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Shareholder engagement involves portfolio managern use a proxy vote to strengthen their influence collectively, allowing absentee shareholders to delegate their votes. The services of external proxy advisory firms' or other shareholders' active participation in a company's affairs. This includes voting on proxies, joining calls with company management, and researching issues to make informed decisions that benefit all stakeholders. It's akin to civic duty, where informed citizens engage in political matters and make prudent choices.
Shareholder activism goes beyond engagement, involving more intensive participation. Shareholder activists may:
Engaged shareholders address various issues, such as:
The desire to enhance investment returns primarily drives shareholder engagement. Ideally, this engagement should benefit all stakeholders, including the public, suppliers, customers, shareholders, and employees.
Engagement can have downsides and limitations:
Active equity portfolio managers typically meet with company management or investor relations teams to discuss their investments. Some countries require stewardship and shareholder engagement policies. Often, these engagements follow the release of company results.
Large investment firms may employ ESG-focused analysts alongside traditional analysts to address non-financial issues. These analysts primarily deal with shareholder voting decisions and environmental and societal issues.
The development of an industry providing corporate governance services, such as governance ratings and proxy advice, results from institutional investors hiring external experts for corporate governance monitoring and proxy voting assistance.
Activist investors invest in a company and look to make significant changes to it to make a profit.
Shareholder activists may:
Shareholders must participate in general meetings and actively use their voting rights to influence corporate decisions.
Minority shareholders often use a proxy vote to strengthen their influence collectively, allowing absentee shareholders to delegate their votes. The services of external proxy advisory firms assist investors in identifying contentious issues.
Question
Which of the following statements is least likely true:
- Shareholder activism creates potential conflicts of interest.
- Shareholder engagement involves proxy battles.
- Shareholder engagement potentially promotes focusing on short-term results at the expense of more important long-term results.
Solution
The correct answer is B:
Choice B is more characteristic of shareholder activism rather than shareholder engagement. Proxy battles entail a more intense effort to influence remaining shareholders to vote specifically, going beyond the regular voting of shares. While not necessarily negative, proxy battles represent a more involved approach.
A and C are incorrect. Answer choices A and C are true.
Portfolio Construction: Learning Module 1: Overview of Equity Portfolio Management; Los 1(d) Describe the potential benefits of shareholder engagement and the role an equity manager might play in shareholder engagement