For or Against? The Year in Shareholder Resolutions—2021

Within the context of growing demands on the private sector to constructively address the world’s environmental, social, and governance (ESG) challenges, shareholder resolutions can be an important tool to persuade companies to increase their focus on key societal challenges. The year 2021 presented a range of themes for consideration, and our approach to each continues to be guided by careful attention to the end result within our well‑tested framework.

The Role of Proxy Voting in Stewardship

We see proxy voting as a crucial link in the chain of stewardship responsibilities that we execute on behalf of our clients. From our perspective, the vote represents both the privileges and the responsibilities that come with owning a company’s equity instruments. We vote our clients’ shares in a thoughtful, investment‑centered way, considering both high‑level principles of corporate governance and company‑specific circumstances. We take an inclusive approach to these decisions, with involvement from our ESG specialists and the investment professionals who follow the companies closely. Our overarching objective is to cast votes in support of the path most likely to foster long‑term, sustainable success for the company and its investors.

Our view is that the proxy vote is an asset belonging to the underlying clients of each T. Rowe Price investment strategy. This means that our portfolio managers are ultimately responsible for making the voting decisions within the strategies they manage. To fulfill this responsibility, they receive recommendations and support from a range of internal and external resources, including:

• The T. Rowe Price ESG Committee
• Our global industry analysts
• Our specialists in corporate governance and responsible investment
• Insights generated from our proprietary Responsible Investing Indicator Model (RIIM)
• Our external proxy advisory firm, Institutional Shareholder Services (ISS)

 

Prudent Use of Our Influence

Our proxy voting program is one element of our overall relationship with corporate issuers. We use our voting power in a way that complements the other aspects of our relationship with these companies. For example, other contexts in which we might use our influence include:

• Regular, ongoing investment diligence
• Engagement with management on ESG issues
• Meetings with senior management, offering our candid feedback
• Meetings with members of the Board of Directors
• Decisions to increase or decrease the weight of an investment in a portfolio
• Decisions to initiate or eliminate an investment
• On rare occasions, issuing a public statement about a company—either to support the management team or to encourage it to change course in the long‑term best interests of the company.

However, in an environment where large institutional shareholders are often rated by third parties according to how frequently they vote against Board recommendations, we wish to be clear—it is not our objective to use our vote to create conflict with the companies our clients are invested in. Instead, our objective is to use our influence—through the various avenues listed—to increase the probability that the company will outperform its peers, helping enable our clients to achieve their investment goals.

A proxy vote is an important shareholder right, but its power is limited to the one day per year when a company convenes its annual meeting. Influence—earned over time and applied thoughtfully—is a tool we use every day.

Varying Degrees of Regulation and Qualification

In various markets around the world, company shareholders are afforded the right to present items to be voted upon at the annual general meeting. However, these shareholder proposals are subject to varying degrees of regulation and qualification. In some markets, such as Japan, North America, and the Nordic region, filing requirements are minimal. As a result, it is common to see many resolutions submitted by individual and institutional investors in these markets. In other markets, where sponsors are required to have large, long‑term holdings to be eligible to submit proposals, shareholder resolutions are relatively infrequent.

In 2021, the T. Rowe Price portfolios voted on 1,098 shareholder resolutions across all markets. Of those, 403 were situations where shareholders were nominating directors to a company’s Board. Another 372 were resolutions asking companies to adopt a specific corporate governance practice. Here, we focus on the 323 remaining proposals that specifically addressed environmental and social (E&S) issues. We classify these proposals into five distinct categories, as illustrated in Figure 1.

Voting Framework: Principles‑Based or Case by Case?

When it comes to proxy voting issues, there is some debate as to the best approach: Is it best to look at each issue individually and consider the company’s circumstances or to apply a set of principles evenly across all companies? In our view, the answer is both.

There are many areas within proxy voting where a principles‑based approach can be implemented effectively. For example, our proxy voting guidelines are designed to promote an appropriate level of Board independence, robust shareholder rights, and strong linkage between executives’ compensation and company performance. However, there are other areas where a case‑by‑case approach is necessary in order to achieve full alignment between our guidelines and our voting outcomes. This is very much the case for shareholder resolutions.

The main reason why shareholder resolutions are hard to implement with a principles‑based voting approach is because they are more nuanced than other proxy voting categories. For example, we employ an objective set of indicators to determine a director’s independence. It is a straightforward decision to vote against existing directors and suggest that the company replaces them with independent Board members. In the case of many shareholder proposals, the message to the company is not only does it need to make a change, but also to employ a prescriptive method to do so. We often find ourselves agreeing with a proponent that a company’s E&S disclosure is inadequate. However, we do not always agree with the prescriptive remedy.

