The Role of Long-Term Shareholder Voice

By: Benjamin Colton and Ryan Nowicki

Bridging the time-horizon gap to create long-term value.

1. As a long-term investor, representing quasi-permanent capital for companies held in our clients’ index portfolios, we are uniquely positioned and incentivized to encourage portfolio companies to consider long-term risks and opportunities in order to maximize long-term value for our clients.
2. With many portfolio companies improving their shareholder engagement practices and approach to long-term financially material issues, our support for incumbent directors in contested elections has steadily increased over the last five years, reaching a new high in 2022.
3. Some activist shareholders, companies, and policymakers are engaging in and/or proposing activities that can circumvent shareholder voice; such measures could result in capital markets characterized by a focus on short-termism, amplifying the influence of certain investors and stakeholders, often with limited investment time horizons.
4. Boards and management teams that focus on managing material risks and emerging opportunities can maximize value for both companies and their diverse shareholder bases, thereby bridging the gap between short and long-term interests.

Introduction: A Critical Juncture for Shareholders

Faced with inflationary pressures, geopolitical uncertainty, and market volatility, companies’ commitment to an elevated culture of shareholder engagement has never been more critical. Coupled with these headwinds are the introduction of a universal proxy card and a shifting legislative environment. These developments have the potential to significantly alter the landscape of shareholder activism.

The universal proxy card (see below) presents a meaningful shift in how investors participate in shareholder democracy, as well as how companies and activist shareholders approach contested elections. In parallel with this development, new measures are currently being considered by policymakers, which intend to further empower individual investors. While we are supportive of the spirit and intent of these proposals to democratize the voice of shareholders, without thoughtful implementation these measures may result in unintended consequences for investors and companies alike.

At the same time, a short-term focus is being demonstrated by company actions, activist shareholder settlements, and legislative proposals, each of which has the potential to silence the long-term shareholder voice. Against this backdrop, the importance of considering long-term perspectives in these discussions has never been more important.

Our Role as a Long-term Investor amidst Diverse Shareholder Views

We appreciate that different investors have a broad spectrum of investment philosophes, risk appetites, and time horizons. We respect this diversity and value building relationships with our portfolio companies given our mutual objective of achieving long-term, risk-adjusted returns for our clients, who are the underlying shareholders in these companies. As a long-term investor, particularly in our index portfolios where we own a company for the duration of its inclusion in the index, we are a stabilizing force for our portfolio companies. We are uniquely positioned and incentivized to use our stewardship tools to encourage portfolio companies to consider long-term risks and opportunities, in an effort to create long-term value for our clients ¹.

By providing cost-effective and efficient vehicles to achieve diversification, our index products have increased access to financial markets for all investors – from individual workers saving for retirement to the world’s most sophisticated institutional investors.

State Street Global Advisors’ Asset Stewardship team aims to address all financially material issues – including environmental, social, and governance (“ESG”) issues – through our proxy voting and company engagement, thereby promoting the reduction of risk in our clients’ investments. In pursuing this mission, we have long recognized that activist shareholders can bring positive change to underperforming companies², particularly when boards or management do not respond to investor concerns. However, we are wary of activist shareholder models of engagement that favor short-term gains at the expense of long-term investor interests.

Our Approach to Engaging with Activist Shareholders and Nominee Candidates

We have a broad history of constructive engagement with management and boards of our portfolio companies, as well as with the activist shareholders who challenge them. This has occurred through dialogue and/or proxy contests. In recent years, we have increasingly witnessed activist shareholders dive deeper into emerging areas of company performance and board oversight, including financially material ESG issues³. As a result, board candidates increasingly offer multidisciplinary expertise in addition to direct industry experience⁴.

