A Guide to Corporate Influence through Ownership
BY BRUCE HERBERT, AIF
Many individual investors and institutions today recognize the power they hold to influence corporations through the access that comes from owning shares of a company. This influence is called shareholder advocacy. This approach has gained significant traction in recent decades as investors, especially institutional ones, use their shareholder status to drive social, environmental, and governance (ESG) reforms.
What is Shareholder Advocacy?
At its core, shareholder advocacy (or shareholder engagement) refers to any effort by an individual or group of shareholders to influence corporate behavior, policies, and practices.
Stock ownership comes with a bundle of rights, one of which is the right to communicate with other shareholders at a company’s annual general meeting (AGM)—often by submitting a resolution or proposal that is then voted upon. Shareholders leverage this right to engage with companies on improving issues around environmental sustainability, human rights, labor practices, corporate governance, and social equity.
Unlike a person who owns stock solely for financial gain, shareholder advocates seek financial gain while also using their influence to push for changes that are both economically beneficial and aligned with some higher value or mission. Advocacy takes many forms, including filing shareholder proposals, engaging in direct dialogue with management, and voting on resolutions at AGMs. The goal is to persuade companies to adopt practices that are more aligned with longterm value creation for all stakeholders, not just short-term profits at the expense of everything else.
In more than five decades of shareholder engagement, we’ve found that if company actions are more sustainable, equitable, just, and fair, they tend to also be more profitable over the long-term.
How Does Shareholder Advocacy Work?
There are three key mechanisms through which shareholder advocacy operates. These include shareholder proposals, proxy voting, and shareholder meetings.
Shareholder Proposals
A shareholder resolution is a formal proposal submitted to a company for inclusion in proxy voting, which typically asks for an improvement in company policies or practice. Proposals can cover a broad range of issues such as environmental sustainability; employee and human rights; fairness, diversity,
and inclusion; or board composition and good governance. Shareholder proposals are submitted to the company and, if they meet certain criteria set forth by the U.S. Securities and Exchange Commission, will be voted on by all shareholders at the next AGM.
Although receiving a majority vote is somewhat rare, shareholdersponsored proposals bring focused attention to critical issues, push company management to take positive steps in response to shareholder concerns, and launch discussion of the topic into the business press.
In fact, roughly 60 percent of the time the mere filing of a shareholder proposal results in a company taking positive steps such that the proposal is withdrawn—a win-win outcome achieved without even going to a vote.
Proxy Voting
At the AGM, shareholders vote on matters related to the company’s operations, such as the election of board members, executive compensation packages, mergers and acquisitions, and shareholder proposals. Institutional investors, such as mutual funds and pension funds, typically have significant voting power due to the large number of shares they own.
By voting in favor of specific resolutions or opposing certain corporate practices, shareholders can influence the company’s decision-making processes. Often, even quite low votes lead to positive change, as companies recognize shareholder proposals as a leading indicator of popular sentiment.
Direct Dialogue
Shareholders, especially large institutional investors, can engage in one-on-one conversations with company management to express concerns or advocate for improvements. These dialogues can be informal or more structured, and shareholder advocates use these opportunities to discuss issues ranging from ESG practices and policies to corporate governance reform, encouraging companies always to take positive steps in a more responsible direction.
What Sorts of Impacts Can Shareholder Engagement Achieve?
Shareholder advocacy often leads to meaningful change within a company. While specific outcomes depend on the issues being addressed, common areas of beneficial impact include environmental sustainability, labor and employment policies, corporate governance, and human rights. (Other articles in this issue outline some of these meaningful outcomes in more detail.)
Shareholder Advocacy vs. Divestment and Impact Investing
While shareholder advocacy leverages ownership power to influence corporate behavior, it differs significantly from other strategies like divestment and impact investing.
Divestment
Divestment is the opposite of investment. It involves selling off companies or sectors that do not align with the investor’s ethical or social values. For example, an investor who is concerned about climate change might divest from fossil fuel companies. Divestment is often thought of as a form of protest or a way to avoid supporting companies that contribute to societal or environmental harm; however, buying or selling shares on the stock exchange neither gives money to a company nor takes it away. In contrast to shareholder engagement, divestment does not attempt to improve the behavior of the company involved. Even the famous South African Divestiture Movement did not succeed because of selling shares. Rather, it succeeded through economic and banking sanctions that cut off capital flows to the apartheid regime, choking off its ability to operate. While these activities may have been highlighted by public statements concerning divestment, this was waving a flag to draw attention to the real work at play in the form of sanctions and selective purchasing.
Impact Investing
Everything so far discussed (along with other actions beyond the scope of this article) creates positive impacts. That said, the narrow term impact investing refers (most often) to investing in non-publicly traded companies, organizations, or funds that seek both financial return and positive social or environmental outcomes.
While shareholder advocacy engages with large, publicly traded companies, impact investing typically focuses on investing in smaller, perhaps local, companies that evidence a commitment to community and positive conduct. Impact investors aim to support businesses that contribute to solutions for pressing global challenges, such as poverty, education, and climate change.
The key distinction is that shareholder advocacy involves engaging with and seeking to transform the large, public companies that can so negatively impact our world; while divestment seeks to avoid investment in certain companies; and impact investing typically involves supporting specific private companies based on their social or environmental impact.
Conclusion
Shareholder advocacy represents an increasingly influential form of activism—one that enables shareholders to engage directly with companies to improve and transform their policies and behavior. By leveraging ownership rights, investors can push for change that benefits not just shareholders but also the broader
society while promoting sustainability, better governance, and social responsibility. Whether it’s through shareholder proposals, voting, or direct engagement, shareholder advocates have the power to drive real, lasting change within the corporate world. Because of its scale and orientation toward engagement and transformation, shareholder advocacy is both an economically effective and morally compelling approach to shepherding investment resources, both for the world and an individual’s own integrity.
Glossary
Corporate governance: The system of rules, practices, and processes by which a company is directed and controlled, typically involving the relationship between the board of directors, management, and shareholders.
Divestment: The process of selling off investments in companies, sectors, or countries that do not align with an investor’s ethical, social, or environmental values.
Faith-based organization: A non-profit organization whose values and mission are rooted in religious or faith-based beliefs.
Impact investing: Investing in companies, organizations, or projects that aim to generate both financial returns and social or environmental benefits.
Institutional investor: Entities like pension funds, mutual funds, and insurance companies that invest large sums of money in company stock. They often hold significant influence over corporate governance.
Proxy voting: The act of voting on company matters by assigning someone else, typically a shareholder representative, to cast votes on their behalf.
Shareholder: An individual or institution that owns shares (stocks) in a company, giving them ownership rights and the ability to vote on company matters.
Shareholder engagement, or advocacy: Use of one’s stockholder ownership rights to engage in dialogue with corporate management teams, and to place an item into the proxy for a vote of all shareholders.
Shareholder proposal: A formal suggestion or request made by a shareholder to a company to change certain policies or practices. Shareholders can vote on these proposals at annual meetings.
Values-based organization: An organization where employees share a clear set of core values that guide decisionmaking, actions, and a sense of community, prioritizing these values over profit margins to develop a positive impact.
Bruce Herbert is the founder of Newground Social Investment and the founding director of NWCRI. Since 1994, Newground has been a leader in sustainable impact investing and shareholder engagement for clients nationwide. Its mission is to harness the power of business for good, aligning clients’ long-term financial goals with a healthy environment, strong communities, and a more just society.
