Opinion: if investors really want companies to fight climate change, they should say where their money is

Shareholders today hold so many opposing views that boards of directors and executives need to create more direct lines of communication to help determine a company’s mission.

For example, many shareholders, especially institutional fund managers and pension funds, are urging companies to spend more money on environmental and social causes, such as reducing emissions and increasing staff recruitment. minority. Others, particularly individual and employee shareholders, continue to prioritize financial returns.

While many managers point out that they are already making investments that help environmental and social causes when financial returns are attractive, some outspoken institutional investors and many boards appear to support the pursuit of environmental and social causes even with financial returns. weak or negative.

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Since large state-owned companies typically have tens of thousands of shareholders, thousands of employees, hundreds of executives, and maybe a dozen directors, it’s not only hard to build consensus, it’s impossible to please. to everybody. Some shareholders present proposals for a general meeting of shareholders vote at company annual meetings, but the process tends to be convoluted and opaque.

For example, proposals are hardly ever detailed enough to allow one to see estimates of financial returns relative to their value for an environmental or social cause. In addition, corporate voting rules allow institutional fund managers and pension funds to hide behind such opacity and many may vote purely because of managing other people’s money rather than managing their own. own money.

Many boards yearn for a clearer mandate on how to respond to complex signals from shareholders and overcome the limitations of voting protocols.

Consider this modest, if sweeping, proposal: At annual shareholder meetings this spring, a board of directors could sponsor a publicly released survey to determine whether and to what extent the company should invest its pre-tax profit in environmental and social initiatives. . The survey would be simple and non-binding to provide a clear and inexpensive way to assess preferences.

The poll would show a proposed percentage of pre-tax profits that shareholders might want to spend on environmental and social causes, such as 10%. The board would commit to targeting an allocation based on the percentage of shares voting yes. For example, if 50% voted yes, the board would commit to allocating 5% (i.e. 10% of 50%) of the 2021 pre-tax profits to these causes in 2022.

The board could question shareholders on any proposed profit percentage – from 0% to 100% – that makes sense given the specific circumstances of a company in terms of shareholder base and current levels of investment. environmental or social.

At the extreme, a board might ask what percentage of shareholders are in favor of allocating 100% of pre-tax profits to environmental and social causes without considering financial returns. If 20% of the shares voted yes, the board would target a 20% allocation.

This exercise would enlighten boards of directors on environmental and social investment regardless of financial returns. Boards of directors have little direct experience in this area, although they may have some experience with direct charitable giving and environmental and social impact assessment of more traditional capital allocation exercises. . The polls would allow the board to determine the extent of research needed to understand such an environmental and social investment.

The value of this approach for discerning shareholder preferences is both to clarify those preferences and to accommodate divergent points of view. A downside of such an approach is that a subgroup of pure altruists may end up requiring a subgroup of pure capitalists to donate with them. An obvious advantage is that it allows everyone to publicly declare their priorities. Overall, such a survey would be a step towards direct communication from shareholders to increasingly attractive boards of directors in an increasingly divided and cacophonous world.

No board is likely to do this without at least some idea of ​​the likely reactions of shareholders. With that in mind, readers are encouraged to provide informal comments in the comments section below. Thank you for leaving your opinion on this hypothetical poll. Suppose you are a shareholder of a company generating a return equivalent to the median of the S&P 500 SPX,
+ 0.92%.
How much of 2021 pre-tax profits should the board allocate to environmental and social causes in 2022, regardless of financial returns?

Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group and editor, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America”. For updates on Cunningham’s research on quality shareholders, sign up here.

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