51. Activist Investing

Here’s this week’s letter:
I recently heard a talk by someone who was saying that shareholders can influence what a company does. But my question is, do I need to be a big time player with lots of stocks to be able to have any influence? The speaker gave the example of Engine 1, and said they had a tiny amount of stocks in Exxon but I guess I just want to hear another opinion about this. Can a middle income person really have any influence?

Thanks so much for your letter! Let’s talk about this talk that you heard LOL. You mentioned that the speaker gave the example of Engine 1. Engine 1 is an investment firm, it’s only two years old and was started by some rich folks who made their millions and then looked around and realized that society is broken. The founder is a guy named Chris James. He used to run coal mines and similar businesses, then he started to work in investment funds. There’s a story in the Wall Street Journal that I’ll link where he says he’s having dinner with his sons and they’re like dad, we don’t get it, you’re on the board for The National Fish and Wildlife Foundation, but you make money from the degradation of the earth. We don’t get it. So he says he started to give them this rambling explanation that they weren’t buying and then he himself started to wonder if he was buying it and bada bing bada boom he empties out the $250M in loose change from his pockets and starts Engine 1. From the beginning, Engine 1 has had an impact focus. His whole theory is that capitalism can be harnessed for positive change and that you need to align what your shareholders want with what the people who are actually affected by your company want. So Engine 1 decided that they would target Exxon. Exxon was already under some pressure to be better and Engine 1 felt like one thing that would help is if they could get certain folks added to Exxon’s board. So, when the annual meeting came up, that’s exactly what they pitched. Here are our candidates for the Exxon board. And Exxon fought it and got a little desperate during the meeting and used some hail Mary tactics, but ultimately Engine 1 was successful. They got 2 out of the 4 candidates they pushed forward onto the board. And that matters, boards can steer a company into a different direction. Actually, of all the stakeholder activism you could think of, getting people on or off the board is seen as the most powerful move to make. And Engine 1 was able to do this.

If you hear Engine 1 tell it, they were able to do this shareholder activism after buying a tiny amount of shares in Exxon, 0.02% but given how gigantic Exxon is, that 0.02% is actually tens of millions of dollars of stock that they originally purchased. I think it was around $40M that they bought, but I will link the exact numbers if you’re interested. That’s astronomically bigger than the amount of shares that I would buy if I got it into my head that I wanted to be a shareholder activist. And I think, unless you are a bigtime investor like Chris James and just didn’t disclose it, you are asking in your letter if a small time everyday investor can have any influence. The answer is, yes, but obviously your power will be multiplied if you join an organized effort.

Every shareholder gets to vote in the annual meetings. Those are the emails you might be deleting that you get from whatever app you use to invest. It will usually say “annual meeting is on this day, here are 3 ways you can vote, a website, a phone number or you can actually attend the annual meeting virtually and vote during the meeting. There’s often some pre-reading, maybe they put together an annual report for you to review first. And then there are the issues that are up to be voted on. The vast majority of the issues I’ve seen are do you agree that this person should be added to the board? Do you agree that this person should be allowed to be a ton of stock in this company? Do you agree that this accounting firm should be hired to represent us?”

But as a shareholder, you are allowed to put an issue up for election at the annual meeting. They’re not always about pushing the company to be a better corporate citizen, sometimes it is about a billionaire trying to get their way. Hi Karl, hey Elon! But sometimes, and actually more and more, we are seeing shareholders put together shareholder resolutions to ask the companies to make improvements on environmental, or social or governance type of concerns.

As you Sow puts together an analysis called Proxy Preview of all of these shareholder resolutions that are being put forward. I’m going to link the analysis they did. They found that there has been a 20% increase in these socially responsible shareholder resolutions. According to their analysis, there are significantly more topics around climate and racial justice. And political contributions. We love to see this.

And actually they have put together the list of things to know if you want to put a proposal in front of one of the companies that you have stock invested in. Here are the steps they outline:

Publicly-traded companies are required by law to report to shareholders. One way they do this is by inviting shareholders to an annual meeting. Before that annual meeting, shareholders are sent documents known as proxy statements that include details about the annual meeting, share ownership, board structure, executive compensation, and details on other issues that will be voted on at the annual meeting.

The proxy statement is going to cover all sorts of topics that are going to come up for a vote at the annual meeting. Could be something like whether or not someone should be elected to become a director of the company, you might be asked to vote on CEO pay. And sometimes management is asking you to vote on something more complicated like  a merger or acquisition.
 
Now here’s where shareholders can become activists. The SEC (that is the U.S. Securities and Exchange Commission) allows shareholders to file proposals with companies on corporate governance, social, and environmental issues. The requirements to file a proposal are that the shareholder must own $2,000 worth of company stock and has held it for three years prior to the annual filing deadline.

If you meet that criteria, you can put together a proposal. You get 500 words to present your case. And then other shareholders vote. They can mail in their vote, they can go online, they can call in their vote, or they might attend the annual meeting and vote live.
So let’s say you put together a proposal but it doesn’t get enough votes at the annual meeting. That’s Ok, because you are given some time to gather support. As long as you get 5% of the total vote the first year, you can resubmit your proposal the next year. You need to get 15% of votes that second year if you want to try again and resubmit your proposal for a vote at the next annual meeting. And on that 3rd year, you need to get 25% of the vote if you want to try to resubmit again. If you’re not able to get these minimum’s they make you wait 3 years before you resubmit.

Of course, you can do this on your own, but you will be much more likely to be successful if you are doing this with a group. So if you are interested in this, let me know, we can do a future episode on this.

By the way! Let’s say you don’t have an individual stock in a company, but you still want to be an activist shareholder- let’s say you have a mutual fund that includes that company. In that case, you can’t vote in the annual meeting BUT you can contact the management of your mutual funds and ask them to vote in favor of issues about which you feel strongly.

Thanks for joining for today’s discussion. This whole discussion of being a shareholder activist kind of reminds me of that old saying that you have to get a seat at the table to change how things are done. I’m very curious to hear your thoughts on this, so get in touch anytime, you can email at spenddonateinvest@gmail.com or you can send a DM through Twitter at spenddonatevest. You might have a different question about being a shareholder activist or maybe a different topic related to lining up your personal values and your money. Please send your questions in. Please share this episode with someone who you think might find it interesting. Thanks to those of you who have left reviews for the show. You can do that pretty easily at the show’s website spenddonateinvest.world Some great questions have come in recently, I’m looking forward to getting those out to you. Have a great day and let’s talk again soon.

https://www.wsj.com/articles/the-hedge-fund-manager-who-did-battle-with-exxonand-won-11623470420
https://www.nytimes.com/2021/06/23/magazine/exxon-mobil-engine-no-1-board.html
https://www.asyousow.org/reports/proxy-preview-2022