Shareholder engagement on non-financial issues at Dutch
listed firms
A linear regression analysis
Master Thesis
University of Groningen Faculty of Economics and Business
Master's Thesis IB&M (EBM719A20.2018-2019.1) 21st January 2019
By
Page | 2 Master Thesis
MSc International Business and Management
Shareholder engagement on non-financial issues at Dutch listed firms
A linear regression analysis
21/01/2019 By: Maureen Kruid Anjelierstraat 2 7943 AM Meppel +316 81064380 m.kruid.1@student.rug.nl S2182467
Supervisor: dr. K. van Veen, k.van.veen@rug.nl
Co-assessor: dr. J. Canello, j.canello@rug.nl
Faculty of Economics and Business University of Groningen
Duisenberg Building, Nettelbosje 2, 9747 AE Groningen, The Netherlands P.O. Box 800, 9700 AV Groningen, The Netherlands
+31 (0)50 363 7098
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I.
Abstract
In the last decade, the ability and willingness of shareholders to influence the management and affairs of companies has been steadily increasing. Particularly the institutional shareholders have more incentives to engage with companies, as this could improve long-term returns. Shareholder engagement intensifies when investors become concerned about the firm’s performance. Shareholders used to worry about the financial performance only, but are becoming more and more interested in the non-financial performance as well, on issues such as environmental, social, and governance. Due to stewardship codes and the Shareholders Rights Directive (SRD), shareholders are empowered with legal instruments to engage proactively with firms, and have the right to ask questions during the Annual General Meeting (AGM). This research focused on the level of shareholder engagement, specifically the shareholder engagement for non-financial issues. The aim of this research was to investigate whether there is an increase in the level of (non-financial) shareholder engagement at Dutch listed firms from 2012 till 2017, as reflected during the AGM’s, and how this relationship of the level of (non-financial) shareholder engagement, and the company’s characteristics, AGM’s characteristics and shareholders’ population characteristics can be explained. The sample size consisted of 37 firms that were analyzed using a linear regression analysis. It was found that there indeed is an increase in the level of (non-financial) shareholder engagement at Dutch listed firms in terms of the amount of questions asked about non-financial concerns relative to the questions asked about financial concerns during the AGM. It was also found that firm size and the number of agenda items contributed positively to the level of (non-financial) shareholder engagement. Moreover, the research found that the higher percentage of foreign (institutional) shareholders, compared to Dutch shareholders, contributed negatively to the level of (non-financial) shareholder engagement, as well as the percentage of institutional shareholders participating during the Q&A session.
Key words: (Non-financial) Shareholder Engagement; Shareholder Activism; Annual General Meeting (AGM); Dutch Listed Firms; Institutional Investors.
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II.
Acknowledgement
After a long academic career at two different institutions, this Master Thesis is the final work that represents the end of my academic career. It is now time to start new adventures, being ready to start working as a professional and travel the world. My thesis road was not one without some minor obstacles, but I am proud of this finished piece of work. First, I would like to thank my supervisor dr. van Veen for his guidance during the past year. Without his support and ideas, I would not have come this far as I am now. Second, I would like to thank my boyfriend, family and friends for their support and help during the writing process of this thesis. They have soothed the road, and gave me courage to keep going on.
Maureen Kruid
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III. Contents page
Table of contents 1. Introduction ………. 7 2. Theoretical framework ………..……….……… 11 2.1 Shareholder activism ………..…..……….. 11 2.2 Shareholder engagement ………..……….. 14 2.3 Stewardship code ………. 16
2.4 Shareholders Rights Directive ………. 17
2.5 Hypothesis development ………. 19
3. Methodology ………..……….. 24
3.1 Research method and sample ……….. 24
3.2 Dependent variables ….………..…..…….. 25 3.3 Independent variables………..…………. 26 3.4 Control variables ………. 28 3.5 Data analysis ……….…... 29 4. Findings ………..………….. 30 4.1 Descriptive statistics ………..……..………. 30 4.2 Correlation analysis ……….………… 33 4.3 Regression analysis ……….. 35 5. Discussion ……….. 39
5.1 Conclusions and implications ……….. 39
5.2 Limitations ……… 41
5.3 Future research ………..……….. 42
References ………..……….. 43
Appendices ………..………. 47
Page | 6 List of tables
Table 1: The Dutch activist shareholder’s toolbox …….………. 12
Table 2: Descriptive statistics ………. 31
Table 3: Overview mean absolute and relative values questions and participants ……… 32
Table 4: Correlation matrix ……… 34
Table 5: Summaries regression analysis ………..……….. 36
Table 6: Overview sample firms and AGM transcripts ……….……… 48
Table 7: Overview topics financial and non-financial questions ………. 50
Table 8: Overview companies and industries ……… 51
Table 9: Overview frequencies industries ……….. 52
List of figures Figure 1: Conceptual model ……….……….. 23
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1. Introduction
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show
how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which
they operate.”
