Overview

University of Melbourne academics Ian Ramsay and Lloyd Freeman have released their analysis of shareholder activist activity in Australia.

The analysis is based on two sources of data: the shareholder ESG resolutions filed with listed Australian companies over the period 2002 to 2019; and interviews with key stakeholders – those who have proposed the resolutions, organisations representing institutional shareholders and company directors, and the Australian Securities and Investments Commission (ASIC).  Our key takeaways are below. 

Some interesting statistics 

• A recent spike in the number of ESG resolutions: Of the 82 shareholder ESG resolutions filed with ASX listed companies during the period 2002 to 2019, 79% (65 resolutions) were advanced in the three years between 2017 and 2019.  
• So far, companies in industries with high exposure to climate change have been the key focus.
  • The study found that the number of companies targeted is fairly small (23 companies in total), with many companies facing multiple resolutions.  
  • 79% of all shareholder ESG resolutions during the period 2002 to 2019 were targeted at companies in only four industries: energy, banking, insurance and materials (though companies in five other industry sectors were also targeted).  The authors consider that this reflects both the companies' relatively high level of climate change exposure and and the history of engagement by individual companies on the subject(s) of the resolutions.  

• 84% of resolutions have been advanced by one of only two filers: Every shareholder ESG resolution since 2015 (69 resolutions in total) have been filed by one of two filers: the Australasian Centre for Corporate Responsibility (ACCR) or Market Forces.  

Most resolutions concern climate risk

• Most resolutions are climate related (but exactly what the proportion is less straightforward to be definitive about).  
  • 57% of all ESG resolutions over the 2002-2019 period (47 of 82 resolutions) directly concerned climate change.
  • However, the authors comment that this 'understates the proportion of resolutions that were climate related'.  For example, if the 25 'governance' resolutions seeking constitutional amendments to enable shareholders to bring advisory votes are included (on the basis that these special resolutions are merely 'facilitative' of the clime-related resolutions that accompanies them) then the proportion of climate change related resolutions increases to 82% of the total.  
  • This figure would further increase depending on how broadly 'climate-related' resolutions is interpreted.  
• Climate change resolutions advanced to date concern the following topics (among others):
  • disclosure of strategies/ targets for reducing their exposure to fossil fuel assets in line with the goals of the Paris Agreement;
  • disclosure around how their climate change-related risks comply with the TCFD recommendations 
  • other resolutions concern methane emissions, deforestation and political lobbying (for a review of membership of industry associations to which the company belongs, based on the associations' stance on climate issues)

'Governance resolutions'

• The next most common category of shareholder ESG resolutions after climate-related resolutions are 'governance resolutions'.  32% of the total number of resolutions (26 resolutions) fall into this category.
• The report comments that 25 of 26 of these resolutions proposed an amendment to the companies' constitution to permit shareholders to bring advisory resolutions or request information.  

For context:

• Under the current shareholder resolution framework in Australia, shareholders are not permitted to propose either an advisory resolution or a shareholder vote to express an opinion (unless permitted to do so under the company's constitution).  
• In consequence, shareholder resolutions on ESG issues in Australia, tend to take the form of: a) a special resolution seeking constitutional change (allowing shareholders to bring advisory resolutions) which require a 75% vote in favour to be passed; and b) an accompanying ordinary (and contingent) advisory resolution or resolutions containing a substantive demand (eg a demand for Paris aligned disclosure).  Ordinary advisory resolutions are only formally put to the meeting, if the constitutional amendment is passed.  

The authors suggest that in light of this, 'governance' resolutions could be viewed as part and parcel of the accompanying substantive ESG resolutions:

'the inference is…open that governance-related resolutions proposing a constitutional amendment to allow for advisory resolutions by shareholders were facilitative or machinery-type resolutions.  That is, such resolutions may not have been advanced as independent issues of corporate governance were such resolutions not required for other, substantive ESG resolutions to be voted on at shareholders’ meetings'.

Other Resolutions

The remainder of ESG resolution advanced during the period related to workers' rights, human rights, gambling and 'free and informed consent' (fracking).  

