On January 6, CalSTRS and Jana Partners, identifying themselves “as active and long-term shareholders,” sent Apple a letter, asking the tech trendsetter to address the needs of parents who want to ensure that children use iPhones and other devices responsibly. Immediately, shockwaves traveled through the business community, as public companies understood that the social impact of their products could come under a microscope in whole new ways.
Wesley Gee, Director of Sustainability at The Works Design Communications in Toronto, says that “when it comes down to brass tacks, companies are now considering: How are we creating value?” He notes that the repercussions of the CalSTRS/Jana letter were keenly felt by some sectors in Canada. “It’s not just Apple thinking about Apple and its own sector. This letter means that mining and other companies in Canada are going to have to strengthen how they manage and measure issues, and also how they disclose their impact on society,” he says.
Is this type of communications something new? It’s not, really, says Gee. He notes that “companies have spoken at a 30,000-foot level for some time, without really saying anything. What’s changed is that you’re not going to be shaking hands and kissing babies anymore. Companies are asked to be specific about how they identify risks and opportunities, and how these are being managed – and value created – over the long term.”
John Truzzolino, Director, Corporate Governance Services for Donnelley Financial Solutions, has observed the rise of impact investors, or investors “looking at the social impact of a company on all facets” of the ESG (environmental, social, and governance) equation. For the first time, he notes, very large institutions are saying “there are things that are ‘impactful’ about Apple’s business that Apple needs to be aware of. They want Apple to look at the social impacts of a device [like an iPhone] on a child when the device is designed for a 40-year old.”
Hot Issues: Climate Change, Board Diversity
The 2017 shareholder resolution requesting ExxonMobil disclose more information about the potential effects of climate change on its business attracted attention, according to Truzzolino. That the non-binding shareholder resolution passed was big news, and that ExxonMobil agreed late last year to start publishing reports on the possible impact of climate change on its business was stunning indeed.
In a December 12, 2017, article, the Financial Times called ExxonMobil’s decision “the biggest success so far for investors who have been pushing companies to do more to acknowledge the threat they face from climate change...”
Gee agrees, calling the ExxonMobil announcement “a tipping point,” as well as a sign that greater pressure for climate change-related disclosures may be coming soon. Among the important considerations for Canadian companies to look at are recommendations from the TCFD, or the Task Force on Climate-related Financial Disclosures, which is currently being reviewed by the Canadian Securities Administrators.
That said, Kern McPherson, Senior Director, North American Research for Glass Lewis, emphasizes: “We’re far from having a single best practice for how companies should disclose these practices, but the clear word for investors is ‘materiality'."
McPherson describes diversity on Boards as another hot issue within ESG. State Street Global Advisors’ installation of the ‘Fearless Girl’ statue on Wall Street in March 2017 was emblematic of how the issue of gender diversity was moving more to the mainstream, he says.
“Gender diversity on the Board is a much more important issue to institutional investors than it has been in the past,” explains McPherson. He notes that Glass Lewis may soon vote ‘no’ to members of nominating committees at companies that have no women on their Boards, have not adopted policies on gender diversity, and have offered no explanation for their inaction.
Alan Hutchison, Partner at Osler, Hoskin & Harcourt LLP in Vancouver, sees parallels between the gender diversity debate and the Me Too movement. The lesson for IROs here, he says, is to heed the raging social discussions of the day because “an IR person has to be aware of all these things and be able to speak to them.”
Meanwhile, Christie Stephenson, Executive Director of the Peter P. Dhillon Centre for Business Ethics at the University of British Columbia’s UBC Sauder School of Business, notes that businesses with a higher percentage of women in power may be able to help their organizations avoid “blind spots” when it comes to making and marketing products. As an example, she notes that FitBit, which did not initially incorporate such “fem-tech elements” as pregnancy and menstrual monitoring into its devices, lost market share to competitors that had included these popular features.
Addressing a Broader Audience
When asked what makes the current activism landscape different, McPherson said that IROs must now address a broader range of investors: “Passive investors are not as passive as they once were. In fact, passive investors are being very active when it comes to proxy voting and analyzing the environmental, social and governance factors in public companies that they own.”
Arguably, another shareholder letter – this one by Larry Fink, CEO of BlackRock – made as deep an impression as the letter addressed to Apple. In a January 15, 2018, headline, The New York Times summarized Fink’s message this way: “Contribute to Society, or Risk Losing Our Support.”
Stephenson says that because passive investors “can’t easily exit, they are using the power of their voices and proxy voting to communicate concerns.” She points out that “everybody is talking about the Larry Fink letter because IR professionals have never been asked to articulate a social purpose like this before. This is a watershed moment.”
Given the changes afoot, how best can IROs respond?
“The worst thing to do is to put your head in the sand and not engage,” says David Salmon, President of Laurel Hill Advisory Group, based in Vancouver. He recommends regular dialogue with top shareholders, taking care to speak with the right individuals. While portfolio managers increasingly consider ESG issues material, they may not be the best people to articulate the ESG concerns of a large investment firm.
Salmon also urges IROs to worry less about whether they are complying with every governance policy and more about simply understanding where shareholders stand. In-depth knowledge lets IROs present shareholder concerns to management and the Board, and also makes it easier to explain to shareholders why your company may not be complying with a particular policy. When a company diverges from shareholders’ governance best practices, he says, “what shareholders want to know is that the issue hasn’t been overlooked or dismissed.”
A Look Ahead
One of the newer governance frontiers is examining the practices of a company’s supply chain. Gee explains that a company like Apple is realizing that the strength of its disclosures is only as good as the disclosures of its supply chain partners “because that’s where a majority of the risks and the impacts would occur.”
Stephenson agrees, noting that “responsible investors have long been saying that companies are going to be held responsible for what happens deep down in their supply chains.” As some indication of what might ultimately be required of companies, she points to the U.K. Modern Slavery Act 2015, which requires large companies to provide assurances that they’ve examined their supply chains and found no evidence of slavery.
She also suggests that Canadian IROs become comfortable discussing the relationship between their companies and indigenous people. Citing the Truth and Reconciliation Commission, she says that IROs at Canadian companies “have a unique legal situation and many opportunities to work in a respectful way with indigenous communities.”
Precisely which governance issues claim the greatest attention may change, but experts agree that the spotlight on ESG issues is not likely to lessen any time soon.
“ESG is not some kind of flavour of the week thing going on,” says Gee. “Paying attention is a purely pragmatic decision companies are making. And that’s great, because in the end, long-term pragmatism usually wins.”
Five Steps for IROs
- Find out your shareholders’ influences. “You need to know which governance groups your shareholders are members of, and which advisors they subscribe to,” says Salmon.
- Do your homework. “Before you walk into that room with an investor, do a little bit of legwork so you know what to expect,” recommends Truzzolino.
- Use your CIRI network. Salmon points out that “IROs have all experienced similar challenges. There’s incredible knowledge in the CIRI community, so use your networks.”
- Look to the responsible investing community. Stephenson says that socially responsible investors “have served as canaries in the coal mine for quite some time.” To learn what issues may be on the horizon, she suggests listening to the concerns of this “vibrant group.”
- Maximize your existing communications vehicles. Gee points out that producing an “integrated report” might mean that your ESG message reaches only a sliver of your audience, while an annual report will be read more broadly. In addition, he recommends communicating via many channels, including written materials, websites, face-to-face conversations, and social media. “You want to reach each of your different audiences in the most appropriate way,” he says.