Shareholder Engagement Inside and Outside the Shareholder Meeting

Abstract

In 1970, Albert O. Hirschman’s groundbreaking text, Exit, Voice and Loyalty, identified the options available to dissatisfied members of an organization – namely, to leave the organization or to seek increased engagement. Hirschman also showed the interplay between exit and voice, by demonstrating that the potential for greater engagement could reduce the need to rely on exit as a response to member dissatisfaction. 

Hirschman’s exit/voice dichotomy is relevant to the contemporary focus of corporate governance on ESG issues. Investors may use ESG information as an ex ante negative screening technique, by, for example, declining to invest in firms which produce fossil fuels that contribute to global warming. Existing investors may adopt a divestment policy, thereby choosing Hirschman’s exit option.

Increasingly, however, investors have chosen to use ESG considerations to frame the way in which they engage with their investee companies by, for example, encouraging their portfolio companies (sometimes across an entire sector) to address climate change transition risks with greater urgency.

In the 50 or more years since publication of Exit, Voice and Loyalty, there have been major changes to capital markets around the world. Today, the dominant shareholders of public companies in many, but by no means all, jurisdictions are institutional intermediaries. Also, financial intermediation investment channels are now highly concentrated. Yet, the other end of the investment spectrum has seen a rapid rise of Millennial and Gen Z shareholders, who,  supported by technological innovations, increasingly invest in, and engage with, their companies through disintermediated processes. 

These developments highlight the fact that shareholders are not homogeneous. They may therefore have different preferences in terms of Hirschman’s exit/voice dichotomy and adopt different forms of engagement to address ESG matters. For some, but not all, shareholders this will involve the shareholder meeting. This paper explores the various engagement techniques used by different types of shareholders today.