The Importance of Active Ownership

Contents

Fast-moving Politicized proposals Large Passive In case you missed it Points to note

Engagement with shareholders continues throughout their lives, not just during proxy voting season.

An important aspect of owning shares in a company is voting on governance issues, but it is certainly not the only aspect. This is expressed through the exercise of voting rights at shareholder meetings, and this “season” is It has now fully rolled out in Japan and is nearing the end of its run in Europe and North America.

As in the past, we have publicly announced our voting intentions in advance of certain shareholder meetings, primarily at companies where our clients have significant economic exposure and where we believe the vote proposals relate to financially significant topics. We believe we are the first major asset manager to routinely pre-announce our voting intentions with detailed justification for a significant number of votes – a commitment to transparency that we take very seriously.

As proxy season approaches Regarding the importance of shareholder engagement, I think it is important to reiterate that engagement is crucial to active asset management throughout the year and is more important than voting.

In fact, we believe engagement is becoming increasingly important to ensuring long-term returns for three reasons:

Fast-moving

First, the business environment is increasingly fast-changing and full of risk.

The topics we consider financially material to businesses continue to evolve, and two years ago no one would have imagined that how to integrate artificial intelligence (AI) into their operations would become a key strategic challenge for nearly every company.

Over the past few weeks, MetaMeta) and alphabet (Google, GoogleIn my last blog, I discussed how to address the mega-cap tech sector’s decade-long failure to keep kids safe on social media, and what it can do to avoid similar failures when it comes to the potential risks of AI. While I recognize the recent progress these companies have made, this year We continued to support There were a number of shareholder proposals relating to AI oversight, reporting of AI misinformation and disinformation, the impact of using AI in targeted advertising, and child safety metrics.

However, most companies have not received shareholder proposals on AI, meaning shareholders do not have the right to vote on the issue. This shareholder meeting season has seen only 11 proposals from eight companies so far. We believe this is not because the impact of AI at other companies is less financially significant. That is why we believe it is incumbent on investors to engage directly with companies outside of shareholder meeting season to understand their AI-related policies and governance, which is what we have done with companies across a range of industries.

One industry where AI is rapidly transforming is media and entertainment. In times of change and uncertainty, having strong governance and stable leadership is even more important. Boards of directors play a key role by overseeing a robust CEO succession planning process, and Disney (Dis) is an example of why this is important.

In our view, the Disney board’s mishandling of Bob Iger’s initial succession plan has seriously undermined the company’s business continuity and performance, given the size and complexity of the company’s business and the challenging conditions in our industry. We supported An attempt to elect Nelson Peltz and James Rasulo to the board, as the succession planning process for a new CEO was underway and it was felt that a fresh perspective would be useful. This was ultimately unsuccessful, but the NB vote was intended to send a very clear message to the board that this second succession planning process needed to be more successful.

Politicized proposals

The second reason we believe active shareholder engagement is increasingly important is the increase in politicized or single-issue advocacy proposals and voters. Investment advisors like Neuberger Berman have a fiduciary responsibility to vote in our clients’ best interests. We strongly support shareholders’ right to put forward proposals that they believe would enhance the long-term value of a company if enacted.

At Lionsgate Capital, we made that happen in November 2023. Submitting a shareholder proposal We urged the company to consider a recapitalization to eliminate its dual-class voting structure, which we argued could be value-destroying. At the time, Lionsgate’s Class B shares were trading below the average forward enterprise value-to-EBITDA multiple of its peer companies. We believed this discount was due in part to the dual-class structure, which reduced trading liquidity, complicated the capital structure and gave undue influence to certain shareholders. We were pleased that our proposal received 62% support and that the company stated its intention to eliminate the share classes by the end of the year.

However, not all shareholder proposals are clearly tied to long-term value creation. They may relate to environmental or social issues that are not considered financially material to the company. They may be too prescriptive, reaching a level of detail that should be left to management. Or they may make demands that the company appears to already be addressing effectively.

Even more worrying are proposers who cynically seek to hijack the proxy voting system to make purely political statements. While these so-called “anti-woke” or “anti-ESG” proposals often appear on the surface to ask boards to consider seemingly apolitical actions, such as separating the chairman and CEO roles, the proposers’ supporting documents may contain problematic political statements unrelated to long-term value creation. Proactive active owners who analyze proxy documents deeply are in the best position to understand what proposers are actually asking for and their impact. According to Royal Bank of Canada, such proposals account for 13% of the total in the 2024 proxy voting season, up from just a handful three years ago.

This may be one reason why support for environmental and social shareholder proposals has decreased over the past two years, while support for governance proposals has actually increased. We believe that thoughtful voting by active, long-term investors is necessary to prevent certain shareholders from exerting disproportionate and potentially damaging influence.

Large Passive

The third reason we believe engagement is becoming increasingly important in ensuring long-term performance is the rise of passive investing.

“Large passive investors,” who often hold large amounts of a company’s stock, argue that because they have to own all the shares, they have an incentive to be active in engagement, and point to dedicated proxy voting teams. But in our view, unless proxy voting is embedded and integrated into ongoing active management and engagement, it too often becomes too mechanical and loses impact.

To see what we mean, consider the example of our work in Japan, a market where shareholder engagement is becoming increasingly welcomed after years of resistance.

We believe Okinawa Cellular Telephone Company continues to have excess cash on its balance sheet. We began voting for more efficient allocation of profits in 2020, and while we were pleased to see the company undertake its first share repurchase that year, limited progress since then has warranted further engagement.

As part of these efforts, the company wrote to the board of directors in February 2022, urging Okinawa’s parent company, KDDI, to address capital inefficiency issues, and in June of the same year pre-announced its intention to vote against Okinawa’s management and outside directors on the issue. In October 2022, the company released its first medium-term plan, committing to increasing earnings per share by 15% over three years, with half of the increase to be funded by share buybacks. Six months later, the company announced it would retire one-third of its loan to KDDI and use the proceeds to fund share buybacks.

“We believe that the combination of our pre-announced voting intentions and ongoing engagement are key elements of the progress made with Okinawa. We continue to engage with the company to improve capital efficiency and have just pre-announced our intention to vote on board independence issues later this week.”

That, in our view, is the message long-term investors should take from voting at this year’s annual meeting: shareholder engagement is important at all times, not just during proxy season.

Points to note

- Tuesday, June 11:
  - China Consumer Price Index
  - China Producer Price Index
- Wednesday, June 12:
  - U.S. Consumer Price Index
  - FOMC Meeting
- Thursday, June 13:
  - U.S. Producer Price Index
  - Bank of Japan Policy Interest Rate
- Friday, June 14:
  - University of Michigan Consumer Sentiment (provisional)