www.icmacentre.ac.uk

Lisa Schopohl

ICMA Centre, Henley Business School, University of Reading

The Hong Kong Polytechnic University, 19/12/2017

JCF Special Issue Conference

The Materiality of Environmental and Social Shareholder Activism –Who cares?!

• 1997-2013: shareholder proposals on environmental, social

and ethical issues grew by more than 100% in my sample

• 60% of the largest U.S. investors consider a company’s

corporate social responsibility (CSR) and good corporate

citizenship when voting their proxies [PWC, 2014]

• Fortune Global 500 companies spend almost USD 20bn per

year on CSR, with US and UK companies contributing

around USD 13bn [EPG, 2015]

• U.S. Chamber of Commerce: Companies spend too much

time and money on issues that have no effect on bottom line

Motivation for the Study

• Industry-specific financial materiality of env. and social factors:

o Only small, industry-specific number of env., social, ethical factors impact

companies’ ability to create and sustain value (Eccles, Krzus, Rogers &

Serafeim, 2012; Lydenberg et al., 2010; Lydenberg, 2012)

o Empirical evidence: Kahn, Serafeim & Yoon (2015); Grewal, Serafeim & Yoon

(2016)

• Sustainability Accounting Standards Board (SASB)

Materiality standards for79 different industries (11 sectors)

• Information is material if there is “a substantial likelihood that the

disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the ‘total mix’ of

the information made available” (SASB, 2013)

Financial Materiality of Env. & Social Factors

Advertising &

MarketingChemicals Automobiles

Advertising Integrity Greenhouse Gas Emissions Materials Sourcing

Data Privacy Air Quality Product Safety

Workforce Diversity

& Inclusion

Energy & Feedstock

Management

Fuel Economy & Use-

phase Emissions

Water Management Labour Relations

Hazardous Waste

Management

Materials Efficiency &

Recycling

Safety & Env. Stewardship

of Chemicals & GMO

Product Design for Use-

phase Efficiency

Political Spending

Health, Safety, and

Emergency Management

Classification of Financial Materiality

Examples:

Ford Motors Co.

2008: proposal by Sisters of St.

Dominic to “Set GHG emissions

reduction goals”

Material:

Fuel Economy & Use-phase

Emissions

2008: proposal by Camilla Madden

Charitable Trust to “Adopt

principles for health care reform”

Immaterial

• Shareholder proposal data from RiskMetrics (now ISS)

• Env. and social performance ratings by Kinder, Lydenberg, Domini &

Co. (KLD, now MSCI)

• All KLD data items that could be mapped to a material SASB issue are

classified as material for a given industry:

Material KLD = ∑Mat. KLD Strengths - ∑ Mat. KLD Concerns

• All remaining KLD items are classified as immaterial for the same

industry:

Immaterial KLD = ∑Immat. KLD Strengths - ∑ Immat. KLD Concerns

• Control Variables: institutional ownership, firm’s total assets, book-to-

market ratio, ratio of capital expenditure to total assets, leverage, ratio of

dividends to total assets, return on assets, prior stock performance

• Sample of 3,360 env. and social shareholder proposals submitted to

663 unique U.S. companies from 1997 to 2013

5

Data and Sample Construction

Overview of Environmental and Social Proposals

(1) (2) (3) (4) (5) All Prop. Voted Prop. Approv. Prop. Avg. Vote Matrial Prop.