Support for shareholder ESG resolutions in Australia is typically 'modest' (with some notable exceptions)

• The authors comment that globally 'the norm is for social and environmental shareholder resolutions to fail to be passed'.  
• The study found that typically in Australia, special resolutions to amend the constitution receive very little support and so far have a 100% failure rate.   Overall, these resolutions have attracted only slightly more than 6% support.  
• The level of support for substantive shareholder ESG resolutions, regardless of the topic, has also generally been modest with some 'notable' exceptions.  The average level of shareholder support for all ESG resolutions over the period 2002-2019 was 10.05%.
• Having said this, the report comments that there have been some resolutions that have received much higher levels of support.  For example, in 2020,  for the first time in Australia, more than 50% of shareholders in a listed public company voted in support of a shareholder climate change resolution, against board recommendations (though the resolution was not carried as it was contingent on the passage of a special resolution to amend the constitution that received only 6.28% of the vote).  
• The report makes clear that though there are signs that the level of support for shareholder ESG resolutions in Australia is rising, and that this trend may continue, there is as yet 'insufficient information available to reach a definitive conclusion on this' (though the upward trend in support is clear in the US context).

Measuring the success of shareholder resolutions – a valuable driver of change (even where they are not carried?)

Interestingly, the report found that securing a high level of support for shareholder ESG resolutions is 'neither the principal objective of the proponents of the resolutions, nor a necessary determinant of success of the proposal'.  Rather, the report found that proponents consider that shareholder resolutions have a positive impact on corporate ESG performance even where they fail to secure majority support - they are viewed as a valuable tool in driving change.

For example, the ACCR views shareholder ESG resolutions as a powerful way elevate ESG issues to the immediate attention of boards and management.  According to the report, 

'The principal objective of ACCR in putting forward shareholder resolutions is not necessarily to obtain large votes in support of its resolutions, but instead, because shareholder resolutions are a very powerful tool, to attempt to have the power of corporations exercised in a more responsible way: "we don’t have any interest in just getting very large votes, because we don’t think that very large votes alone will change things"'.

Similarly, Market Forces considers that the volume of votes in support for ESG resolutions is not necessarily reflective of their value.  For example, Market Forces considers that some of its 'biggest achievements' have been the concessions secured from companies as a result of engagement on a resolution ahead of a meeting, and in exchange for the withdrawal of the resolution.  

General agreement on the value of shareholder resolutions as an engagement mechanism

According to the report, there was general consensus from ASIC, the Australian Institute of Company Directors, the Governance Institue of Australia (GIA) and the Australian Council of Superannuation Investors (ACSI) that shareholder resolutions provide an important stakeholder engagement mechanism and that this has resulted in positive change in some companies that have been targeted.  

Having said this, stakeholders were not unanimous in their views on the extent to which shareholder resolutions are responsible for/effective in driving positive change.  

Stakeholders also raised a number of potential downsides.  For example, ASIC considers the 'potential for shareholder resolutions to blur the fundamental distinction between the role of the board of directors and that of shareholders', and the potential for resolutions not to align with the long term interests of all the company's shareholders as a potential disadvantage.  

Agreement that the current mechanism is 'clunky' but no consensus on whether or how it can/should be improved

Overall, the report found that the stakeholders interviewed broadly agreed that the current shareholder resolution framework in Australia (the inability for shareholders to advance and advisory resolution without a constitutional amendment) is flawed.  However there was no consensus on how this could be improved or even on the need to improve it. 

For example, according to the report, ACSI considers that despite the inefficiencies in the current process, the process does at least enable investors to express their views on key ESG issues.  

'investors do not feel obligated to support constitutional changes because they know that they can vote on the advisory resolutions, which is the more important issue of substance.  Given the general approach to publish the results of proxy votes, there is appropriate transparency on the advisory vote: ‘So, it’s not like [shareholders’ views are] unimportant or ignored just because the first leg fails’.

ASIC suggested that though ultimately a question for parliament, enabling shareholders to bring advisory resolutions could be considered.  The report sums up ASIC's position on this as follows:

'based on experience in other jurisdictions such as the United Kingdom, provided they remain non-binding, and not directive, permitting advisory resolutions without the need for an accompanying resolution to the amend the company constitution may be a valid mechanism for shareholders to engage on issues while preserving the responsibility of the board'.

[Source: Freeburn, Lloyd and Ramsay, Ian, An Analysis of ESG Shareholder Resolutions in Australia (October 5, 2020). University of New South Wales Law Journal, Vol. 44, No. 3, 2021, forthcoming, Available at SSRN: https://ssrn.com/abstract=3859264]