- Larry Fink, CEO of BlackRock (Fink, 2018)
Since the financial crisis of 2007-2008, European and Dutch politicians have called upon institutional investors to take a more active role as shareholders (Aquila, 2016). This led shareholders to seek increasing engagement on fundamental corporate issues and concerns. As a result, the Shareholder Rights Directive (SRD) was implemented across European jurisdictions in 2007, which aims to enhance shareholders’ rights in listed companies and tackle hindrances to cross-border voting (Scalera, 2010). Under the SRD, shareholders are provided with the legal instruments to engage proactively with corporate executives and directors, such as the right to put items on the agenda, the right to table draft resolutions, and the right to ask questions and expect answers on agenda items during the Annual General Meeting (AGM).
Shareholder engagement intensifies when investors become concerned about company performance, whether for economic reasons, for corporate governance failures or for specific deficiencies in management practice (Martin, Casson and Nisar, 2007). There is an increasing pressure put on companies by shareholders. This pressure, or shareholder activism, focuses mainly on corporate governance issues, such as redundancy rate or corporate social responsibility (Aquila, 2016). These days, shareholders focus more on the non-financial aspects of the company and adopt a long-term orientation. Engaging shareholders effectively and satisfying their growing information needs is therefore becoming an essential role of directors of listed companies (Scalera, 2010).
Page | 8 The total level of shareholder activism is most likely higher, since shareholder activism in the Netherlands predominantly takes place behind closed doors (Ivanova, 2017).
Till now, there is no similar research available within the academic framework that has focused on shareholder engagement in a Dutch context. However, this is an interesting topic for Dutch listed firms, as more and more is invested in Dutch firms by institutional investors. In 2016, the financial assets managed by pension funds were 193,7% of the Dutch GDP, and the financial assets managed by insurance corporations 69,7% (OECD, 2017). The Dutch public equity is an upcoming market for institutional investors, in 2014 more than 80% of shares of Dutch listed companies were held by some of the world’s largest global institutional investors, and it is therefore of importance for Dutch listed firms to respond to this shareholder engagement (Abma, van Kleef, Lemmers, and Olaerts, 2017; Melis and Nijhof, 2018). The increase in institutional ownership has provoked regulatory and voluntary initiatives aiming at increasing their level of ownership engagement (Celik and Isaksson, 2014). An example is the Dutch Stewardship Code that will enter into force in January 2019 (Eumedion, 2018). Long-term (institutional) investor engagement is seen as means to optimize firm performance and foster economic growth (Fenwick and Vermeulen, 2018). Companies can benefit from this engagement as a preventive measure against the consequences of shareholder dissatisfaction.
Page | 9 However this research focuses on shareholder engagement in a Dutch context, as institutional investment is rapidly growing in the Netherlands; the financial assets of pension funds has almost doubled in seven years, from 118,5% of the Dutch GDP in 2009 to 193,7% of GDP in 2016 (OECD, 2017). Consequently the relevant research question becomes:
“Is there an increase in the level of (non-financial) shareholder engagement at Dutch listed firms, and how can this be explained?”