Total 3360 63.90% 0.65% 13.45 43.96%

1997 106 54.72% 0.00% 6.97 34.91%

1998 94 67.02% 0.00% 7.43 42.55%

1999 109 68.81% 0.92% 8.25 49.54%

2000 111 63.96% 0.00% 6.73 50.45%

2001 151 64.24% 0.00% 7.53 47.02%

2002 193 58.55% 0.00% 9.04 60.10%

2003 189 54.50% 0.00% 9.79 46.56%

2004 215 72.56% 1.86% 10.89 44.19%

2005 230 61.74% 0.43% 9.27 47.39%

2006 247 66.80% 0.81% 12.42 45.34%

2007 244 66.39% 1.23% 14.22 45.49%

2008 285 62.11% 0.70% 13.61 40.70%

2009 278 58.27% 0.72% 16.48 39.21%

2010 243 64.61% 0.00% 17.92 49.79%

2011 239 61.92% 1.67% 20.28 37.24%

2012 211 68.25% 0.47% 18.43 37.44%

2013 215 71.63% 0.93% 21.05 34.42%

Comparison of Targeted Firms and Matched Firms

Target - Sample Control-Sample Diff t-stat p-value

N Mean N Mean

Sec.-adj. Overall KLD Score 2,380 0.62 2,380 0.39 0.23*** 2.81 0.005

Sec.-adj. Material KLD Score 2,380 -0.27 2,380 -0.07 -0.2*** -6.99 0.000

Sec.-adj. Immaterial KLD Score 2,380 0.89 2,380 0.47 0.43*** 5.89 0.000

Sec.-adj. KLD Strengths 2,380 2.58 2,380 1.07 1.51*** 18.46 0.000

Sec.-adj. Material KLD Strengths 2,380 0.40 2,380 0.21 0.2*** 10.19 0.000

Sec.-adj. Immaterial KLD Strengths 2,380 2.18 2,380 0.86 1.31*** 18.34 0.000

Sec.-adj. KLD Concerns 2,380 1.96 2,380 0.67 1.28*** 21.31 0.000

Sec.-adj. Material KLD Concerns 2,380 0.67 2,380 0.28 0.39*** 15.76 0.000

Sec.-adj. Immaterial KLD Concerns 2,380 1.28 2,380 0.39 0.89*** 18.75 0.000

Institutional Ownership 1,938 0.69 1,938 0.69 -0.01** -1.97 0.049

Log Book-to-Market 2,318 -0.97 2,318 -0.99 0.02** 2.05 0.041

Log Assets 2,379 9.66 2,379 8.93 0.73*** 29.65 0.000

CapEx 2,207 5.40 2,207 5.55 -0.15* -1.66 0.097

Leverage 2,369 26.60 2,369 25.28 1.32*** 3.32 0.001

Dividends 2,287 2.07 2,287 1.64 0.43*** 3.97 0.000

RoA 2,378 5.55 2,378 5.72 -0.18 -1.04 0.296

Log Prior-Year Return 2,375 0.00 2,375 -0.03 0.03*** 3.66 0.000

Which Companies are Targeted by

Material Environmental and Social Shareholder Proposals?

Additional Firm Controls include: Institutional Ownership, Log Assets, Log Book-to-Market, CapEx, Leverage, Dividends, RoA,

Log Prior-Year Return and Repeat Target

𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑𝑖,𝑡 = 𝛽0 + 𝛽1𝑀𝑎𝑡. 𝐾𝐿𝐷 𝑖,𝑡 + 𝛽2 𝐼𝑚𝑚.𝐾𝐿𝐷 𝑖,𝑡+ 𝐵3 𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡

+ 𝛽4𝑅𝑒𝑝𝑒𝑎𝑡𝑇𝑎𝑟𝑔𝑒𝑡 + 𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐹𝐸 + 𝜀𝑖,𝑡 ,

(1) (2) (3) (4) (5) (6)

All Prop. Mat. Prop. All Prop. Mat. Prop. All Prop. Mat. Prop.

Sec.-Adj. Mat. KLD -0.00998 -0.0329***

(0.00633) (0.00850)

Sec.-Adj. Imm. KLD 0.00245 0.00300

(0.00249) (0.00354)

Sec.-Adj. Mat. KLD Strengths -0.00442 -0.0167

(0.00941) (0.0131)

Sec.-Adj. Imm. KLD Strengths 0.0123*** 0.0151***

(0.00308) (0.00450)

Sec.-Adj. Mat. KLD Concerns 0.0123* 0.0367***

(0.00740) (0.00997)

Sec.-Adj. Imm. KLD Concerns 0.0195*** 0.0260***

(0.00419) (0.00589)

Constant -4.350*** -5.753*** -3.677*** -5.232*** -3.699*** -4.317***

(1.015) (0.835) (1.033) (0.894) (1.011) (0.872)

Industry FE & Year FE YES YES YES YES YES YES

Year FE YES YES YES YES YES YES

Control Variables YES YES YES YES YES YES

Observations 4,527 2,097 4,527 2,097 4,527 2,097

Pseudo R-squared 0.219 0.287 0.221 0.286 0.223 0.294

(1) (2) (3) (4) (5) (6)

All Prop. Mat. Prop. All Prop. Mat. Prop. All Prop. Mat. Prop.

