Provision 4 of the Code requires that when 20% or more of votes have been cast against the board’s recommendation in respect of a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons for the result. It should then publish an update on the views received from shareholders, plus actions taken, no later than six months after the shareholder meeting.
The boards of both companies will therefore need to report within six months on how they have engaged with shareholders on these issues, and the resulting outcomes. This guarantees further public discussion of what the “right” approach should be – and additional pressure on the board to justify its decisions, particularly around target setting. Investors will also expect that any such public debate will go on to inform the company’s next section 172 statement, published as part of its annual report and accounts, providing yet more insight into each board’s engagement with shareholders and response to their concerns.
In the US, oil company Chevron recently faced a rebellion by shareholders who voted, by a very significant 61% majority, in favour of a proposal from Follow This requiring the group to cut its total greenhouse gas emissions, including customer emissions and its own and supply chain emissions. Follow This has reportedly also succeeded recently in pushing through resolutions on the same terms at two other US oil companies, ConocoPhillips and Phillips 66.
Similarly, Exxon is likely to see three board seats taken by shareholder nominees after an activist campaign led by Engine No. 1 that came to a head at its recent AGM. The shareholders’ position (104-page / 8.8MB PDF) is that Exxon’s failure to move to renewables quickly enough is a major risk to the company’s future, and therefore that outside expertise are required on the board; something that is available, the shareholder group posits, through its nominees who are all highly experienced in the energy and renewables sector.
What is striking about this activity is the nature of the players involved. Activism in this area is no longer the domain only of environmental charities and NGOs. These challenges and resolutions have received backing from major institutional investors – in Blackrock and Legal & General, two of the very largest. At Exxon, Engine No. 1’s slate included two former chief executives and significant energy sector experience. If there has been any doubt previously, it is now clear that concerns about climate change are firmly mainstream and a focus of powerful institutional investors. The same issues arise time and again: are corporates moving quickly enough; and will boards align with activist shareholders’ calls to meet the Paris obligations or, despite some heavyweight support for those positions, continue with their current strategic approach, which retain at least for now majority investor support.
Regardless, setting and communicating the company’s strategy and engaging with key stakeholders in doing so is a fundamental obligation of the company’s board. Responsibility, at least in part, for significant shareholder dissent therefore lies with the board.