In the late 1990s, some shareholders became concerned that new practices in subprime mortgage lending could harm low-income borrowers. Companies like Wells Fargo received shareholder resolutions asking them to adopt anti-predatory-lending policies. Wells engaged in discussions with the shareholders and ultimately implemented practices that helped keep its mortgage origination business relatively free of “toxic mortgages.”
However, these kinds of successes were not common during the mid-2000s, when the mortgage industry was driven to generate ever more volume with declining concern about quality. Shareholders had even less success raising concerns about the increasing reliance of banks on complex financial tools whose risks were not well understood.
Perhaps fueled in part by the weak corporate policies that underpinned the financial crisis, engagement between companies and shareholders has become an accepted part of mainstream corporate governance. In 2014, governance stalwarts such as Calpers and traditional asset managers such as Fidelity and Vanguard endorsed a letter calling for greater dialogue between shareholders and corporate directors. Recently, David Katz of Wachtell Lipton, a trusted legal adviser to corporations, wrote that shareholder engagement should be “at the top of every well-advised board’s to-do list.” And BlackRock, the world’s largest asset manager, partnered with the environmental group Ceres to produce a how-to guide on the subject.
But dialogue between shareholders and companies adds value only if both sides approach that dialogue in the right spirit. The interests of long-term investors — to maximize the value of their investment — align well with those of companies. Shareholders can offer valuable perspective about a company’s corporate governance and its relationship to outside stakeholders — customers, employees, communities, regulators and others.
Our name for this kind of constructive dialogue is the “Shareholder Alignment Frontier.”
Read the full article, “Shareholder Alignment Is the Way to Add Value” in American Banker.
John K.S. Wilson is the head of corporate governance, engagement and research at Cornerstone Capital Group. Prior to Cornerstone, he was the director of corporate governance at TIAA-CREF and the director of socially responsible investing at the Christian Brothers Investment Services. He is also an adjunct assistant professor at the Columbia University Graduate School of Business.
Erika Karp is the founder and chief executive of Cornerstone Capital Inc., a New York-based firm offering investment banking, strategic consulting and investment management. Previously, she was managing director and head of global sector research at UBS Investment Bank.