Sec.-Adj. Mat. KLD -0.00998 -0.0329***

(0.00633) (0.00850)

Sec.-Adj. Imm. KLD 0.00245 0.00300

(0.00249) (0.00354)

Sec.-Adj. Mat. KLD Strengths -0.00442 -0.0167

(0.00941) (0.0131)

Sec.-Adj. Imm. KLD Strengths 0.0123*** 0.0151***

(0.00308) (0.00450)

Sec.-Adj. Mat. KLD Concerns 0.0123* 0.0367***

(0.00740) (0.00997)

Sec.-Adj. Imm. KLD Concerns 0.0195*** 0.0260***

(0.00419) (0.00589)

Constant -4.350*** -5.753*** -3.677*** -5.232*** -3.699*** -4.317***

(1.015) (0.835) (1.033) (0.894) (1.011) (0.872)

Industry FE & Year FE YES YES YES YES YES YES

Year FE YES YES YES YES YES YES

Control Variables YES YES YES YES YES YES

Observations 4,527 2,097 4,527 2,097 4,527 2,097

Pseudo R-squared 0.219 0.287 0.221 0.286 0.223 0.294

Which Companies are Targeted by

Material Environmental and Social Shareholder Proposals?

𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑𝑖,𝑡 = 𝛽0 + 𝛽1𝑀𝑎𝑡. 𝐾𝐿𝐷 𝑖,𝑡 + 𝛽2 𝐼𝑚𝑚.𝐾𝐿𝐷 𝑖,𝑡+ 𝐵3 𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡

+ 𝛽4𝑅𝑒𝑝𝑒𝑎𝑡𝑇𝑎𝑟𝑔𝑒𝑡 + 𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐹𝐸 + 𝜀𝑖,𝑡 ,

Companies are

more likely to

be targeted if

they have more

CSR concerns

and more

immaterial CSR

strengths.

Additional Firm Controls include: Institutional Ownership, Log Assets, Log Book-to-Market, CapEx, Leverage, Dividends, RoA,

Log Prior-Year Return and Repeat Target

Who Submits Material Shareholder Proposals?

To be continued…

𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑗,𝑖,𝑡 = 𝛽0 + 𝐵1 𝑆𝑝𝑜𝑛𝑠𝑜𝑟 𝑇𝑦𝑝𝑒 𝑗 + 𝛽2 𝑀𝑎𝑡. 𝐾𝐿𝐷 𝑖,𝑡+ 𝛽3 𝐼𝑚𝑚.𝐾𝐿𝐷 𝑖,𝑡

+𝐵4 𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡 + 𝛽5𝑉𝑜𝑡𝑒𝑑 𝐷𝑢𝑚𝑚𝑦𝑗,𝑖,𝑡 + 𝐵6 𝑅𝑒𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑇𝑦𝑝𝑒 𝑗

+ 𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐹𝐸 + 𝜀𝑗,𝑖,𝑡

(1) (2) (3)

Material Material Material

Sec.-Adj. Mat. KLD -0.0215*** (0.00712) Sec.-Adj. Imm. KLD 0.00577** (0.00274) Sec.-Adj. Mat. KLD Strengths 0.00765 (0.00936) Sec.-Adj. Imm. KLD Strengths 0.00107 (0.00344) Sec.-Adj. Mat. KLD Concerns 0.0369*** (0.00884) Sec.-Adj. Imm. KLD Concerns -0.00996** (0.00435) … … … … Constant -2.224* -2.397* -2.003

(1.283) (1.314) (1.325) Industry FE & Year FE YES YES YES

Proposal Type FE YES YES YES

Control Variables YES YES YES

Observations 2,699 2,699 2,699

Pseudo R-squared 0.303 0.300 0.306

Who Submits Material Shareholder Proposals?

