Norges Bank Investment Management, the investment vehicle for the world’s largest sovereign wealth fund, has issued new voting guidance warning other investors that shareholder proposals should not be used for “micromanaging” boards or side tracking boards with fringe agendas.
The notice comes as it becomes recognised in markets around the world that shareholder proposals have grown significantly since the financial crisis of 2008 and especially on sustainability issues.
Norges Bank’s guidance asks investors to think about the materiality of their concerns; whether proposals impose unreasonable expectations on companies and to use a case-by-case approach rather strict voting rules.
According to Norges Bank’s chief corporate governance officer, Carine Smith Ihenacho, shareholder voting decisions demand a robust analytical approach as they grow in volume.
“We have to make decisions on issues put forward in shareholder proposals that often wide-ranging and have complex root causes. We therefore need to make considered, analytically based voting decisions.”
She added: “However, some shareholders proposals focus on tangential issues attempt to micro-manage company boards. Investors need a robust method to differentiate the quality of proposals when voting for or against them.”
Those comments will no doubt come as welcome support for board directors contending with a huge increase in sustainability-related proposals over recent years, soon seen as useful interventions while others are viewed as vering on the vexatious.
According to figures from proxy advisor ISS, governance interest peaked in the immediate aftermath of 2008, while sustainability resolutions have steadily multiplied until they now form the greater portion of proposals. ISS has also found increasing evidence of engagement between shareholders and boards on ESG issues.
When Morrow Sodali, a governance consultancy, polled 41 fund managers in March they all said ESG risks and opportunities played a greater role in their investment decisions over the previous 12 months.
When the not-for-profit As You Sow looked at the 2020 US proxy season it found there were 429 ESG proposals facing corporates against 366 the previous year.
The Norges Bank guidance calls for investors to only raise “material sustainability risks that a company is managing inadequately”.
Applying materiality criteria, the investor said, can allow shareholders to “weed out” proposals filed without care or due analysis.
In addition, Norges Bank expressed concerns about the diverging agendas of shareholders generating more proposals that appeal to niche interests. They should therefore “limit their prescriptiveness”, asking themselves whether a proposal places “unreasonable expectations on the company or appear to impose a strategy”.
It also suggested that a “rules-based” approach to voting can frequently ignore the unique circumstances of a company. That, Norges Bank said, therefore requires more “case-by-case” thinking before filing a resolution.
Last year attention was drawn to the cost and benefits of shareholder proposals by academics Nikolay Gantchev and Mariassunta Gianetti. According to their research, shareholder proposals do not, on average, “produce positive abnormal returns”. Though they do believe some proposals produce benefits as well as being a low-cost form of intervention, especially when compared with highly organised hedge fund activism.
The low cost does, however, mean proposals have proliferated and resulted in a small number of individuals submitting a high number of resolutions.
However, Gantchev and Giannetti expressed particular concerns about the quality of proposals. “The low-cost of submitting a proposal, however, allows unskilled or uninformed shareholders to post a large number of proposals to many different companies,” they wrote.