Does proxy voting really promote corporate sustainability?

• Published date: 01 May 2023
• Author: Julie Bernard,Olivier Boiral,Laurence Guillaumie,Marie‐Christine Brotherton
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/corg.12464

ORIGINAL ARTICLE

Does proxy voting really promote corporate sustainability?

Julie Bernard

1

| Olivier Boiral

1

| Laurence Guillaumie

2

|

Marie-Christine Brotherton

1

1

Pavillon Palasis-Prince, Université Laval,

Quebec, Quebec, Canada

2

Pavillon Ferdinand-Vandry, Université Laval,

Quebec, Quebec, Canada

Correspondence

Julie Bernard, Pavillon Palasis-Prince,

Université Laval, Office 1639, Quebec,

Quebec G1V 0A6, Canada.

Email: julie.bernard.5@ulaval.ca

Funding information

Canadian Foundation for Governance

Research; Canada Research Chair in

Internalization of Sustainability Practices and

Organizational Accountability; Université Laval

Abstract

Research question/issue: This study explores the challenges faced by responsible

investment and shareholder activism practitioners in integrating sustainability by

means of proxy voting as shareholder engagement strategy.

Research findings/insights: Proxy voting guidelines that sometimes include sustain-

ability provisions are applied in a very elastic and inconsistent way. Proxy voting

agents are expected to follow the guidelines; they explain their non-compliance by

pointing out the guidelines' vagueness, the opacity of current proxy voting practices,

and portfolio managers not necessarily aligned with their clients' stated sustainability

commitments, along with their perceptions of what is in the best interest of the

clients.

Theoretical/academic implications: This study sheds new light on processes underly-

ing proxy voting practices for sustainability, which have been largely overlooked in

the literature. By opening the “black box”of proxy voting processes, this study chal-

lenges the dominant optimism in this area and raises serious concerns regarding the

effectiveness of current shareholder activism practices. This paper also contributes

to the critical literature on corporate sustainability and neo-institutional approaches

by showing that the use of proxy voting guidelines in this area can be considered as a

rational myth based on symbolic commitments divorced from substantial change in

the dominant financial logic.

Practitioner/policy implications: This paper has important practical implications for

institutional investors, organizations involved in proxy voting practices, and stake-

holders in general. Among other things, this article shows the importance of clarifying

the commitments included in proxy voting procedures, monitoring their application,

and providing training on ESG issues to the actors involved in implementing the

guidelines.

KEYWORDS

corporate governance, corporate sustainability, responsible investment, proxy voting,

shareholder engagement, rational myths

1|INTRODUCTION

Institutional investors are facing increasing demands regarding the

integration of environmental, social, and governance (ESG) issues into

their corporate decisions (e.g., Hart, 1995; Majoch et al., 2017). In this

context, shareholder engagement strategies used in responsible

investment (RI) and active ownership are growing in popularity, in par-

ticular to favor a better integration of ESG issues such as biodiversity,

Received: 4 September 2020 Revised: 8 February 2022 Accepted: 19 April 2022

DOI: 10.1111/corg.12464

Corp Govern Int Rev. 2023;31:445–463. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd. 445

human rights, and climate change (Mueller & Ising, 2017). Active own-

ership includes shareholder activism (McNulty & Nordberg, 2016) and

“actions taken by shareholders with the explicit intention of influenc-

ing corporations' policies and practices”(Goranova & Ryan, 2014,

p. 1232). Such shareholder activism can be either financially or socially

motivated (Aguilera et al., 2015; Goranova & Ryan, 2014; Judge

et al., 2010).

Shareholder engagement strategies include dialogue, shareholder

proposals, and proxy voting and can be practiced by institutional

investors. Proxy voting refers to the casting of a corporate ballot by

an institutional investor or a proxy voting firm at shareholder meet-

ings, such as annual general meetings (Solomon & Solomon, 2004).

Proxy voting can be part of a wider shareholder engagement strategy,

including shareholder activism, and can be practiced by various insti-

tutional investors, not exclusively those focused on RI (Ruggeri, 2019).

Institutional investors represent a heterogenous group, and their

motivations can be very diversified (Westphal & Zajac, 2013).

While various actors are involved in shareholder engagement

strategies, institutional investors (e.g., pension funds and investment

companies) represent a significant part of institutional pressures for

ESG integration due to their importance in terms of capital and influ-

ence (Arjaliès et al., 2017; Crete & Rousseau, 1997; Dumas &

Louche, 2015). Institutional investors are therefore well positioned to

influence companies and their integration of ESG issues through

shareholder engagement strategies (Ferraro & Beunza, 2018). For this

reason, it is useful to gain a better understanding of how these actors

are integrating sustainability through shareholder engagement strate-

gies such as proxy voting.