This research first follows a descriptive approach to investigate if there is a trend in pressure on non-financial issues, put on companies by shareholders. How is this growing shareholder activism reflected at the AGM’s of Dutch listed firms, in terms of the amount of questions asked about non-financial concerns relative to the questions asked about financial concerns? Second, this research follows an explanatory approach and investigates how to explain the differences between companies and questions asked during the AGM’s. Why do some companies receive more non-financial questions than other companies? The three differences used in this research are the characteristics of the company, the characteristics of the AGM’s and the characteristics of the shareholders’ population. A relevant study of Kruitwagen, Madani, Caldecott and Workman (2017) used the characteristics of investors and companies to test “the effectiveness of owner engagement strategies by studying the conditions for cooperation between investors and their companies”. Another relevant study of Melis and Nijhof (2018) also focused on investors in the Dutch context, where it was explored whether “institutional investors are contributing to the enactment of stewardship by corporate boards”. This was measured using a self-evaluation of institutional investors, who had to evaluate their engagement behavior on four engagement ways: attendance at shareholders’ meetings, use of voting rights, engagement in dialogue with the company, and engagement in dialogue with other shareholders.
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2. Theoretical framework
2.1 Shareholder activism
“The corporate fear of activists tends to be driven by the idea that an activist will cause the
company to lose their focus on running the business. Today, the environment is shifting. Companies are beginning to realize that they must listen to the activist investor.”
- Patricia Lenkov, President of Agility Executive Search LLC (Skroupa, 2018) Shareholder activism can be defined as ‘shareholders using their ownership rights attached to ordinary shares to influence company’s management’ (Chapman and Cutler, 2016; Ivanova, 2017). The ability and willingness of shareholders to influence the management and affairs of corporations has been steadily increasing for more than a decade (Noked, 2013). The current state of activism is a big playing field where shareholders have greater influence. Most shareholders are institutional investors, and these days many institutional investors are activist investors. Large firms especially are the focus of attention for activist shareholders, partly because they are more likely to attract attention. Hence shareholders can expect to have greater public support for their proposals (Stathopoulos and Voulgaris, 2016).
Page | 12 Smaller investors usually do not have the resources to do so (Birkmose, 2014). According to Ivanova (2017), it is the institutional investor that is most likely to provide leverage on companies to improve their performance, as investors with bigger stakes in their investee companies have higher monitoring incentives as their influence and resulting benefits from activism increase.
Shareholder activism is very context-specific, with factors such as the corporate governance system and regulatory environment of a given country having an impact on engagement dynamics (Ivanova, 2017). In table 1, an overview of common tools that Dutch activist shareholders use, ranging from least to most aggressive, is presented (Aquila, 2016).
Level of aggression Tools Least aggressive
Most aggressive
Private discussions and engagement with the company Public engagement with the company
Stake building
Right to participate in and vote at general meeting Right to place an item on the agenda
Right to convene a meeting Initiate litigation
Table 1: The Dutch activist shareholder’s toolbox (Aquila, 2016)
1. Private discussions and engagement with the company: The vast majority of shareholder activism starts with the activist engaging with the boards of the company in a private setting. This could take the form of informal one-on-one discussions or conference calls with the company’s CEO to discuss strategy and measures to maximize shareholder value, or more formal communication by sending private letters.
2. Public engagement with the company: When a shareholder activist is not satisfied with the company’s response to issues raised in private discussions, starting a public campaign might be an alternative to realize its agenda. Generally, this includes the use of (social) media, teaming up with other shareholders and institutional investors, and gaining support of the investor community at large.
Page | 13 4. Right to participate in and exercise right to vote at general meeting: Every shareholder
has the right to participate in and exercise its voting right at the company’s general meeting. In principle, the holder of one share is entitled to one vote. Shareholders may vote in person or by proxy, and the proxy may be granted electronically.
5. Right to place an item on the agenda: Shareholders holding individually or jointly 3% of the company’s stock have a right to submit items for the agenda of the general meeting. Shareholders can submit items on the agenda as either a voting item or a discussion item. However, shareholders cannot force the board to put an item on the agenda as a voting item if the general meeting does not have the power to resolve upon the topic.
6. Right to convene a meeting: Shareholders holding individually or jointly 10% of the company’s stock are entitled to call a general meeting and put such items on the agenda as they deem appropriate.
7. Initiate litigation: Shareholder litigation typically takes place in inquiry proceedings before the Dutch Enterprise Chamber. Any shareholder that alone or acting jointly holds at least 10% of the company’s stock may initiate inquiry proceedings and request the Dutch Enterprise Chamber to order an inquiry into the policy of the company by independent court-appointed investigators (Aquila, 2016).
