[Deep Dive] Shareholders for change!
In the inaugural Deep Dive issue we look at shareholder activism together with Betsy Middleton from Follow This which played a big role at the events at the end of May.
Big oil and gas majors have had a couple of very bad weeks. Shell lost a big case against Friends of the Earth Netherlands that forces them to address their carbon footprint. Exxon faced a shareholder rebellion where an activist investor Engine no 1 got three climate friendly (sort of) board members elected. Finally, Follow This got yet another majority win for a climate shareholder resolution at Chevron.
Last week, June 3 on Clubhouse we sat down with Betsy Middleton who runs Strategy and External Communications at Follow This to talk about shareholder activism. This article is written in part based on the interview with her and the ensuing discussion.
For more information about big fossils bad week see the May 24-30 issue of this newsletter.
TL;DR at the bottom of the issue.
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How to use capitalism against itself
Follow This was started 5 years ago and until recently run mostly by founder Mark van Baal with the help of volunteers. Following recent success, the team has expanded rapidly. There are many approaches to how shareholder activism can work. And the two approaches highlighted by the past week’s events are different but work in a similar fashion.
Engine no 1 and Follow This
Engine no 1, responsible for what happened at Exxon, is a classic hedge fund, i.e. a company that manages other people’s money and uses the influence that the money buys to influence the management of the company. In the case of Exxon, Engine no 1 got three board members elected. Engine no 1 owns 0.02% of Exxons stock, which in a 260B$ behemoth amounts to roughly 52M$.
Follow This has similar aims as Engine no 1 (although see “Ideology or money” below for one key difference), but it targets regular folks like you and me. To invest in a hedge fund you typically need a significant amount of money at least 100K€ (but that changes with jurisdictions) in other words, you need to be considered a “professional accredited investor”. At Follow This you can pick which oil and gas major you would like to help them influence by buying one share in the oil major of your choice. Currently, you can buy a share in Shell, Chevron, BP and Total. Follow This will then buy the share for you and hold it in a holding company and use the influence that share buys to be an activist shareholder (more below). It is still your share though, so you can tell them to sell it at any time you want (at which point of course they can’t use your share to influence the company).
In other words, Follow This asks you and me for help, whereas hedge funds such as Engine no 1 targets professional accredited investors. But the basic strategy and way of operating is similar. So how is a shareholder activist operating?
How shareholder activism works
The scene where shareholder activism can shine is at the Annual General Meeting (AGM), which all companies are required to hold once pr. year. At the AGM shareholders can submit what’s called a shareholder resolution, basically fancy talk for something the board needs to discuss at the AGM and all shareholders need to vote for or against. However, not everyone can submit a shareholder resolution. You need to own a certain amount of shares before you are allowed to. How many depends on what country the company is in. In the US for instance you will need to own at least 2000$ worth of shares for 3 years before you can submit a shareholder resolution or 25.000$ worth of shares for 1 year. In the UK you need 100 people / companies each owning 100GBP worth of shares.
Once you reach the minimum requirement to submit a shareholder resolution you need to figure out what that shareholder resolution should be. This could be asking the company to set clear targets on scope 1-3 emissions in the short-, medium- and long-term in order to be compliant with the Paris agreement like Follow This does.
For things like getting board members elected (what Engine no 1 managed to do at Exxon) the process is more rigorous and does require the activist shareholder to own more shares than the above stated amounts. But the overall idea is the same: Get to a point where the investor meets the requirements to be able to put forth a resolution of their choice in front of the other shareholders.
Prior to the AGM the management of the company provides their advice to shareholders on whether or not they think a particular resolution should be voted for or against. There’s also a number of so called “proxy advisors” that also gives their advice on these.
At the AGM all eligible shareholders then vote for the resolution you have put forth and if you get a majority you “win”. And from here on it gets complicated.
Usually shareholders follow the advice of either the management or the proxy advisors, but no this time!
Winning a shareholder resolution in US vs EU
While Follow This usually rarely wins, this year alone they have gotten the majority win on 3 out of 6 shareholder resolutions filed and in fact all they have filed in the US. They won the majority vote at ConocoPhillips with 58% of shareholders, Phillips 66 with 80% and Chevron with 61%. Here in the EU they got 39% at Equinor, 21% at BP and 30% at Shell. So all wins in the US and all losses in Europe. But this doesn’t mean that all is lost in the EU and it doesn’t mean that all is won in the US either!
🇺🇸: First of all, before the vote even occurs, the board can ask for a resolution to be excluded from a vote. For climate resolutions, this happened about three times as often during the Trump administration than that of Obama's! Even if a resolution is included and won, the boards are not legally required to follow the majority vote.
🇪🇺: In the EU though it’s different. Any vote count above 20% will legally require the board to respond to the resolution and engage with the activist investor to come to an understanding of the “controversial” vote. And this obviously creates a different and stronger kind of pressure. In the case of Shell and BP Follow This succeeded in getting >20% of the votes at both companies.
The most important thing for an activist shareholder is that they can show a growing support for their resolution. Because boards in some jurisdictions are not legally required to follow the majority vote, showing a growing support for the same resolution brought forward over and over again will have the effect that the management will start to take the resolution seriously in order not to risk a takeover like what happened at Exxon. In addition growing support from an activist shareholder usually garners a lot of media attention as we have seen and thus further increases pressure on the management. This will furthermore feed the important point that fossil fuels are not acceptable in the future and will thus also make it harder for the industry to maintain support from their investors.
But regardless of the jurisdiction, if the management doesn’t heed the resolutions the shareholder activist will have a very strong position to threaten with divestment, because they can basically show everyone that the company isn’t doing anything to address the issue that the shareholder activist is pushing. And that brings us to the next question:
Divest or activist invest?
