By Bryce Tingle
About the author: Bryce Tingle is a law professor and member of one of Canada's securities commissions.
Engine No. 1 launched an audacious bid in 2021 to place some of its representatives on the board of energy giant Exxon. The newly formed hedge fund argued in part that Exxon's lagging stock price arose from the company's failure to plan for a transition to a low-carbon future. Shareholders rewarded the fund's climate change-themed campaign with three seats on Exxon's board. The campaign attracted a lot of shareholder support, at least in part due to the rhetoric around carbon emissions.
The win was called " historic" and a " landmark climate vote," but there was always something improbable about the activist campaign. For example, Engine No. 1 argued that Exxon needed to invest in fields with a lower production cost per barrel -- in other words, to find more-profitable oil reserves. That's a message about increasing shareholder value, not one intended to warm environmentalists' hearts.
The past three years have vindicated the skeptics who believed that the proposals wouldn't reduce carbon emissions. Instead, Exxon " doubled down" on its core oil-and-gas business, significantly increasing drilling. This year, Exxon filed a lawsuit against shareholder activists calling for it to set emissions-reductions targets. The shareholders withdrew the proposal.
Stories like this are a puzzle. They suggest that some shareholders vote in irrational ways. Whether Exxon should -- or could -- prepare for a carbonless future, the much-discussed corporate election in 2021 apparently had as little connection with reality as, well, any political election. This should worry investors.
Serious investors know that they depend on corporate managers and directors for the success of their investments. They may be less conscious of the fact that the value of their shares also depends on the quality of their fellow investors. As I detail in my book, Hard Lessons in Corporate Governance, in the past 40 years shareholders have accumulated increasing power over the way that companies are governed.
Ironically, even as their power has grown, shareholders have continued to ignore voting in their investment calculations. Academic attempts to model how much value investors give the votes attached to their shares (as opposed to the economic rights) find that investors give their voting rights a cash value of somewhere from zero to almost zero.
Political scientists will find this problem familiar. Individual voters in a political election know that their votes won't alter the outcome. Voters correctly respond to this lack of incentive by refusing to spend much time informing themselves. This is the reason for the legendary ignorance of the average voter. Less than 20% of Americans know their senators and less than half know that their state has two of them. This ignorance isn't because the voters are dumb. It is because the voters are smart. They aren't wasting time learning stuff over which they have no control.
A vote is also a way of expressing who you are, what you believe, and which tribe you belong to. Voters regularly vote in ways that are irrational from their perspective of, say, their economic interests, but that advance certain private emotional or social objectives. This is why voters tend to get information from sources that confirm their prejudices and why conspiracy theories are so common.
Many shareholders also vote their shares in a way designed to keep the costs of doing so as low as possible, and in ways that seem designed to flatter their self-image more than advance the interests of the corporation.
Bad corporate voting may have adverse effects. A 2013 study demonstrated that directors will enact a policy recommended by proxy advisors, even when they know the policy is value-destroying. How do we know? The value of companies adopting the policy declined, but the insiders sold their shares before the policy was adopted.
In 2024, Salesforce's shareholders rejected a $39.6 million compensation package for CEO Marc Benioff. Last year, Netflix lost a say-on-pay vote and promised that it would make "substantial" changes to the way it compensated its executives.
These sorts of stories make it sound like shareholders are using their voting power wisely to steer companies in the most obvious area where managers' interests run contrary to their own. But like the Exxon battle of 2021, appearances are often deceiving.
Ten years ago, three researchers looked at what happened when shareholders rejected an equity compensation plan. They found no decrease in future compensation practices or the total amounts paid to the CEO. Instead, they found that companies returned with similar incentive proposals, which the shareholders approved, as if they had forgotten their earlier votes.
Voting matters for companies, just as it does for countries. Investors should interrogate companies dominated by shareholders who treat their voting power casually. Do the largest shareholders simply follow trendy advice from proxy advisors? Do their votes reflect the company's financial performance? Do they publicly articulate the reasons they vote against management? Do their investing decisions contradict their voting decisions?
Informed and intelligent voting matters to citizens. It matters to investors, too.
Guest commentaries like this one are written by authors outside the Barron's newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 27, 2024 08:30 ET (13:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.