Shareholder Engagement Inside and Outside the Shareholder Meeting

In a recent paper, we explore the engagement practices of public company shareholders and offer several important insights.

First, contemporary shareholder-company engagement is a multi-dimensional and evolving phenomenon with shareholders using, to varying degrees, a wide range of engagement techniques. These include the shareholder meeting, behind-the-scenes interactions, public campaigns, and online technologies such as discussion boards and messaging apps. The latter technologies are particularly favored by Generation Z and Millennial investors and have been used in some recent high-profile cases to marshal investors’ governance influence with remarkable effect. Generation Z and Millennial investors are expected to become significant equity investors as a result of inter-generational wealth transfers, raising the possibility that tech-enabled engagement will become increasingly prominent.

Second, shareholders often mix and match different engagement techniques in a complementary manner to leverage their influence on corporate governance. For example, institutional investors use dissenting votes at a shareholder meeting as a signal to a company that it has not addressed concerns previously raised by shareholders in private discussions. Voting dissent by institutional investors can then lead to further behind-the-scenes interactions to resolve investor concerns.

Third, much shareholder-company engagement is undertaken collectively or relies on synergistic interactions between different shareholder types. Examples include institutional investors forming ad hoc coalitions to confront problematic investee companies in private; hedge funds obtaining the support of institutional investors in public campaigns against companies; and gadflies and activist organizations tabling shareholder voting proposals that are supported by institutional investors.  Intermediaries such as investor networks and engagement firms also act as collective action mechanisms, channelling and focusing the influence of the multiple investors that participate in or use them. These developments highlight the increasing capacity of public company shareholders to overcome collective action challenges.

Fourth, despite the range of mechanisms available to shareholders, the shareholder meeting remains significant. Its formal, in-person, and public nature sets it apart from other engagement mechanisms and gives it unique potential as a forum for scrutiny and accountability. For corporate managers, providing a public and in-person account of a company’s performance at a shareholder meeting can be an unsettling experience that focuses the mind and imposes a level of discipline on how they account for that performance. Activist shareholders can read the room, seek to build consensus, and leverage the pressure on corporate managers from the floor of the meeting. Dissatisfaction with virtual shareholder meetings during the Covid-19 pandemic underscored the benefits for shareholders of the in-person interactions at a physical shareholder meeting. Although low attendance rates indicate that shareholders do not routinely use the shareholder meeting to maximum effect, we argue that the meeting is better thought of as having contingent significance because its potential as an accountability mechanism can prove critical when a company experiences serious governance problems.

The shareholder meeting is also significant as the occasion on which shareholder voting occurs. Voting data highlight that share voting is today a key mechanism for public company shareholders to exert influence in corporate governance. Often this voting power is exercised in a reactive fashion; that is, it will be used to express dissatisfaction by voting against or withholding votes on resolutions tabled by corporate management. Increasingly, however, activist shareholders exploit shareholder voting power in a strategic and proactive manner. Gadflies and activist organizations, for example, table resolutions for consideration at a shareholder meeting as part of a campaign to drive change in a company’s affairs. Evidence indicates such proposals can attract significant levels of voting support. As a result of this support, the mere filing of a proposal is sometimes sufficient to prompt corporate managers to engage with activists to secure the withdrawal of the proposal and the avoidance of an adverse voting outcome.

As a result of technological developments, it could be argued that, in theory at least, there is no reason why voting need occur at the shareholder meeting. It could, for example, be undertaken through a separate online plebiscite, leaving the shareholder meeting as a forum purely for reporting, discussion, and debate. We argue that any such proposed change should be approached with caution. Our paper notes how an Australian proposal to separate the voting function from the shareholder meeting was met with mixed support. Critics argued that having share voting finalized at the shareholder meeting contributes to the meeting’s capacity to act pressure corporate managers, especially where voting outcomes reveal material shareholder disquiet.

Our paper’s insights have important implications for understanding – and regulating – the governance of public companies. In particular, the multi-dimensional and evolving nature of contemporary shareholder-company engagement practices means that the processes which shape corporate decisions are becoming more diffuse and potentially less transparent. Ensuring accountability is a more complex issue in these circumstances as highlighted, for example, by recent debates about the pros and cons of  proxy advisers and shareholder proposals. Our insights are also relevant to the debate about the relevance of the shareholder meeting. We show that the meeting remains an important, yet imperfect, engagement mechanism. Possibilities for improving the effectiveness of shareholder meetings merit careful consideration. However, reform initiatives must recognize that the shareholder meeting today forms part of a broader array of engagement techniques and mechanisms. In these circumstances, it will be necessary to consider carefully whether reforms to the meeting are likely to make a significant difference to overall shareholder-company engagement in light of the alternative mechanisms used by shareholders.

This post comes to us from professors Tim Bowley, Jennifer G. Hill, and Steve Kourabas at Monash University – Faculty of Law. It is based on their recent paper, “Shareholder Engagement Inside and Outside the Shareholder Meeting,” forthcoming in Board-Shareholder Dialogue: Policy Debate, Legal Constraints and Best Practices (Luca Enriques & Giovanni Strampelli eds., 2024, Cambridge University Press) and available here. A version of this post will appear on the Oxford Business Law Blog.