The Importance of Active Ownership

Shareholder engagement is for life, not just for proxy-voting season.

An important aspect, but certainly not the only one, of owning shares in any company is voting on governance issues. This is expressed by voting proxies at shareholder meetings, and this “season” is in full swing in Japan and wrapping up in Europe and North America.

As in previous years, we have been publishing our voting intentions in advance of select shareholder meetings on our “NB Votes” web page, with a focus on companies where our clients have significant economic exposure and where we believe the voting proposal relates to a financially material topic. We believe we were the first large asset manager to regularly pre-announce our voting intentions with detailed rationales for a substantial number of votes, and it is a commitment to transparency that we take very seriously.

While proxy season raises the prominence of shareholder engagement, we think it is important to reiterate that engagement is crucial for active asset management throughout the year—and that there’s much more to it than voting.

Indeed, we believe engagement is becoming ever more important for securing long-term returns. Here are three reasons why.

Fast-Moving

The first is simply that the business environment is increasingly fast-moving and fraught with risk.

The topics we believe are financially material to companies continue to evolve. Two years ago, few would have imagined that a key strategic question for almost any business would be how it plans to integrate artificial intelligence (AI) into its operations.

Over the past couple of weeks, ahead of votes at companies such as Meta and Alphabet, we have been debating how to respond to the mega-cap technology sector’s decade-long failure to ensure children’s safety on social media, and what we can do to help avoid similar failures on the potential risks from AI. While we recognize recent progress at these companies, this year we continued to support a number of shareholder proposals related to AI oversight, and to reporting on AI mis- and disinformation, the impact of AI use in targeted advertising and child-safety metrics.

Most companies didn’t receive a shareholder proposal on AI, however, which means shareholders didn’t get to vote on the issue. We have seen only 11 proposals at eight companies so far this proxy season. That’s not because the impact of AI is any less financially material at other companies, in our view, which is why we think it’s incumbent on investors to engage with companies directly, outside of proxy season, to understand their AI-related policies and governance. This is something we have been doing at companies across a range of industries.

One industry where AI is having fast-moving implications is media and entertainment. In times of change and uncertainty, it is even more important to have strong governance and stable leadership. Boards play an important role in this by overseeing robust CEO succession-planning processes, and for us, Disney is an illustration of why this matters.

In our view, the Disney board’s mishandling of Bob Iger’s first succession plan has been a costly distraction from business continuity and performance, given the scale and complexity of the company’s operations and the challenging industry backdrop. In April, we supported the attempt to elect Nelson Peltz and James Rasulo to the board. With a new CEO succession-planning process under way, we felt fresh perspectives would be helpful. While this ultimately failed, our NB Vote was intended to communicate a very clear message to the board that this second succession-planning process needs to be more successful.

Politicized Proposals

The second reason we believe active shareholder engagement is becoming more important is the rise in politicized or single-issue advocacy proposals and voters. Investment advisors like Neuberger Berman have a fiduciary duty to cast votes in the best interest of our clients. We strongly support the right of shareholders to file proposals that they believe would enhance the long-term value of a company if enacted.

We did that ourselves at Lions Gate Capital in November 2023, filing a shareholder proposal asking the company to consider a recapitalization to eliminate its dual-class voting structure, which we argued might impair value. At the time, Lions Gate’s Class B shares traded below the average forward enterprise-value-to-EBITDA multiple of its peers. We believed this discount was driven in part by the dual-class structure, which dampened trading liquidity, complicated the capital structure and gave certain shareholders outsized influence. We were pleased that our proposal received 62% support and that the company stated its intention to collapse the share classes by the end of this year.

But not all shareholder proposals have such a clear link to long-term value creation. They may be related to environmental and social issues that we do not believe are financially material to the company; they may be too prescriptive, getting to a level of detail that ought to be left to the management team; or they may make an ask that we believe the company is already effectively addressing.

Even more worrying are proponents that cynically intend to hijack the proxy voting system to make purely political statements. While these so-called “anti-woke” or “anti-ESG” proposals often superficially appear to ask a board to consider an ostensibly apolitical act, such as separating the chair and CEO roles, the proponents’ supporting materials can contain troubling political statements unrelated to long-term value creation. Engaged active owners that dive deeply into the proxy materials are best positioned to understand the actual ask that the proponent is making, and its likely impact. Proposals like these represented 13% of the total in the 2024 proxy season, up from only a handful three years ago, according to Royal Bank of Canada.

This may be one reason why support for environmental and social shareholder proposals has declined over the last two years while support for governance proposals has actually risen. We believe thoughtful voting by active, long-term investors is necessary to prevent certain shareholders from exercising an outsized, and potentially damaging, influence.

Massive Passives

The third reason we believe engagement is becoming more crucial for securing long-term performance is the rise of passive investing.

The “massive passives”—which often own very large shares of companies—argue that they are incentivized to be engaged because they have to hold every stock, and point to their dedicated proxy-voting teams. But, in our view, if proxy voting is not embedded and integrated into ongoing active management and engagement, it too often becomes mechanical and loses its power to influence.

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

The Okinawa Cellular Telephone Company persistently carried too much cash on its balance sheet, in our view. We started voting for more efficient allocation of profits back in 2020, and while we were pleased to see the company’s first share buybacks that year, limited subsequent progress called for further engagement.

As part of those efforts, we wrote to the board in February 2022, asked Okinawa’s parent company, KDDI, to address the capital-inefficiency issues and, in June that year, pre-disclosed our intention to vote against Okinawa’s management and external directors on the issue. In October 2022, the company released its first-ever midterm plan, committing to grow earnings per share by 15% over three years, with half of that growth coming from share buybacks. Six months later, the company announced it would unwind a third of its loans to KDDI and use the proceeds for share buybacks.

We regard the combination of pre-disclosed voting intentions and ongoing engagement as an important factor in the progress achieved at Okinawa. We continue to engage with the company to enhance capital efficiency and have just pre-disclosed our intention to vote on a board-independence issue later this week.

This is the message long-term investors should take from this year’s votes at annual general meetings, in our view: Shareholder engagement is critical all the time, not just during proxy season.