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Sustainability gets the vote

When Dale Wannen of US investment advisor Sustainvest Asset Management wanted Irish pharmaceuticals company Actavis to publish an annual sustainability report he didn’t just write a letter to the directors, or lobby a regulator for a rule change, he took matters into his own hands and proposed a shareholder resolution.

Although Acativs is an Irish incorporated company, its shares are listed on the New York Stock Exchange and so Wannen filed the resolution under the US rules. This means that a proposal only needs to achieve 3% of the vote in order to automatically reappear a second time on the company ballot; Wannen managed to achieving 32% support. Very few shareholder proposals ever gain majority support, which is hardly surprising when, depending on the company’s articles of association (by-laws), the rules on voting counting can stack the odds against the shareholders. In the case of Wannen’s proposal, Actavis counted abstentions — some 37 million — as votes against the item. If, as is standard in the UK, the company had ignored the abstentions, the votes would have reached a staggering 43%  in favour.

Wannen says that he “considers sustainability reporting a minimum requirement for responsible corporations”. His approach isn’t unique. Which is probably why more US companies are lobbying for the exclusion of shareholder resolutions , on the grounds of “wasted shareholder resources”, despite ample evidence which shows that investor resolutions focussed on issues such as environment, sustainability, diversity and human rights[1] are growing in both number and support.

In his ballot argument, Wannen noted that more than half of the S&P 500 companies already report on “environmental, social and governance impact,” including notable pharmaceutical companies such as Johnson & Johnson, Pfizer and Abbott Laboratories. However, Manifest’s research has shown that America still has a way to go with good quality sustainability reporting compared to other major global markets. Despite the global debate over sustainability report, not much has changed since Ernst & Young’s Triple Bottom Line reporting white paper published in 2010[4].

Using Manifest’s Say on Sustainability disclosure rating framework, Actavis is indeed among those companies reluctant to talk about their sustainability governance. Their latest assessment for financial year ending December 2013 was an E – nearly the lowest possible grade achievable – and with no noticeable change from its time as US-incorporated company Actavis Inc where they also scraped an E with a 14% attainment. With this disappointing result, Actavis joins almost a third of all the companies assessed with financial years ending during 2013 which were awarded an E, and the 39% of all US companies assessed that year to achieve an E.

Disclosure quality in the pharmaceuticals sector (UK/EU/US) is varied, but has shown a significant  improvement in disclosure between 2012 and 2013, with the number of final grade Bs achieved increasing from 5 (18%) to 9 (33%) of the total grades, and B/C grades forming over 50% of the total (see table).

Financial Year A (%) B (%) C (%) D (%) E (%) F (%)
2013 0 0 9 33 6 22 5 19 7 26 0 0
2012 0 0 5 18 8 29 6 21 9 32 0 0
Source: Manifest Say on Sustainability: pharma sector disclosure performance 2012/2013, final grades

How did the Actavis peers cited by Wannen score?

Company 2012 2013
Grade % Score Grade % Score
Abbot Laboratories D 32% C 49%
Actavis E 14% E 14%
Johnson & Johnson B 68% B 77%
Pfizer D 42% D 39%
Source: Manifest Say on Sustainability: pharma sector disclosure performance 2012/2013, final grades

This improvement among industry peers indicates that Actavis is arguably performing less well year-on-year and it is now clearly being left behind by its rivals. Given this comparison, plus the company’s poor quality sustainability disclosures, Wannen’s resolution proposal is what any responsible investor would call a “reasonable request”.

As mentioned, in its previous financial year Actavis was incorporated in the US but for 2013 it was domiciled in Ireland, the destination of choice for corporate inversions. Changing country of incorporation has been an increasing and controversial trend among US pharmaceuticals companies. There is a keenness to avoid the US corporate income tax rate of 35% – the highest in the developed world. The US is also one of the few countries that makes its companies pay that rate on all the worldwide income it brings home. Moving domicile does have potentially far greater implications than a lower tax bill in the longer term.

For owners of Irish-domiciled companies they face the curiosity of Irish company law blended with NYSE listing rules and SEC federal rules. Shareholders choosing to present resolutions through the company law route need only meet the thresholds set out in s70 of the articles of association and Irish company law rather than the SEC scrutineers. As the NYSE is not a “regulated market elsewhere in the EU” the 3% threshold for tabling resolutions at a meeting do not apply. For Actavis’ owners one share will suffice.  This may leave those inverted US-listed EU-incorporated companies wondering if they have jumped out of the frying pan into the fire.

The move to Ireland is unlikely to place the company under immediate regulatory pressure to improve its sustainability reporting; only financial institutions supported by the government guarantee scheme  are currently required to publish a corporate responsibility report. That may change when the EU non-financial reporting requirements fall into place.

Manifest’s analysis shows that sustainability is a key issue that many investors, not to mention the general public, consider important. The potential financial and material benefits of sustainable business practices to the company itself, including cost and risk reduction, competitive advantage, improvement of corporate reputation and even ‘synergistic value creation’[3] have been accepted by the Law Commission as material investment considerations.

Rather than simply excluding companies from their potential universe, institutional investors are increasingly keen to understand the ESG risks of their investments by using sector-specific investment policies [4]. Consequently, the demand for the high quality information to make informed voting and engagement decisions is creeping up the agenda.

Notwithstanding the complexities of regulations and listing rules, the message from investors is that irrespective of where a company calls home, sustainability reporting is no longer an optional extra.


[1] Elks, J. (2014) ‘Record Number of Social and Environmental Shareholder Resolutions Filed in 2013’ Sustainable Brands.com. Posted 05 March 2014(http://www.sustainablebrands.com/)

[2] Ernst & Young (2010) Climate Change and Sustainability: seven questions CEOs and boards should ask about ‘triple bottom line’ reporting. Global: EYGM Ltd (https://webforms.ey.com/)

[3] Tonello, M. (2011) ‘The Business Case for Corporate Social Responsibility’ The Harvard Law School Forum on Corporate Governance & Financial Regulation. Posted 26 June 2011 (http://blogs.law.harvard.edu/)

[4] Cozic, A., de Barochez, A., Blanc, D., Polodna, T. & Russell, A. (2013) ESG Strategies of European Asset Owners: from theory to practice (2013 Survey) Paris: Novethic (http://www.novethic.com/)


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