the situation for bondholders, who do not have voting rights and who may nonetheless leverage change and have a significant impact? Bondholders also have opportunities galore to speak up about sound corporate governance and should avail themselves of these opportunities to uphold best practices, including environmental, social and governance challenges. Creditors may engage in more relevant collaborative engagement initiatives during the primary emission of a bond, or during debt restructurings. Just like shareholders, bondholders aim to maximise financial value by managing risks and constructing a portfolio which is aligned with the values of its beneficiaries.

Rights and duties

Being a shareholder entails having rights, but also duties. Shareholder democracy allows shareholders, in particular minority shareholders, to defend their rights during capital increases. However, this also brings about some responsibilities, namely fostering long-term value creation, the integration of ESG factors and upholding major principles such as transparency and equity of information, the independence of the board of directors and other steering committees (audit, remuneration committees) and defending minority shareholders.

Global equity markets represent about one quarter of global financial assets. By adding the value of the company debt, the total value of financial assets issued by private companies thus represents one third of this total... Hence, it is clear that investors may exert a significant impact and that by means of an engaged dialogue with companies, they may play an important role to make the world a more sustainable place. It is certainly a cause worth fighting for, and will benefit all of us.

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