If investors really want companies fighting climate change, they should put their mouths where their money is

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Shareholders nowadays have so many conflicting viewpoints that boards and managers need to create more direct lines of communication to help determine a company’s mission.

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For example, many shareholders, especially institutional wealth managers and pension funds, urge companies to put more money behind environmental and social causes, such as cutting emissions and increasing recruitment of minority personnel. Others, especially individual and employee shareholders, continue to prioritize financial returns.

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While many managers insist that they already make investments that help environmental and social causes while financial returns are attractive, some vocal institutional investors, and quite a few boards the environment, even with weak or negative financial returns. And support furthering social causes.

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Since large public companies typically have thousands of shareholders, thousands of employees, hundreds of managers, and perhaps a dozen directors, building a consensus is not only difficult but impossible to please everyone. Some shareholders put forward proposals for the shareholder body’s vote at the company’s annual meetings, but the process becomes complicated and opaque.

For example, proposals are not nearly detailed enough to enable them to see estimates of financial returns compared to their value for an environmental or social cause. In addition, corporate voting rules enable institutional wealth managers and pension funds to hide behind such ambiguity and many vote based on managing others’ money rather than on managing their own money.

Many boards are longing for a clear mandate on how to respond to complex shareholder signals and remove the limitations of voting protocol.

Consider this modest, if radical, proposal: At annual shareholder meetings this spring, a board may sponsor a publicly disclosed survey on whether a company should invest its pretax profits in environmental and social initiatives. Voting would be simple and non-binding to provide a cheap, clear way of measuring preferences.

The poll would state a proposed percentage of pretax profits that shareholders would like to allocate to environmental and social causes, such as 10%. The Board will commit to target allocation based on the percentage of shares voting Yes. For example, if 50% voted yes, the board would commit to allocating 5% (ie 10% of 50%) of the 2021 pre-tax profit to such causes during 2022.

The Board may vote for shareholders as to any proposed profit percentage – from 0% to 100% – that makes sense given the company’s specific circumstances in the context of the shareholder base and current levels of environmental or social investment.

As an extreme, a board may ask what percentage of shareholders favor allocating 100% of pretax profits to environmental and social causes, regardless of financial returns. If 20% of the shares voted yes, the board would target an allocation of 20%.

This exercise will inform the board about environmental and social investments, regardless of financial returns. Boards have little direct experience in doing this, although they may have some experience with direct charitable giving and assessment of the environmental and social impact of more traditional capital allocation practices. The polls will enable the Board to determine the extent of research needed to understand such environmental and social investments.

The appeal of this approach to discerning shareholder preferences is to clarify those preferences and accommodate conflicting views. One drawback of such an approach is that a subset of pure philanthropists may effectively require a subgroup of pure capitalists to donate with them. One obvious advantage is that it enables everyone to publicly go on record to declare priorities. Overall, a survey like this would be a step toward direct communication with shareholders for increasing appeal in an increasingly divided and raucous world.

No board is likely to do this without at least some understanding of potential shareholder reactions. In that spirit, readers are invited to provide some informal input in the comments section below. Please give your opinion on this hypothetical survey. Let’s say you are a shareholder in a company generating returns equal to the median S&P 500 SPX,
How much of 2021 pretax profits should the board allocate to environmental and social causes during 2022, regardless of financial returns?

Lawrence A. Cunningham is a professor at George Washington University, the founder of quality shareholder group, and the publisher, since 1997, “Warren Buffett’s Essays: Lessons for Corporate America, For updates on Cunningham’s research on quality shareholders, register here,

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