Shareholder Activism and ESG: Legal Considerations and Trends

Kiran Malik

22 Mar, 2023

Shareholder activism and environmental, social, and governance (ESG) issues are increasingly becoming important topics for companies and investors alike. Shareholder activism refers to the actions taken by investors to influence the management and direction of a company, often in pursuit of improving the company’s financial performance or addressing ESG concerns. ESG considerations, on the other hand, involve assessing a company’s impact on the environment, society, and corporate governance practices. As companies face increasing pressure to address ESG concerns and respond to shareholder activism, it is crucial for them to consider the legal implications of these issues. This includes complying with securities laws and regulations, adhering to fiduciary duties of directors, and ensuring compliance with proxy rules and shareholder proposals. In this blog, we will explore the legal considerations and trends in shareholder activism and ESG, as well as case studies of notable examples in these areas. By examining these issues, we can gain a better understanding of the challenges and opportunities facing companies in the context of shareholder activism and ESG, and the importance of addressing these issues for long-term success.

Legal Considerations for Shareholder Activism and ESG

Companies must navigate a complex legal landscape when it comes to shareholder activism and ESG issues. Here are some of the key legal considerations that companies should be aware of:

• Securities laws and regulations: Companies must comply with a variety of securities laws and regulations, which govern the issuance, sale, and trading of securities. In the context of shareholder activism, this means companies must be careful not to engage in activities that could be perceived as market manipulation, insider trading, or other securities violations. Companies must also be mindful of the potential impact that their ESG practices could have on their securities disclosures, particularly if they could impact the company’s financial performance or reputation.
• Proxy rules and shareholder proposals: Shareholder activism often takes the form of submitting proposals for consideration at a company’s annual meeting. However, these proposals must comply with proxy rules set forth by the Securities and Exchange Commission (SEC). These rules govern the process of soliciting and voting on proxies, as well as the content and format of proxy materials. Companies must also be prepared to respond to shareholder proposals, which can include making disclosures, changing policies, or engaging in other actions to address shareholder concerns.
• Fiduciary duties of directors: Directors of a company have a fiduciary duty to act in the best interests of the company and its shareholders. This means that they must exercise their powers and make decisions with the goal of maximizing shareholder value, while also taking into account the broader interests of stakeholders, including employees, customers, and the community. In the context of ESG issues, directors must carefully balance the potential benefits of pursuing sustainable and socially responsible practices with their legal obligation to maximize shareholder returns.
• State corporate law and charter amendments: State corporate law sets the legal framework for how companies are organized and governed, and establishes the rights and responsibilities of shareholders and directors. This includes the ability to amend a company’s charter, which outlines the company’s purpose, governance structure, and other key details. Companies may amend their charters to address ESG issues, but must be mindful of potential legal challenges and the need to comply with state corporate law.

In summary, companies must be aware of a range of legal considerations when it comes to shareholder activism and ESG issues, from complying with securities laws and regulations to balancing fiduciary duties with broader stakeholder interests. By understanding these legal considerations, companies can better navigate the complex landscape of shareholder activism and ESG, and develop strategies for long-term success.

Trends in Shareholder Activism and ESG

The landscape of shareholder activism and ESG issues is constantly evolving. Here are some of the current trends that companies should be aware of:

• Increase in ESG-focused shareholder proposals: There has been a notable increase in the number of shareholder proposals focused on ESG issues in recent years. These proposals often call for increased transparency around companies’ environmental and social impact, and may request that companies set specific ESG-related goals or report on progress towards achieving them.
• Focus on board diversity and executive compensation: Shareholder activists are increasingly calling for greater diversity among company boards, particularly in terms of gender and racial diversity. Additionally, there is growing scrutiny of executive compensation, with investors calling for greater alignment between pay and performance, as well as more transparency around how executive pay is determined.
• Rise of passive investors and their impact on activism: Passive investors, such as index funds and exchange-traded funds (ETFs), now hold a significant portion of many publicly traded companies. While passive investors typically do not engage in activist activities themselves, they may be influenced by the views of active investors or ESG-focused proxy advisory firms, and may vote their shares accordingly.
• Use of social media and technology in activism: Social media and technology are increasingly being used as tools for shareholder activism. Activist investors and advocacy groups can use social media platforms to mobilize support for their causes and to pressure companies to take action. Additionally, technology is being used to analyze companies’ ESG performance, allowing investors to make more informed decisions and to push for change where it is needed.