Shareholder engagement can promote corporate sustainability

and improve corporate efficiency through a win–win relationship

between economic and environmental performance (Long et al., 2017;

Sánchez-Medina et al., 2015; Secinaro et al., 2020; Stefan &

Paul, 2008). While there are many criticisms of sustainability perfor-

mance measurements (Carroll, 1979), such as nonfinancial ratings

(e.g., Boiral et al., 2020b; Capelle-Blancard & Petit, 2013; Igalens &

Gond, 2005), proxy voting can signal an increased monitoring by insti-

tutional investors (McCahery et al., 2016). RI and shareholder engage-

ment strategies, such as proxy voting, started with advocacy groups

(King & Gish, 2015) and religious organizations (Proffitt &

Spicer, 2006) putting pressure on companies about major social cau-

ses, such as those advocated by the civil rights and anti-apartheid

movements (King & Gish, 2015). Such practices are increasingly

adopted by large pension funds and asset management firms (Lee &

Lounsbury, 2011; Proffitt & Spicer, 2006), leading to increased moni-

toring of sustainability performance and concrete changes.

For example, Engine No. 1 backed by a coalition of three fund

managers owning more than 20% of shares, namely, BlackRock, Van-

guard, and State Street, used the elections at the ExxonMobil annual

general meeting to gain three seats for independent directors on the

board through proxy voting in a reflection of widespread unhappiness

with the company's climate change strategy and its financial perfor-

mance in recent years (Mufson, 2021). However, such shareholder

engagement strategies have also been critiqued as proposals may not

be ambitious enough, such as only disclosing information or a report

on specific issues (King & Gish, 2015, p. 716), or may possibly be a

way of applying marketing solutions to risk management when

responding to the requests from shareholder proposals (Malsch, 2013;

Michelon et al., 2020) rather than representing the actual integration

of sustainability into practices.

Several academic studies have explored how corporate sustain-

ability is promoted and integrated through shareholder engagement

strategies (e.g., Ferraro & Beunza, 2018; Henriques & Sadorsky, 2017;

Logsdon & van Buren, 2009). However, most of these studies have

focused on dialogue and shareholder proposals. With the exception of

a few studies (Lee & Lounsbury, 2011; O'Rourke, 2003;

Richardson, 2009; Viviers, 2015), the literature has overlooked proxy

voting as a shareholder engagement strategy and its role in the inte-

gration of ESG factors. Previous studies have shown the potentially

conflicting role of proxy voting, as it can be used as a tool by institu-

tional investors to initiate dialogue with companies that may imple-

ment a proposal even when it has been voted against in order to

avoid its recurrence or subsequent negative publicity (Lee &

Lounsbury, 2011; O'Rourke, 2003). Proxy voting could also have

adverse effects when a company justifies its questionable behavior

and hardens its position on the issue at stake because of a low num-

ber of votes supporting a given proposal (O'Rourke, 2003). Further-

more, the role of individuals involved in the integration of ESG factors

in proxy voting, in both institutional investment organizations and RI

contexts, has also been overlooked.

However, these abovementioned academic studies have exam-

ined either publicly available data (such as annual general meetings

vote results) or institutional investors' points of view using this mech-

anism, but none, to our knowledge, have included actors involved

directly in the process of casting votes in proxy voting as a share-

holder engagement strategy. Several authors have underlined the

need for additional empirical studies on how actors navigate through

conflicting demands, such as profit and sustainability, and the logic

underlying their decisions (e.g., Greenwood et al., 2010; Pache &

Santos, 2013).

In this context, the focus of this study is to explore the challenges

faced by RI and shareholder activism practitioners in the integration

of ESG factors through proxy voting as a shareholder engagement

strategy in an RI context. More specifically, this study examined the

effectiveness of current proxy voting practices in integrating ESG fac-

tors by exploring the role of profitability and intermediation in an RI

shareholder engagement context and by documenting the challenges

faced by the actors involved in RI when it comes to ESG integration in

proxy voting. Furthermore, this study challenges the prevailing opti-

mism in the literature (Lee & Lounsbury, 2011; McCahery et al., 2016;

Richardson, 2009; Viviers, 2015) with regard to this particular share-

holder engagement strategy and confirms the relevance of neo-

institutional approaches in the analysis of ESG integration by organi-

zations and institutional investors (Adams & Larrinaga-González, 2007;

Gürtürk & Hahn, 2016; Perego & Kolk, 2012; Testa et al., 2018).

According to the neo-institutional theory, organizations tend to

respond to external pressures through symbolic measures that

446 BERNARD ET AL.