The Policy Formation Process at T. Rowe Price

Our approach to voting on E&S shareholder resolutions is one small part of our overall responsibilities related to proxy voting. This approach continuously evolves along with the overall corporate backdrop. It is informed by changes in regulation, improvements in corporate disclosure, campaigns by stakeholders, company‑specific events, and our investment professionals’ views on these matters.

The T. Rowe Price ESG Committee is made up of experienced investment professionals, including analysts and portfolio managers from both our Equity and Fixed Income Divisions and our heads of Global Equity and International Equities. In addition, the membership includes cross‑functional expertise from internal legal counsel, business unit management, and investment operations. The committee is cochaired by our head of Corporate Governance and our director of Research for Responsible Investing. The ESG Committee’s first meeting of each year is to review proxy voting activity from the year before, to reassess the suitability of our voting guidelines, and to consider adding to or amending the guidelines.

The tools we use to reassess the suitability of our voting guidelines each year include (a) a review of the previous year’s voting patterns, including an analysis of the cases where we decided to override our policies, and (b) an analysis of up‑and‑coming ESG issues, informed by our internal research and data from a variety of external sources, such as our proxy advisory service, our trade associations, and proponents of shareholder resolutions. The robust discussions held each year by this committee ensure that the T. Rowe Price Proxy Voting Guidelines remain fit for purpose, incorporating changes in the global ESG landscape as they happen.

Oversight of Proxy Voting and ESG at T. Rowe Price

Proxy voting is an investment function within T. Rowe Price. This is part of our service offering as investment advisers, and it is subject to the Boards of Directors oversight of the various T. Rowe Price investment advisers. The T. Rowe Price advisers have fiduciary responsibilities. It is the duty of the advisers to vote shares in portfolio companies solely in the interests of their clients, taking into account factors relevant to a long‑term investor.

The ESG Committee reports annually to all the funds’ (US mutual funds, SICAVs, Trusts, and OEICs) Boards of Directors. We provide a detailed overview of year‑over‑year changes in voting patterns, amendments to the voting guidelines, and a discussion of the management of potential conflicts of interest. We also provide a detailed analysis of our votes on E&S matters.

In addition to the funds’ Boards, which exercise direct oversight over the T. Rowe Price advisers, T. Rowe Price Group, Inc. (Group), is a publicly traded corporation with a separate Board of Directors. The Group Board also has an interest in ESG matters in that it oversees the corporation’s ESG strategy, environmental footprint, human capital management, risk management, and other related functions. The ESG capability of the T. Rowe Price advisers is a strategic issue of interest to the Group Board. For this reason, the director of research for Responsible Investing and the head of Corporate Governance provide annual updates to the Group Board. This presentation focuses on our firm’s investment in our ESG capability: technology resources, talent, tools, training, and products managed under an ESG framework. (Our proxy voting activity is generally not part of the discussion because oversight for such investment activities is the responsibility of the funds’ Boards.)

Review of Alignment Between Corporate and Investment Perspectives on Climate Risk

In response to a request by the T. Rowe Price Group, Inc., Board of Directors, in 2021 we conducted a comparison of the firm’s corporate‑level policies, views, and statements on climate change against the proxy voting activities of the firm’s investment advisers.

More detailed information on this review, including methodology and findings, is provided as an appendix  to this document (Appendix: Climate Risk Alignment Review).

Conclusion

T. Rowe Price has dedicated significant resources toward building ESG expertise and insight. Consistent with our strategic investing approach, voting decisions on these matters are made using case‑by‑case analysis, taking into account the company’s particular ESG risks, opportunities, and disclosure.

Our overall framework for integrating ESG factors into the T. Rowe Price investment process—which includes proxy voting—is research‑centered. Its purpose is to produce investment insights for our internal teams of analysts and portfolio managers. As a global asset manager serving as a fiduciary for clients with different perspectives, beliefs, time horizons, and investment goals, it is not our objective to build our investment strategies around a specific set of values. Instead, our objective is to apply different lenses (environmental, social, ethical, and governance) to deepen our understanding of the investments held in our clients’ portfolios.

The quality, intent, and utility of shareholder resolutions on ESG matters are highly variable at this time. Some well‑targeted resolutions are extremely helpful in persuading companies to strengthen their management of certain risks, leading to improved outcomes for investors. Other resolutions are not helpful—we would even call them harmful—if the objectives of the proponent do not align with economically oriented, long‑term investors. This is why we believe that the most responsible approach to voting such resolutions is to apply the thoughtful, investment‑focused framework we have discussed in this report.

 

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Appendix: Climate Risk Alignment Review

In response to a request by the T. Rowe Price Group, Inc., Board of Directors, in 2021 we conducted a comparison of the firm’s corporate-level policies, views, and statements on climate change against the proxy voting activities of the firm’s investment advisers.