Case Studies of Shareholder Activism and ESG

Several recent high-profile cases of shareholder activism and ESG issues highlight the importance of companies addressing these concerns. Here are three case studies:

1. ExxonMobil and climate change:

• In 2017, a group of shareholders led by activist investor Engine No. 1 successfully pushed for the election of three new board members at ExxonMobil, citing the company’s failure to adequately address climate change risks.
• The group called for ExxonMobil to shift its focus towards renewable energy and to set clear emissions reduction goals.
• In 2020, ExxonMobil faced additional pressure from shareholders and environmental groups over its climate change policies, with some calling for the company to split its chairman and CEO roles to improve oversight of climate-related risks.
• In response to these concerns, ExxonMobil announced in December 2020 that it would set emissions targets and invest in new low-carbon technologies.

2. Amazon and employee rights:

• In 2019, Amazon faced significant shareholder pressure over working conditions for its employees, particularly those in its warehouses and delivery network.
• Shareholders submitted a proposal calling for Amazon to publish a report on the company’s efforts to address workplace injuries and improve worker safety.
• Additionally, a group of employees known as Amazon Employees for Climate Justice organized a walkout in 2019 to protest the company’s climate change policies.
• In 2020, Amazon faced further criticism over its response to the COVID-19 pandemic^[1] and concerns about worker safety.
• Amazon has since announced a series of measures aimed at improving working conditions for its employees, including increased pay and benefits, as well as expanded safety protocols.

3. Coca-Cola and plastic waste reduction:

• Coca-Cola has faced increasing pressure from shareholders and environmental groups over its use of plastic packaging and its impact on the environment.
• Shareholders have submitted proposals calling for the company to set targets for reducing plastic waste and to increase its use of recycled materials.
• In 2018, Coca-Cola announced a goal to collect and recycle the equivalent of every bottle or can it sell globally by 2030.
• Additionally, the company has invested in new sustainable packaging technologies, such as plant-based bottles and biodegradable packaging.
• Coca-Cola has also launched initiatives aimed at promoting recycling and reducing plastic waste, such as its “World Without Waste” program.

These case studies demonstrate the power of shareholder activism in driving change on ESG issues. Companies that fail to address these concerns risk facing significant reputational damage and potential legal and financial consequences. By prioritizing ESG considerations and engaging with shareholders, companies can position themselves for long-term success and sustainability.

Conclusion

The increasing focus on shareholder activism and ESG issues reflects a growing awareness of the impact that companies have on society and the environment. As we have seen, there are several legal considerations that companies must keep in mind when engaging with shareholders and addressing ESG concerns, including securities laws and regulations, fiduciary duties of directors, and state corporate law.

At the same time, there are several key trends shaping the landscape of shareholder activism and ESG issues, including a focus on board diversity, executive compensation, and the rise of passive investors. Additionally, technology and social media are playing an increasingly important role in activism and in analyzing ESG performance.

It is clear that companies must prioritize engagement with stakeholders and addressing ESG concerns in order to succeed in the long term. This includes developing strategies for addressing environmental and social impacts, engaging with shareholders and other stakeholders, and incorporating ESG considerations into decision-making processes.

By understanding the legal considerations and trends in shareholder activism and ESG, companies can better position themselves for success and sustainability, while also contributing to a more just and sustainable world.

Also Read:
ESG and Sustainable Development: How are they Related?
What is the Role of Regulators in Promoting ESG Investments?
Future of Environmental, Social, and Governance (ESG): Emerging Trends and Opportunities for Investors