The free-market economy relies on a central tenet: It is the job of a corporation to maximize returns to its shareholders. This is the purpose of all corporations, no matter what business they engage in.
This concept, which places the interests of a company’s shareholders – its owners – above all else, is known as “shareholder primacy.” It is so central to good corporate governance that companies and regulators have developed a mechanism, the shareholder proposal, which allows anyone who holds more than minimal stock in a corporation to petition its board of directors to examine an issue with an eye towards improving the company and its value.
But in the 21st century – especially in the last ten years or so – shareholder proposals have been repurposed and weaponized by activist groups to pressure companies to disregard shareholder primacy and to adopt policies informed by ideological concerns instead.
In Canada the main targets of these ideologically driven agendas have been oil and natural gas companies, among the most productive pillars of our national economy, as well as the banks that fund them. Using shareholder proposals, activists have set out to limit and ultimately put an end to Canadian oil and natural gas exploration, production and export.
Activist groups including Investors for Paris Compliance, Stand.earth and Environmental Defence Canada have presented anti-fossil-fuel shareholder proposals to all major Canadian banks and other companies in our natural resource sector. Last year, for example, Stand.earth demanded that the Royal Bank of Canada’s (RBC) board of directors “adopt a policy for a time-bound phase-out of RBC’s lending and underwriting to projects and companies engaging in new fossil fuel exploration, development and transportation.” In other words, they were asking Canada’s biggest bank to stop supporting an industry that sustains hundreds of thousands of Canadian jobs, pays tens of billions of dollars in taxes annually, and forms the economic backbone of our country.
Until recently, these stunts were largely pulled without any opposition. But last year InvestNow, the not-for-profit organization I lead, submitted and presented countervailing shareholder proposals to three Canadian banks asking for explicit commitments to continue to invest in and finance Canadian hydrocarbon energy.
We’ve continued that work this year, presenting shareholder proposals at the annual general meetings of all five big chartered banks – BMO, CIBC, Scotiabank, RBC and TD – asking them to commission and issue reports qualifying and quantifying the impacts and costs of their “net zero” commitments.
This year InvestNow also submitted our first shareholder proposal to an energy company. We asked Suncor Energy Inc., one of Canada’s largest oil producers and refiners, to drop its pledge to achieve net zero carbon emissions by 2050 and rededicate the company to its core business of producing and refining crude oil. In our view, Suncor should be producing more oil and getting it out to more customers in Canada and around the world – not contributing to its own demise and that of its industry.
As expected, InvestNow’s proposals were opposed by the boards of directors at the banks and at Suncor and ultimately rejected. Even so, our hope is that we planted a seed in the directors’ minds about their duty of care and fiduciary obligations to the company’s shareholders.
This isn’t merely wishful thinking. After all, south of the border we are seeing substantial pushback on this front. New asset management firms like Strive Asset Management have been founded explicitly to “live by a strict commitment to shareholder primacy.”
There are also growing calls for a return to shareholder primacy in the political arena. There is a valid concern that ideologically motivated corporate activities pose a threat both to the financial integrity of public pension funds and a challenge to democratic governance. A number of states have created the non-profit State Financial Officers Foundation whose mission is “to drive fiscally sound public policy, by partnering with key stakeholders, and educating Americans on the role of responsible financial management in a free market economy.” The organization and its members are firm and vocal defenders of shareholder primacy.
Further pushback is coming from some of the recipients of activist shareholder proposals. ExxonMobil is among the leaders here. The company has long been reviled by environmentalists for its insistence on keeping profitability, technical excellence and energy production central to its business.
In January, ExxonMobil filed a lawsuit to block a shareholder resolution put forward by the groups Follow This and Arjuna Capital, whose stated objective was to force the company to commit to precipitous cuts in CO2 emissions, including with respect to the downstream effects from the combustion of its products by customers. Exxon argued that such a resolution would force the company to “change the nature of its ordinary business or to go out of business entirely.” Which is what these “shareholders” intend; Exxon’s lawsuit quotes Arjuna Capital’s contention that “Exxon should shrink” and Follow This’s statement that its goal is “to wind down the company’s business in oil and natural gas.”
By taking a stand, ExxonMobil was bucking the industry trend of attempting to placate activists. Those attempts have been unsuccessful. Meanwhile, ExxonMobil’s bolder, more confrontational tactic led to both activist groups dropping their proposals and promising not to bring forward similar demands in future.
Canadian firms should take note. The more they give in to anti-oil and gas activists, the more they’ll have to deal with them, to the detriment of both their business and our economy. Perhaps that they will soon see the sense in saying “No” to the activists and “Yes” to shareholder proposals like ours.
The future of shareholder primacy is bright. All it will require to triumph is a little courage.
The original, full-length version of this article was recently published by C2C Journal.
Gina Pappano is executive director of InvestNow and was formerly head of market intelligence at the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV).
