“Shareholder Activism on Sustainability Issues” — New Harvard B-School Paper Will Further Inform Us on ESG “Materiality” and its Impacts on Companies in the Capital Markets

One of the most influential voices of the Harvard B-School faculty on corporate sustainability and sustainable investing trends is George Serafeim, the Jakurski Family Associate Professor of Business Administration.  He has teamed with Calvert and other organizations to produce a substantial, impressive body of work related to “making the investment” and “making the business” cases for both corporate managers and boards, as well as for institutional and individual investors.

In a commentary in the July 12th issue of the Harvard Business Review, he presents key highlights of a paper just published by him and his research team (Jody Grwal and Aaron Yoon) on the positive and negative affects of shareholder activism and capital market results (for affected companies).  The team looked at 2,665 proxy resolutions filed between 1997 and 2012 and presents in-depth research findings and conclusions in their paper (“Shareholder Activism on Sustainability Issues”).

The importance of “Materiality” of “G” and “ESG” issues played a key role in what happens for the target companies in the capital markets, short- and longer-term after corporate managements took action on the issues raised in engagements and where proxy campaigns resulted.

Where an ESG issue raised by shareholders was about an issue / issues that were indeed material, and corporate management responded by making changes, adjusting policies and practices and so on, there were positive results [for the company] in the capital markets. Where the issue E, S or G issue raised was im-material, management response had the opposite effect.

Why if the issue is not material and management responded (even though the shareholder resolution did not receive a majority vote) would (1) management react and (2) the capital market impact would be negative (share price declines, for example)?  The authors set out three primary reasons.

First, incentives of managers and investors were “mis-aligned,” and management may agree to initiatives that will destroy financial value because they believe they (top managers) will benefit.  Second, corporate managements struggled to really understand “material” and “immaterial” shareholder requests.  Third, management responded, taking action to divert attention away from really material issues that were problematic. (Example: a financial firm responding to a less material environmental issue (fossil fuels) to divert attention away from a material issue like making false advertising claims.)

Authors Serafeim, Grewal and Yoon caution:  while policy experts have argued that E and S issues divert the attention of senior management and directors away from more important work…we show this position is supported in case of financially immaterial ESG [shareholder] proposals.  “Our results suggest that one should be careful about over-generalizing, since a significant number of ESG proposals are financially material and associated with subsequent increase in market valuation.”  The research project findings will no doubt be carefully studied by shareholder activists in all quarters of the financial markets, whether ESG-focused or mainstream (such as hedge fund managers).

The HBR article and the comprehensive 60+ page paper with sector/industry materiality mapping, capital market charting, reference review, and other important resources, has quickly become a topic of conversation in the institutional investment community.

At G&A Institute we are having many ongoing conversations with both corporate managers and our colleagues in the investment community on “materiality,” with the information or data being discussed often viewed by “the beholder.”  (Remember the old saying, “Beauty is in the eye of the Beholder?”)  The topic of materiality is at the heart of the new sector and industry standards published by SASB, and in the fourth generation (G4) of the Global Reporting Initiative (GRI) frameworks.  Professor Serafeim’s paper will fuel further, deeper debate on the possible “real world” effects (such as impact of share price) of corporate managements’ and investors’ engagements on “material” and “im-material” issues and topics.

We share some of our thoughts on the critical issue of “materiality” and the services and resources that we provide our G&A Institute web site — check out our Materiality Assessments & Strategies services.

For a really good read on highlights of the paper, see the story below — “The Fastest-Growing Cause for Shareholders is Sustainability.”  Congratulations to Professor George Serafeim and his colleagues for publishing the important paper “Shareholder Activism on Sustainability Issues.”

The Fastest-Growing Cause for Shareholders Is Sustainability
(Wednesday – July 13, 2016)
Source: Harvard Business Review – Ask someone to name the demands that activist hedge funds make of companies and they’ll likely list corporate governance issues like board changes and executive compensation, or perhaps some form of restructuring. In fact…

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