So which is better? Should you divest or should you invest and be an activist? Betsy’s point at the interview was that being an activist gives you more control with the company instead of selling the control out to the people with lower ethical standards. Shareholder activism also makes it very transparent to everyone what the company is doing or not doing. It makes it transparent to the management that the company’s shareholders are not having it any more. It makes it transparent to the financial sector (of which the fossil fuel industry depends heavily on) that nobody is having this anymore. All of this transparency has a particular strong effect if the activist can gather a growing support for their resolution. The threat then if the company is not playing ball can be divestment. The challenge with divestment is that it’s mainly the big funds that really can make a difference there, and they’re very afraid of losing money by selling the shares. It might be better to hold on to them and exert the influence they have, which is what happened to Exxon. Engine no 1 didn’t do it on its own, it had a couple of big funds to support the votes for the board members it put forth. A great example of this strategy was also seen in Follow This’ recent vote at Shell, where a big UK fund supported Follow This’ resolution.
Emily Atkin from Heated seems to agree. It’s a great one-two punch and we need both. We need the constant threat of divestment to magnify the impact of activist shareholder resolutions.
Ideology or money?
When asked point blank whether Engine no 1 did it for ideological reasons or to make money the founder Chris James said in a recent interview with the Guardian:
“This debate should not be ideological, when companies think about their impacts, whether they are on communities or the environment, it brings a lot of common sense back to capitalism.”
-Chris James, Founder of Engine no 1, The Guardian interview, 04.06.21
Chris James believes that his 52M$ position in Exxon will be a good investment. Betsy from Follow This on the other hand was very clear that Follow This is doing it to push the fossil fuel majors to become part of the solution with the hope that there will no longer be fossil fuel majors in the future, rather energy companies that provide renewably sourced energy for years to come. If the transition from oil majors to green energy companies is successful, then Follow This will be doing long-term shareholders a big favor.
This to me is probably the biggest difference between these two kinds of activist shareholders: The good thing about the differences is that they’re not mutually exclusive from a climate perspective. Whether Exxons changes to 100% clean energy rapidly and flourishes or loses so much money that it can’t fund its operations and dies, we win.
Are we at an inflection point?
It seems by the recent successes by activist shareholders such as Follow This and Engine no 1 that we might have reached an inflection point. In a follow-up e-mail we asked Betsy that exact question (edited for brevity):
“For the success with shareholder activist climate votes there are, of course, many factors. To summarise the most important:
First, there has been momentum building for a few years. The Follow This resolution at Shell has been on the ballot since 2016 (when it got less than 3% of the votes) and has increased a little each year as more investors realise that climate change cannot be ignored in risk calculations, even in the most basic sense of material/financial risk.
Secondly, this is indicative of the finance industry as a whole, which seems to really be on the precipice of major change following this AGM season. In general, more investors than ever are factoring in climate as a serious risk (but also an opportunity in some markets, like renewables) as they realise that it is heavily within the interest of their portfolio to take it into account considering the pace at which fossil fuel assets are likely to become stranded in the future and the increasing costs of climate litigation and taxes compared to declining cost of renewables. Not only are fossil fuels becoming less of a secure investment in themselves, but also it has become clear that their effects on global climate will damage all sectors, therefore all investments in a portfolio.
Specifically in the US, the political climate probably had an impact. This is because of the gatekeeping of shareholder proposals that doesn't exist so much in the EU. As the decisions of exclusion (as mentioned earlier, red.) were carried out following Biden's election and his executive order that demanded all departments and agencies put climate as a priority, there was definitely a higher chance the proposals even had the opportunity to come to a vote than in years before (under Trump, red.).
Finally, we saw incredibly high votes for climate resolutions in the US (both against the advice of company management and against the advice of top proxy voting advisors, which is quite rare). This is likely in part due to the fact that US oil and gas companies have really zero commitment to climate strategies.”
On Betsy’s last point: Readers of my newsletter will know that I’m very critical of the fossil fuel companies in the EU and their “green” agenda. It’s no secret that there are mounting evidence that all they’re doing is greenwashing. In the US they don’t even bother pretending that they’re doing anything. This might give shareholder activists “easier” wins in the US because it’s easier to show the faults. Whereas over here in the EU it’s harder because the picture is more muddled due to the clever marketing schemes employed by the fossil fuel majors. In some sense the greenwashing strategy employed by the EU fossil fuel companies protects them from shareholder activism. Fortunately, the requirements before the management will need to take action is lower in the EU so it doesn’t look like it’s protecting them for long!
We all hope that this way of using capitalism against itself is accelerating in the coming years. And this is where Follow This is such a cool initiative because you don’t need millions in the bank to make a difference. If you, like me, believe in shareholder activism be sure to support them by buying a green share of your choice. I probably need the standard this is not investment advice here though!
Shareholder activism stands in contrast to divestment as a way to utilize the core of capitalism to spur change in companies. Different countries have different rules for how shareholder activism can operate. The basic function though is the same: The shareholder activist submits a shareholder resolution at the Annual General Meeting (AGM) which all shareholders have to vote on. The key to a shareholder activist is to get an increasing amount of support for the resolutions as that can be used to pressure the company to action. Shareholder activism works great in tandem with divestment as shareholder activism uses divestment as a threat to get their resolutions in front of the management. That is in general how shareholder activism achieves the highest amount of pressure.
That’s it for this deep dive! I hope you enjoyed it. Let me know what you thought about it in the comments below or by sending me an e-mail at firstname.lastname@example.org.
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Thank you for reading and enjoy the rest of the week! 👋