Activist shareholders, often with short-term time horizons, would be well served to focus on bridging the gap between short and long-term interests. By demonstrating a compelling case for how their proposed strategy and director nominees are superior to the incumbent’s approach to value creation, activist shareholders could increase their base of support among voting shareholders. A focus on this approach is particularly relevant in today’s market environment marked by volatility and uncertainty, in which activist shareholders may be incentivized to drive their agendas and advocate for change.⁵

Despite a renewed focus on director quality by activist shareholders, our support for incumbent directors in proxy contests has increased year-over-year since 2017, reaching a new high in 2022 as seen in Figure 1.⁶

This increase in support can be attributed to:

• A lack of focus and substance on long-term strategy in dissidents’ rationale, coupled with engagement models that over-emphasize short-term performance periods, which come at the expense of long-term investor interests and could result in the “greenwashing“ of ESG issues⁷
• The greater responsiveness of incumbent management and boards of target companies, as well as improved board independence, enhanced focus on ongoing board refreshment, and elevated quality and experience of incumbent directors
• Our commitment to standing behind portfolio companies during the global pandemic, while they focused on financial resiliency and navigated immediate challenges, including employee health, customer protection, and supply chain safety

Figure 1: Our Support in Global Proxy Contests, 2017-2022

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Footnotes

¹“Why Index Investing is Good for Markets – And Investors”. State Street Global Advisors. (August 2019)
https://www.ssga.com/investment-topics/environmental-social-governance/2019/10/why-index-investing-is-good-for-markets.pdf
²Brav, Alon. Jiang, Wei and Kim, Hyunseob. ”The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes” Oxford University Financial Review. (June 2015) https://rfs.oxfordjournals.org/content/28/10/2723.full.pdf
³“H1 2022 Review of Shareholder Activism”, Lazard Capital Markets Advisory Group. (July 2022)
H1 2022 Review of Shareholder Activism (lazard.com): https://www.lazard.com/media/452146/lazards-h1-2022-review-of-shareholder-activism.pdf
⁴“Shareholder Activism in 2021” Insightia. (January 2022)
⁵Gonzalez, Juan Pablo, Goodman, Anthony, van Biesen, Tanya, Olson, Nels. “The Return of the Activist Investor” Korn Ferry (August 2022) https://www.kornferry.com/insights/this-week-in-leadership/the-return-of-the-activist-investor
⁶State Street Global Advisors Voting Data as of date 8/1/2022
⁷“The Effect of Shareholder Activism on Corporate Strategy”, Spencer Stuart, Evercore & NYSE Governance Services. (April 2016) https://www.spencerstuart.com/research-and-insight/the-effect-of-shareholder-activism-on-corporate-strategy
⁸“Global Proxy Voting and Engagement Guidelines” State Street Global Advisors. (March 2022).
⁹“Fact Sheet: Universal Proxy Rules for Director Elections”, U.S. Securities and Exchange Commission. (July 2022)
https://www.sec.gov/files/34-93596-fact-sheet.pdf
¹⁰Hirst, Scott. “Comment Letter to SEC: Universal Proxy”. (June 7, 2021) https://www.sec.gov/comments/s7-24-16/s72416-8893542-241143.pdf
¹¹Hirst, Scott. “Universal Proxies”. Yale Journal on Regulation. Vol 35, No.2. (September 25, 2017)
https://ssrn.com/abstract=2805136
¹²“The Activist Report: 13D Monitor. 10 Questions with Ben Colton”, 13D Monitor. (February 2022)
¹³Liekefett, Kai H.E. “Welcoming the Universal Proxy”, Sidley (July 2022) https://www.sidley.com/-/media/publications/welcoming-the-universal-proxy.pdf?la=en
¹⁴Bebchuk, Lucian A. and Brav, Alon and Jiang, Wei and Keusch, Thomas, “Dancing with Activists” (June 1, 2017). Journal of Financial Economics, Harvard Law, Columbia Business School and European Corporate Governance Institute.
https://ssrn.com/abstract=2948869

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Originally Posted November 3, 2022 – The Role of Long-Term Shareholder Voice

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