Page | 14 2.2. Shareholder engagement
The primary aim of shareholder engagement is to change firm behavior and influence firm’s performances (Birkmose, 2014). Traditionally, shareholders have shown their discontent with management by selling their shares (Rose, 2012). Nowadays, shareholders have a key role and shareholder engagement is seen as one of the cornerstones of listed companies’ corporate governance model. In order to engage, shareholders must have incentives which induce or motivate their engagement. Engagement with companies used to occur predominantly only when companies were in financial difficulties (Micheler, 2013). However, due to political and regulatory changes, shareholders have significantly changed the non-financial expectations of their investee companies (Rose, 2012). Shareholders now also express their concerns about the company’s non-financial performance and vote on a given matter (Uysal et al., 2018). It is primarily long term investors who have an interest in engagement because engagement is generally an activity that improves long-term returns to shareholders (Arsalidou, 2012). According to Melis and Nijhof (2018), institutional investors only undertake engagement if it adds shareholder value. Thus, institutional investors will have an incentive to engage if the value of the company can be expected to rise as a result of their engagement.
Shareholder engagement is a response to the shareholder activism (Martin et al., 2007). The methods of engagement range from informal discussion (that is the preferred mode of engagement) through to formal methods, such as shareholder resolutions. Boards and management teams should thoughtfully assess their approach to dealing with investors that are considered as activists. Responding effectively to these activist shareholders in the current environment requires a more proactive and continuous engagement with shareholders. Listening carefully to the concerns of the shareholders, and clearly communicating the firm’s strategy, including how current actions and results are related to broader firm objectives are of importance (Noked, 2013; Chapman et al., 2017). Enhanced shareholder engagement is seen as an essential part of healthy corporate governance in companies providing scrutiny and a form of governance for the corporate sector (Chiu, 2014).
Page | 15 Shareholder engagement intensifies when investors become concerned about the firm’s performance, whether for financial reasons, such as share price performance, profitability, or trends in market share, or for non-financial reasons, such as the use of green energy and biodiversity (Martin et al., 2007). A common application of shareholder engagement is the mitigation of environmental, social, and governance risks of portfolio companies, such as those arising from climate change (Kruitwagen et al., 2017).
Shareholder engagement consists of shareholders attending analyst conference calls, quarterly earnings calls and the annual meeting of shareholders (Ivanova, 2017). Shareholders who have concerns about an investee company, and who do not intend to sell their shares, should let the board of directors know their concerns (Martin et al., 2007). However, according to Ivanova (2017) investors are sometimes reluctant to engage because of internal conflicts of interests. They feel this could have a negative impact on their future ability to communicate with management and their relationship with the targeted company.
Page | 16 2.3 Stewardship code
The share of equity investments held by institutional investors has increased significantly in recent years (Fenwick and Vermeulen, 2018). A broad consensus has emerged that involving these institutional investors can be an effective mechanism to improve firm governance. Therefore, it is important to understand how institutional investors can be engaged through regulatory action. Various corporate governance and stewardship codes were drafted to prescribe institutional investor stewardship behavior. Regulators perceived effective stewardship to be a crucial instrument in the hands of institutional investors to maintain good corporate governance (Melis and Nijhof, 2018). Stewardship codes as regulatory measures can assist in creating a ‘stewardship culture’, in which institutional investors actively participate in the governance of their companies. The process of designing and implementing regulatory measures plays a crucial role in triggering interest in the need for a more engaged relationship between institutional investors and the companies that they have invested in. To increase the benefits of engagement it has been suggested that loyalty incentives, such as enhanced dividends, enhanced voting rights, fees for good stewardship or tax advantages, should be given to institutional shareholders that engage in stewardship (Birkmose, 2014).
In order to encourage this meaningful and constructive engagement, industries and countries have therefore implemented stewardship codes. The distinctiveness of such codes is the attempt to create more responsible and purposeful investor engagement. The first country-based stewardship code was published in 2010 by the United Kingdom’s Financial Reporting Council. The UK Stewardship Code sets out good practice for institutional investors seeking to engage with the board and management of listed companies. In 2011, a private initiative code by Eumedion was published in the Netherlands, the Best Practices for Shareholder Engagement. Eumedion represents approximately 65 Dutch and foreign institutional investors' interests in the field of corporate governance and related sustainability performance (Eumedion, 2017).