To be continued…

𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑗,𝑖,𝑡 = 𝛽0 + 𝐵1 𝑆𝑝𝑜𝑛𝑠𝑜𝑟 𝑇𝑦𝑝𝑒 𝑗 + 𝛽2 𝑀𝑎𝑡. 𝐾𝐿𝐷 𝑖,𝑡+ 𝛽3 𝐼𝑚𝑚.𝐾𝐿𝐷 𝑖,𝑡

+𝐵4 𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡 + 𝛽5𝑉𝑜𝑡𝑒𝑑 𝐷𝑢𝑚𝑚𝑦𝑗,𝑖,𝑡 + 𝐵6 𝑅𝑒𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑇𝑦𝑝𝑒 𝑗

+ 𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐹𝐸 + 𝜀𝑗,𝑖,𝑡

(1) (2) (3)

Material Material Material

Sec.-Adj. Mat. KLD -0.0215*** (0.00712) Sec.-Adj. Imm. KLD 0.00577** (0.00274) Sec.-Adj. Mat. KLD Strengths 0.00765 (0.00936) Sec.-Adj. Imm. KLD Strengths 0.00107 (0.00344) Sec.-Adj. Mat. KLD Concerns 0.0369*** (0.00884) Sec.-Adj. Imm. KLD Concerns -0.00996** (0.00435) … … … … Constant -2.224* -2.397* -2.003

(1.283) (1.314) (1.325) Industry FE & Year FE YES YES YES

Proposal Type FE YES YES YES

Control Variables YES YES YES

Observations 2,699 2,699 2,699

Pseudo R-squared 0.303 0.300 0.306

(1) (2) (3)

Material Material Material

… … … … SRI Fund 0.154*** 0.155*** 0.148*** (0.0342) (0.0348) (0.0345) Asset Manager 0.118* 0.110* 0.113* (0.0629) (0.0615) (0.0633) Foundation/Endow. 0.289*** 0.298*** 0.278*** (0.0515) (0.0532) (0.0524) Other 0.0269 0.0302 0.0172 (0.0650) (0.0639) (0.0644) Public Pension Fund 0.125*** 0.131*** 0.118*** (0.0381) (0.0388) (0.0381) Religious Institution 0.174*** 0.176*** 0.160*** (0.0330) (0.0338) (0.0330) Special Interest -0.0543 -0.0513 -0.0573 (0.0440) (0.0446) (0.0447) Union Fund 0.0227 0.0315 0.0106 (0.0422) (0.0425) (0.0425) Constant -2.224* -2.397* -2.003

(1.283) (1.314) (1.325) Industry FE & Year FE YES YES YES

Proposal Type FE YES YES YES

Control Variables YES YES YES

Observations 2,699 2,699 2,699

Pseudo R-squared 0.303 0.300 0.306

Continued…

Who Submits Material Shareholder Proposals?

(1) (2) (3)

Material Material Material

… … … … SRI Fund 0.154*** 0.155*** 0.148*** (0.0342) (0.0348) (0.0345) Asset Manager 0.118* 0.110* 0.113* (0.0629) (0.0615) (0.0633) Foundation/Endow. 0.289*** 0.298*** 0.278*** (0.0515) (0.0532) (0.0524) Other 0.0269 0.0302 0.0172 (0.0650) (0.0639) (0.0644) Public Pension Fund 0.125*** 0.131*** 0.118*** (0.0381) (0.0388) (0.0381) Religious Institution 0.174*** 0.176*** 0.160*** (0.0330) (0.0338) (0.0330) Special Interest -0.0543 -0.0513 -0.0573 (0.0440) (0.0446) (0.0447) Union Fund 0.0227 0.0315 0.0106 (0.0422) (0.0425) (0.0425) Constant -2.224* -2.397* -2.003

(1.283) (1.314) (1.325) Industry FE & Year FE YES YES YES

Proposal Type FE YES YES YES

Control Variables YES YES YES

Observations 2,699 2,699 2,699

Pseudo R-squared 0.303 0.300 0.306

Continued…

Who Submits Material Shareholder Proposals?

Do Material Proposals Gather Greater Shareholder Support?

