Voice and exit: using engagement as a force for change

Investors often come under pressure to divest from companies. But engagement can be a more effective way to bring about positive change, argues Steve Waygood.

5 minute read

people sat in a meeting room

The economist Albert Hirschman once argued people have two different ways of responding to disappointment: they either stay put and complain or vote with their feet. Hirschman called these options ‘voice’ and ‘exit’. An oppressed citizen may start a protest or emigrate to another country. Unhappy customers may return their goods for a refund or simply start shopping elsewhere.

This dilemma also applies to ethically-minded investors. If shareholders in a company discover it is polluting the environment or mistreating its staff, should they voice their concerns or simply exit the investment?

Divesting from companies that break ethical rules is often the more convenient option and may even bring a useful reputational boost. But once investors sell out they are no longer able to apply pressure to company boards. They may be replaced by less conscientious shareholders who are more than happy to look the other way so long as the profits keep rolling in. As Hirschman observed, while exiting may be convenient and conscience-soothing, it tends to entrench the status quo.

Steve Waygood, chief responsible investment officer at Aviva Investors, argues investors should use their voices before heading to the exit door. In this Q&A, he explains how shareholders can engage with companies to improve their practices; sets out what investors can do to ensure their asset managers are applying the necessary pressure; and highlights examples of engagements that have delivered positive change.

Why is engagement a better approach than divestment?

Engagement is more than a buzzword; it can be traced back to the origins of company law, which positioned shareholders as the primary regulators of corporate behaviour. Modern investors should approach their responsibilities in this spirit. They have a moral duty to act where they have the power to enforce generally-accepted standards. Often this means staying put to establish a dialogue and exerting pressure where necessary. It can also help to protect long-term shareholder value.

Divestment may be a simpler solution in many cases. Selling out can ease an investor’s conscience and earn praise from divestment campaigners. But the real question is what is more likely to bring about change? Imagine you are an executive at a mining company where lax safety standards are leading to fatalities among staff.  You are coming under heavy criticism from the company’s investors and could be voted off the board at the next annual general meeting. Would your life become easier or harder if those concerned investors walked away? I would say it becomes considerably easier.

How can investors make sure they are listened to?

Equity investors have a variety of tools at their disposal. They have the power to fire a company’s leadership at AGMs, and can use this to vote against strategies they disagree with. They can also vote against auditors if they are concerned the company’s report and accounts are not being properly scrutinised or do not truthfully represent the financial and reputational risks it faces due to its unethical practices.

Shareholders can work in tandem to bolster their influence. Collaborative engagement can be particularly important when it comes to addressing the behaviour of powerful fossil fuel companies that are used to resisting pressure from environmental campaigns.

Some argue that divestment from fossil fuels is necessary because the business model itself is the issue, rather than isolated cases of malpractice. How would you respond to this?

It is true that the activity of fossil fuel companies threatens the future of the whole planet. But we would argue this makes engagement even more important, because the stakes are so high.

If carbon emissions are not curtailed, it is possible global temperatures could rise by six degrees by 2100. In current prices, the associated damage could wipe $43 trillion off the value of financial markets.1 Such a catastrophe is difficult to contemplate. But without government engagement from large and powerful investors, policymakers may not come under enough pressure to correct the market failure. And without company engagement, energy utilities could simply continue burning fossil fuels, using their own lobbying activities to ensure policymakers let them do so.

By collaborating to put pressure on executives, investors can push these companies towards more-sustainable energy sources. Such a transition is in the interests of everyone, including the companies themselves, as at a certain point the remaining hydrocarbon reserves will become uneconomic to extract.

Could you give an example of successful engagement in the energy industry?

Consider Exxon Mobil’s recent steps to improve its approach to climate reporting. We’ve been engaging with Exxon for over a decade on this issue, voting against board members due to their position on climate change. Traditionally Exxon was among the most resistant of the oil majors to climate-related initiatives, but a significant milestone was reached at the company’s AGM in 2017.

At the meeting, the Church Commissioners, the organisation that manages the assets owned by the Church of England, led a shareholder proposal requiring Exxon to publish an annual assessment of the long-term effects of global climate agreements on its portfolio. Aviva Investors and other shareholders supported the proposal, and this investor pressure has begun to bear fruit. The company’s reporting now includes assessments of the impact of a global rise in temperatures on its operations, as well as the sensitivity of its portfolio to various supply and demand scenarios, such as the proliferation of electric cars.

This shows just how long engagement can take, which is why it is also important for investors to engage with governments to ensure they make sure market incentives are properly structured and encourage good corporate behaviour.

Beyond disclosure, what difference can engagement make in climate-related industries?

Engagement is about reducing the underlying emissions too. For example, Italian multinational electricity firm Enel pledged never to build another coal station following our engagement. At its renewables programme launch event, the chief executive Francesco Starace said it was “obvious that renewables were winning the battle for competitiveness against fossil fuels and nuclear power. It is a matter of fact, there is no discussion any more.” A coal-fired power station opened in Chile in 2016 will be Enel’s last. Nor will the company spend any more money on nuclear. Half of Enel’s £18 billion growth investment over the next five years is going into solar and wind energy, which currently provide just seven per cent of its electricity.

Similarly, we asked Glow Energy in Thailand for a public no new coal commitment. A few months later it announced it will not add any new coal-fired power plants to its generation fleet. In total, five of the 40 fossil fuel firms we have engaged with have committed to science-based targets (i.e. consistent with the Paris agreement on climate change) on emission reductions. For example, Origin Energy became the first Australian company to have science-based emissions targets recognised by the global We Mean Business initiative, which helps drive collaborative engagement on this issue.

Can engagement deliver benefits in other sectors?

Engagement can help investors tackle wider issues such as corporate governance. Take Samsung Electronics in South Korea. The company has been involved in a series of controversies over the years, centring on the exercise of undue political influence and the misappropriation of shareholder funds.

But Samsung recently announced important reforms, including the appointment of independent international directors and the splitting of the roles of chairman and chief executive. Samsung also revealed it would significantly increase the dividend pay-out ratio, which had long been a point of contention between the controlling family and minority shareholders. Much more remains to be done, but these changes reflect the efforts of Aviva Investors and other long-term shareholders over many years to engage with the company.

What can institutional investors do to ensure they are pushing companies to remedy their behaviour?

It is important that institutions have a clear process for identifying the companies that are of greatest concern in their portfolios, and ensure their fund managers are proactive in addressing the issues. One way for institutions to ensure their managers are taking responsibility on engagement is to incorporate it into their incentive structure. Is there a sanction in place if the engagement plan fails to deliver? And is there a reward if the plan is delivered and change is implemented?

What should investors do if they fail to see the changes they are pushing for?

Not every investor has the clout to make a company alter its behaviour, and sometimes firms will refuse to improve their business practices no matter how powerfully investors protest. Engagement can fail, and there will come a time when the only option is to walk away.

Where persistent and concerted engagement has failed, then it’s time to use the exit. For example, in 2017 Aviva divested its own money from a Japanese coal company called J Power because, despite our best efforts, we saw no progress on a series of key issues. But we strongly believe investors should use their voices to bring about change before they head for the exit. It helps to accelerate corporate action.


Research from the Economist Intelligence Unit (EIU), commissioned by Aviva Investors.


Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.