Dealing with CSR-focused shareholder proposals
Public Canadian companies are increasingly being faced with shareholder proposals focused on corporate social responsibility (CSR) or human rights issues. This is due in part to rising interest in these issues by ethical focused shareholders, proxy voting advisory companies and institutional investors like pension funds. In the minds of many investors, companies that lack robust CSR or human rights programs face reputational and financial risk that can be addressed through better governance.
Many investors (including pension funds and banks) actually report on how they manage their own risk exposure on environmental, social and governance (ESG) issues in their portfolios. As such, these investors are more likely to care about CSR-related proposals that may affect their own perceived risk profile. This means that management of CSR and human rights risks can affect access to capital and even perceived shareholder value.
Early engagement is beneficial
Many companies faced with shareholder proposals of this nature will already have engagement strategies with investors and stakeholders on CSR and human rights topics. This early engagement can allow companies to spot issues before they manifest into a shareholder proposal. It can also allow companies to exchange thinking with interested stakeholders on CSR and human rights topics, explaining the work they are doing and their approach to dealing with future challenges. Open lines of communications (while protecting confidentiality and privilege) can be a good way to head off inflammatory issues early. But where a shareholder proposal is made, the company must be able to transition from a purely engagement mindset. This may necessitate the addition of new players beyond the core CSR team, such as senior executives or legal, as the focus turns to development of an effective response strategy that preserves the company’s CSR goals, reputation, stakeholder relationships and strategic business interest, while minimizing legal risk.
Strategy development is crucial
When faced with a CSR or human rights focused shareholder proposal, companies must consider the proposal itself, the stakeholder and public relations context, reputation risks and legal risks to determine the best response strategy. The response can range from direct engagement and negotiation of a withdrawal to a litigation approach. In this regard, there will be an initial question about whether the proposal is legally valid and whether it needs to be included in the management circular to shareholders. A number of legal approaches can be taken to challenge a proposal, including resisting inclusion of the proposal in materials sent to other shareholders. The best approach will depend on the context and the legal options on the table.
Ongoing negotiation and engagement
In conjunction with development of the legal strategy, ongoing engagement with the shareholder group advancing the proposal will be necessary and useful. Early dialogue can help define the issues, expectations and possible areas of compromise. A variety of approaches can be taken in such negotiations, from a firm strategy to an accommodative approach seeking voluntary withdrawal of the proposal. If an agreement can be reached on the withdrawal of a proposal, the company will need to consider drafting an agreement with the shareholder group. This could include commitments by the company responding to the issues at hand and commitments from the shareholders about how they will communicate publicly on the issues raised and whether they will bring similar proposals again in the future.
Planning public communications
In the event that a controversial proposal proceeds, a communications strategy will need to be implemented. This would involve preparation of the company’s written response to the proposal that will be sent in the management circular. There may also be additional targeted communications or engagement with key shareholder groups. The company may seek to persuade other shareholders to vote against the proposal. If the proposal goes to a vote, the company will need to anticipate the questions or other vocal activism that may take place at the annual meeting. Senior executives will need to be briefed on how best to respond to pointed questions relating to the proposal. Demonstrating a knowledgeable understanding of the issues in these exchanges will be important to reassure other stakeholders that the company is on top of these issues.
Implementing human rights governance strategies
Whether a proposal is withdrawn, defeated, or never even made, companies should consider how their approach to CSR and human rights governance is responsive to shareholder expectations and as part of the overall business strategy. This can also lead to opportunities for community and stakeholder engagement that can help companies meet their long-term stakeholder relations goals.
The author is a lawyer with Norton Rose Fulbright, Toronto.