% 𝑜𝑓 𝑉𝑜𝑡𝑒𝑠𝑗,𝑖,𝑡 = 𝛽0 + 𝛽1𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐷𝑢𝑚𝑚𝑦 𝑗,𝑖,𝑡 + 𝛽2 𝑀𝑎𝑡. 𝐾𝐿𝐷 𝑖,𝑡+ 𝛽3 𝐼𝑚𝑚.𝐾𝐿𝐷 𝑖,𝑡

+𝐵4 𝑆𝑝𝑜𝑛𝑠𝑜𝑟 𝑇𝑦𝑝𝑒 𝑗 + 𝐵5 𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡 + 𝐵6 𝑅𝑒𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑇𝑦𝑝𝑒 𝑗

+𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐹𝐸 + 𝜀𝑗,𝑖,𝑡

(1) (2) (3) (4)

% of Votes % of Votes % of Votes % of Votes

Material Dummy 0.305 0.0710 0.282 0.337

(0.605) (0.690) (0.603) (0.608)

Sec.-Adj. Mat. KLD -0.130 -0.0505

(0.196) (0.232)

Sec.-Adj. Imm. KLD -0.388*** -0.464***

(0.0843) (0.108)

Sec.-Adj. Mat. KLD X Material-Dummy -0.115

(0.322)

Sec.-Adj. Imm. KLD X Material-Dummy 0.169

(0.129)

Sec.-Adj. Mat. KLD Strengths -0.600**

(0.279)

Sec.-Adj. Imm. KLD Strengths -0.423***

(0.0985)

Sec.-Adj. Mat. KLD Concerns -0.328

(0.246)

Sec.-Adj. Imm. KLD Concerns 0.241*

(0.127)

Constant 12.66** 12.61** 8.203 13.75***

(5.146) (5.172) (5.040) (5.287)

Industry FE & Year FE YES YES YES YES

Resolution Type FE YES YES YES YES

Control Variables YES YES YES YES

Observations 1,796 1,796 1,796 1,796

R-squared 0.457 0.457 0.457 0.451

Adj. R-squared 0.421 0.421 0.422 0.415

Do Material Proposals Gather Greater Shareholder Support?

% 𝑜𝑓 𝑉𝑜𝑡𝑒𝑠𝑗,𝑖,𝑡 = 𝛽0 + 𝛽1𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐷𝑢𝑚𝑚𝑦 𝑗,𝑖,𝑡 + 𝛽2 𝑀𝑎𝑡. 𝐾𝐿𝐷 𝑖,𝑡+ 𝛽3 𝐼𝑚𝑚.𝐾𝐿𝐷 𝑖,𝑡

+𝐵4 𝑆𝑝𝑜𝑛𝑠𝑜𝑟 𝑇𝑦𝑝𝑒 𝑗 + 𝐵5 𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡 + 𝐵6 𝑅𝑒𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑇𝑦𝑝𝑒 𝑗

+𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐹𝐸 + 𝜀𝑗,𝑖,𝑡

(1) (2) (3) (4)

% of Votes % of Votes % of Votes % of Votes

Material Dummy 0.305 0.0710 0.282 0.337

(0.605) (0.690) (0.603) (0.608)

Sec.-Adj. Mat. KLD -0.130 -0.0505

(0.196) (0.232)

Sec.-Adj. Imm. KLD -0.388*** -0.464***

(0.0843) (0.108)

Sec.-Adj. Mat. KLD X Material-Dummy -0.115

(0.322)

Sec.-Adj. Imm. KLD X Material-Dummy 0.169

(0.129)

Sec.-Adj. Mat. KLD Strengths -0.600**

(0.279)

Sec.-Adj. Imm. KLD Strengths -0.423***

(0.0985)

Sec.-Adj. Mat. KLD Concerns -0.328

(0.246)

Sec.-Adj. Imm. KLD Concerns 0.241*

(0.127)

Constant 12.66** 12.61** 8.203 13.75***

(5.146) (5.172) (5.040) (5.287)

Industry FE & Year FE YES YES YES YES

Resolution Type FE YES YES YES YES

Control Variables YES YES YES YES

Observations 1,796 1,796 1,796 1,796

R-squared 0.457 0.457 0.457 0.451

Adj. R-squared 0.421 0.421 0.422 0.415

Material

proposals do not

receive greater

vote support

from the general

shareholder.

o Main Findings:

More than 56% of the submitted proposals focus on financially

immaterial matters

Certain investors are better at targeting financially material issues, but

overall shareholder base does not seem to differentiate between the

financial materiality, or otherwise, of a proposal

Companies are more likely to be targeted if they show past violations

and concerns on material environmental and social issues

o The findings have important implications:

Little evidence that sponsors systematically target topics that are

financially material for the company’s industry

Companies can impact – to some extent – the likelihood of becoming

the target of shareholder activism through their performance on

environmental and social issues

Summary of Findings and Conclusion

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