For purposes of this report, we refer to “corporate” activities as those pertaining to T. Rowe Price Group, Inc., as overseen by its Board of Directors. We refer to “investment” activities as those pertaining to the various T. Rowe Price investment advisers established to advise and manage assets on behalf of our advisory clients, including all of our US mutual fund and other commingled fund shareholders, and other investment advisory clients. Collectively, these companies are known as the Price Advisers, and they are overseen by and accountable to separate Boards of Directors.

We note that T. Rowe Price Group, Inc., and its Board of Directors are not responsible for overseeing the proxy voting activities of the investment subsidiaries of the company. Such activities are conducted at the direction of, and overseen by, the Price Advisers. The shareholders and stakeholders of these two entities are distinct, and they may have different interests. Nevertheless, we elected to take this opportunity to evaluate the question of whether incongruities exist between the investment advisers’ proxy voting record and the policies of T. Rowe Price Group, Inc.

To conduct this analysis, we compared climate‑related statements from the following documents:

Step 1: High‑Level Perspective

Documents from both entities address climate change directly. Our corporate disclosures describe it as “a prevalent risk to businesses” and sets out that “the long‑term sustainability of our business requires forward‑thinking environmental practices.” Similarly, the Price Advisers’ disclosures state: “How our investments are positioned to navigate climate change is a key concern for our analysts and portfolio managers. We believe it is part of our fiduciary duty to understand how our investee companies are assessing their exposure to climate change and are building environmental sustainability into their long‑term strategic planning.”

Step 2: Disclosure

Documents from both entities mention disclosure of greenhouse gas emissions and plans to reduce them as key early steps that corporations can take to allow investors to begin to assess and mitigate risks around climate change. Both entities specifically highlight the Task Force on Climate‑Related Financial Disclosure (TCFD) as their preferred framework for approaching such disclosure.

On the corporate side, T. Rowe Price Group, Inc., is a public supporter of the TCFD framework and incoporated recommendations from the TCFD into its 2020 Sustainability Report. On the Price Advisers side, the Proxy Voting Guidelines specifically mention the funds’ tendency to support shareholder resolutions seeking TCFD reporting. Also, the ESG Annual Report and other documents mention that our engagement efforts with portfolio companies often center around advocacy for better environmental disclosure, including recommending adoption of the TCFD framework.

Step 3: Proxy Voting

Consistent with its duties to vote shares in portfolio companies solely in the best interests of our clients, the Price Advisers have established an ESG Committee, which serves an independent function to oversee the voting process and to establish and maintain a set of voting guidelines. The guidelines mention climate change as a voting issue in several places. However, there is no specific guideline set out for any shareholder resolutions of an E&S nature. This is due to the Price Advisers’ belief, as fundamentally oriented investors, that these issues must be viewed through a company‑specific lens.

Our perspective is that issuers have very different exposure to climate‑related risks, depending on their geographic locations, their business models, regulation, leadership, and the long‑term nature of the energy transition. Issuers also provide very different levels of disclosure on these issues, ranging from full TCFD‑aligned reporting provided by certain larger companies in more climate‑sensitive industries to smaller companies that have not even started to measure their Scope 1 emissions yet. Therefore, the Price Advisers’ Proxy Voting Guidelines lay out an approach to analyze such proposals on a case‑by‑case basis.

A review of the documents on the corporate side confirms that there are no disclosures that mention proxy voting specifically. This is appropriate, considering that the corporate entity and its Board of Directors are not responsible for voting or overseeing the proxy voting activity of the Price Advisers.

Summary of Findings

After reviewing the documents listed, we conclude the following:

1. that both entities’ general, high-level perspectives on the investment risks associated with climate change are aligned,
2. that both entities’ strong support for the TCFD reporting framework is further evidence of alignment, and
3. that there is no misalignment between the two entities’ disclosures on proxy voting.

Furthermore, we conclude the Price Advisers’ proxy-voting records for 2020 and 2021 are consistent with their Proxy Voting Guidelines and strongly demonstrate a case-by-case analysis of each climate-oriented proposal voted by Price Advisers’ portfolios.

T. Rowe Price understands and embraces our various stakeholders’ interests in climate change as an important investment consideration. This applies to stakeholders of the corporation, such as T. Rowe Price Group, Inc., shareholders; our communities; and our associates. It also applies to stakeholders of the Price Advisers, such as our investment clients.

We are committed to providing consistent reporting and candid assessments of our activities on both the corporate and investing sides of our business. This is the second year we have published this For or Against report providing detailed reporting around the Price Advisers’ proxy voting on E&S resolutions. We will continue to publish this analysis annually in addition to our detailed, company‑level vote disclosures, which are reported twice a year and can be found at troweprice.com/esg.