The Problem With Proxy Ballots

Vote With Money Instead

by Garvin Jabusch

Many people assume that engagement with public companies through
proxy voting and resolution filing is the best — if not only
— way to see positive environmental, social, and governance
outcomes from your investments. For me, this approach misses a
fundamental point of market-based solutions: you make in
investments in the most compelling ideas that reflect what you
think is likely to grow, where you think the economy is headed,
and yes, outcomes you support. That means using investments to
favor firms that are already making innovative sustainable
contributions to the global economy — not trying to Frankenstein
aging, destructive, legacy companies into healthy new citizens.

Consider the recent case of a major advocacy victory with
ExxonMobil. After years of effort, a shareholder advocacy
coalition in January succeeded
in persuading the company
to place prominent atmospheric
scientist and climate change expert Susan K. Avery on their board
of directors. The theory is that surely Dr. Avery’s appointment
signifies a change in attitudes at Exxon, and her expertise will
encourage the company to incorporate climate change into its
corporate strategies. Meanwhile, Exxon Mobil Corporation announced
in February that its “proved reserves were 20 billion
oil-equivalent barrels at year-end 2016.” That’s 20 billion
barrels of oil they fully intend to extract for purposes of being
sold and burned. This is what Exxon is; no new board member is
going to change that. Speaking to Inside Climate News,
Jamie Henn, spokesman for said,
“It’s hard to believe this is little more than a PR stunt meant to
pave over the decades the company spent deceiving the public about
the crisis.” A cynic could conclude that shareholder activism’s
largest victory to date vs. ExxonMobil adds up to a PR coup for
the firm under fire.

Further, a lot of advocacy is ineffectual. For example, State
Street Global Advisors has recently made
with a plan to use their proxy voting power to
encourage Russel 3000 companies to place more women on their
boards. What’s the plan, and will it work? Slate Money’s Felix
Salmon explored
from the perspective of a Russel 3000 company with zero
women on the board: “In a year’s time …if you still have zero
female board members and you can’t persuade State Street that you
have made moves to get more female representation on your board,
then, if and when the chairman of your nominating committee gets
re-nominated for a board seat, they will vote against that
individual. I mean, come on.” State Street then seems to be
engaging in a symbolic form of advocacy, and not seriously
expecting to effect change in corporate behavior.

I’ve written
that “[r]eal impact depends upon voting with your
dollars for the future economy, for the actual catalysts of
change, for the viable growth areas where we can reasonably expect
to earn good equity growth in this era of rapid change. This means
a higher level of due diligence that avoids the trap of thinking
public equities are ‘set it and forget it’…it’s not that public
equity portfolios can’t have impact, it’s just that they
usually don’t” (emphasis added).

So how do we measure the impact of a portfolio if not by
activism? I say it’s about looking at the economic impact of your
investments. Invest in the firms that are earning more revenue
from creating environmental and social solutions, employing more
people, and gaining market share from riskier and less efficient
competitors. While this may be harder to quantify than tallying up
shareholder proposals, these business and economic
factors have dollars behind them, and that means they equal
impact at scale.
At the end of the day, an economy
driven by products and services that address the environmental and
social risks confronting the global economy has much greater
positive impact than an economy of ExxonMobil’s touting their lone
climate scientist board member. The traditional metrics of
business are the metrics for a reason: they measure real results.
Investing in solutions providers exhibiting the best of these
metrics is simply the most powerful message we can send.

Clearly, it’s more environmentally, socially, and economically
meaningful to vote with dollars rather than proxy ballots, but it
also has greater financial potential. Today, business-as-usual
investing in S&P 500 companies means buying a flat 12 month
forward earnings per share (EPS) estimate average, paired with a
high average price to book valuation. On the other hand, many
solutions –like renewable energy, organic farming practices, and
water management are growing EPS more rapidly, yet many of them
remain undervalued. Investors can send the market a powerful
signal about which investments matter and have
quantitatively better odds at superior returns by opting for these
solutions-creators, rather than the overvalued companies of the
old economy. Faster growth at a cheaper price? This is what
investment managers are supposed to be seeking, but is almost
absent from major benchmarks.

It’s easy to keep investing in stalwarts of the old economy like
the S&P 500, then reassure ourselves that shareholder
engagement will solve our problems. But it won’t. Let’s be honest
with ourselves: we know it is time is stop making lazy and,
ultimately, destructive investment decisions based on the
inherited wisdom of indexing or for fear of not tracking our
benchmark, and then justifying those investments by citing
engagement. Addressing systemic risks – like climate change,
resource scarcity, and widening inequality – means buying
companies that are solving big risks and avoiding firms
contributing to risk. This sends the markets a strong signal about
the economy’s evolution, and also means that there’s a lesser need
to engage these companies in the first place.

Shareholder advocacy can certainly have positive impact, but
there’s an important caveat to remember. In the end, companies
only care about shareholder proposals when they identify ones that
already align with the firm’s self-interest and end goals.
Limiting fossil fuel use and climate change is not in ExxonMobil’s
self-interest, and no number of resolutions, proxy votes or polite
letters is going to change that. As such, shareholder engagement
can initiate positive change within the existing goals and
structures of a company but not in a company’s fundamental reason
to exist. Thus, advocacy is most effective when practiced on firms
already engaged in a business that lends itself to the goal
favored by the activist. You can work with a solar company to help
them improve their supply chain or to have more minority
representation in leadership, but you can’t persuade an oil
company not to drill. Shareholder advocacy can and does have
positive impacts around the periphery of big issues like climate
change, but its power is trivial next to the power of the
underlying economics. And the brightest signal of the economics is
markets and returns.

To illustrate, join me in a short thought experiment. Imagine
you’re the CEO of an oil major, say ExxonMobil. What concerns you
more: a world where everyone keeps buying index funds that bump
your stock price every time they do, but occasionally people file
resolutions that you largely ignore, or a world where everyone has
decided simply to skip that and invest instead in what’s next,
eschewing fossil fuels altogether? I know for sure which of these
worlds the CEO of Exxon most fears, and that tells me all I need
to know about how to have impact.

An version of this

post originally appeared on

Garvin Jabusch is cofounder and chief investment officer
Alpha® Advisors
, LLC. He is co-manager of the Shelton

Green Alpha Fund (NEXTX),
of the 
Green Alpha Next Economy Index, the Green
Alpha Growth & Income Portfolio, and of the 
Sierra Club Green Alpha Portfolio. He
also authors the Sierra Club’s green economics blog, 
Green Alpha’s Next

Source: Alt Energy Stocks