EXECUTIVE SUMMARY

“A Voice in the Boardroom” is written for organizations and individuals who want to use their voice as shareholders to influence companies, but are not sure how to get started. It is meant primarily for asset owners — endowments, foundations, family offices, individuals or others — who are long-term stewards of capital on behalf of themselves and others.

Shareholders have the power to influence companies by engaging them in dialogue around social, environmental and governance concerns. We call these activities active ownership, the primary mechanism of corporate democracy. Active owners have helped bring about change in the policies of thousands of companies on such issues as climate change, board diversity and executive compensation, benefiting companies, investors and society as a whole. Proxy voting is a crucial tool in the engagement process.1

For small-time owners of common stock, it can be easy to discount the importance of participating in proxy voting. But adding one’s voice to those of other shareholders, large and small, can garner attention and influence the board of directors, management, and the social and environmental policies of a company. Even a small shareholder’s voice can become part of a larger trend of advocacy.

Because of the complexity of modern corporations and the diversification of many investment portfolios, the idea of getting involved in active ownership may seem daunting. But the corporate governance novice is not alone. There are numerous partners available who possess the experience and expertise to support investors, whether they aspire to become thought leaders who actively engage companies or merely want to ensure that their institution’s shares are voted in a thoughtful manner.

To get the most out of these partnerships, investors must be able to have an informed discussion about proxy voting and corporate governance with internal stakeholders such as boards, donors and staffs, and external stakeholders such as proxy agents, asset managers, and custodial banks. By understanding how the proxy process works and what the issues are, investors can position themselves to carry out their priorities efficiently and effectively.

The Investor as Steward of Capital

It may come as a surprise that the primary purpose of the public equity markets is not to finance new business investment. Public companies typically use internal cash flows rather than the capital markets to fund the investments in property, plant, equipment and other expenditures that enable their growth. In fact, public companies in the US and other markets buy back more equity shares than they issue in a given year. The function of funding new investments resides more in other asset classes such as venture capital.

Public equity investors do serve an important function, however: to serve as stewards of their existing investments. Stewardship involves a commitment to engage with companies, through both proxy voting and shareholder–company dialogue, to answer some of the most important questions about how companies govern themselves:

  • Can investors feel confident that the managers of public corporations, to whom they have entrusted their capital, will act in shareholders’ best interests?
  • Will corporate managers look to build enduring value, rather than pursue short-term profitability that places the institution at greater risk over the long term?
  • Will companies behave responsibly towards other corporate stakeholders such as employees, customers and society?

Why Is Stewardship Necessary?

Investment in the public equity markets brings numerous advantages over investments in other asset classes or direct investments. Important among them is the ability to diversify a portfolio across companies and industries. Equity investment also requires a “separation of ownership from control”—the owners of capital delegate the job of running companies to professional boards and management teams.

There are real benefits to delegating the day-to-day management of companies to specialists with specific industry expertise. However, this separation creates risk in the form of the principal-agent problem. Managers are hired to deliver returns to shareholders, but may be tempted to make decisions that benefit themselves at the expense of the company. Or, they may choose a strategy that earns high returns immediately but places the organization at risk in the future. Or, surrounded by like-minded individuals, they may become victims of “group-think” and miss the early signals of social change that will impact their competitiveness.

Moreover, as large companies supply an increasing share of the global economy, a narrow focus on maximizing shareholder returns without regard to the welfare of other stakeholders can exacerbate social ills such as pollution, inequality, or public mistrust of society’s institutions. Ironically, over the long term, exclusive focus on short-term profit maximization can actually undermine the interests of the shareholders themselves—as the financial crisis of 2007-08 demonstrated.

The Link Between Governance and Sustainability

As owners of companies, shareholders are well positioned to play an important role in addressing these issues within their investment portfolios. Shareholders can’t micromanage companies and shouldn’t try. However, they can encourage rules of the game that hold corporate leaders accountable to shareholders, offer incentives for long-term, sustainable value creation, and encourage consideration of how corporate decisions affect society as a whole.

We call these rules of the game corporate governance, defined as the relationship among all corporate stakeholders that determines how decisions are made about the strategic direction of the firm. Corporate governance defines the roles and responsibilities of shareholders, management, and boards.

Sustainability is a core element of good corporate governance. Cornerstone Capital defines sustainability as “the relentless pursuit of material progress towards a more inclusive and regenerative economy.” Companies become more sustainable by maintaining constructive relationships with stakeholders such as employees, suppliers, customers, and society as a whole. These relationships matter for corporate business performance because a company’s stakeholders are the ultimate source of its ability to create value.

For this reason, although some stakeholders may not have a formal role in corporate decision-making, companies that fail to incorporate legitimate concerns of stakeholders into strategic and operational decisions do so at their own peril—as companies such as BP, Valeant Pharmaceuticals, Volkswagen and many others have learned.

While historically many investors saw proxy voting and engagement as a low priority, a growing number now view this oversight function as critical to the effective functioning of the capital markets. This guide is intended to help investors learn how to use the power of proxy voting and engagement to influence companies and bring about a more sustainable economy.

Please click here for the executive summary of “A Voice in the Boardroom.” The complete report is available to clients of Cornerstone Capital Group.

John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group. He leads a multidisciplinary team that publishes investment research integrating Environmental, Social and Governance (ESG) issues into thematic equity research. He also writes and presents widely about the relevance of corporate governance and sustainability to investment performance for academic, foundations, corporate and investor audiences.

Caleb Ballou is a Research Associate at Cornerstone Capital Group. He recently completed a dual MBA and MA in international affairs at Columbia University.

1. This guide specifically addresses voting proxies. For broader instruction about engaging in dialogue with corporations, we recommend The Networked Corporation by John K.S. Wilson and 21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions by CERES and Blackrock.