Page | 17 2.4 Shareholders Rights Directive
The Shareholder Rights Directive (SRD) pursues the fostering of dialogue between the board of directors and investors, and is implemented across member states of the European Union, including the Netherlands (European Council, 2017). The Parliament and Council of the European Union have implemented the SRD on the 11th of July in 2007. According to Scalera (2010), in the current economic and legal environment, directors of European listed companies need to engage shareholders effectively to ensure their support of business strategies aimed at recovery and medium to long-term growth, instead of short-term growth. However, the SRD is only the first step in a legal process that is expected to substantially increase shareholders rights in the coming years (Rose, 2012).
The aim of the SRD is to strengthen shareholders’ rights and shareholder engagement and to facilitate and encourage effective shareholder control to sound corporate governance (Birkmose, 2014). In order to increase shareholder activity, the SRD focuses on reducing legal and regulatory barriers to shareholder engagement in cross-border voting and on strengthening shareholders’ rights in company law. As such, shareholders should be provided with the legal instruments to engage proactively with corporate executives and directors under the SRD. The SRD ensures that shareholders in listed companies have the right to certain information prior to the AGM, the right to put items on the agenda, the right to table draft resolutions, the right to attend meetings in person or by proxy and to vote, and the right to ask questions and expect answers on agenda items. The latter, allowing questions at the AGM, is the most direct form of shareholder engagement. Under Article 9(1) of the SRD, every shareholder shall have the right to ask questions related to items on the agenda of the AGM, and the company is under an obligation to answer these questions (Scalera, 2010; Rose, 2012; Birkmose, 2014). This results in the effect that shareholders are allowed and encouraged to directly engage with the board of directors, whilst directors are generally under an obligation to answer questions from shareholders.
Page | 18 In 2019 SRD II will be implemented, that replaces the current SRD (Pershing, 2018). The new directive has been adopted on the 3rd of April 2017 by the European Council, and European member states have up to two years to incorporate the new provisions into their domestic law. Under SRD II, the remuneration policy should contribute to the business strategy, long-term interests and sustainability of the company and should not be linked to short-term objectives (European Council, 2017). However, not all shareholders are long term oriented. Instead, some investors may look for short arbitrage possibilities taking highly leveraged positions. The fundamental question is whether such investors should be given the same rights as those who are devoted for the long term value creation that also benefits the firm’s stakeholders as well as the society (Rose, 2012). Moreover, SRD II will ensure that companies are able to identify their shareholders and obtain information regarding shareholder identity from any intermediary in the chain that holds the information. The purpose is to facilitate the exercise of shareholder rights and their engagement with the company. Lastly, SRD II will help companies to be more transparent in their approach to shareholder engagement. This aims to enhance the transparency of voting and engagement policies and voting records (Birkmose, 2014). They will have either to develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so. This policy will describe how they integrate shareholder engagement in their investment strategy and the engagement activities they carry out.
Page | 19 2.5 Hypothesis development
A wide range of engaged shareholders that are focused around emerging social issues and evolving regulations, have shaped today’s shareholder activism landscape (Uysal et al., 2018). Every shareholder has the right to participate in and exercise its voting right at the company’s general meeting (Aquila, 2016). Moreover, every shareholder has the right to put items on the agenda, and ask questions related to items on the agenda of the general meeting. The company will answer the questions put to it by shareholders (Rose, 2012). This research focuses on the level of shareholder engagement, specifically the shareholder engagement for non-financial issues. However, engagement with listed companies is a subject much talked about, but about which empirical data are available only to a limited extent (Melis and Nijhof, 2018). According to Uysal et al. (2018), engagement occurs when shareholder activists raise their concerns about financial or non-financial performances during the AGM’s, such as the firm’s environmental impact, Corporate Social Performance (CSP), political activity and diversity. This is supported by Melis and Nijhof (2018), who state that ‘investors engage in dialogue with a Dutch company when there were specific concerns about a certain subject’, and by Rose (2012), who states that “(institutional) investors have the desire to maximize shareholder value and of alternative political/ moral motivations related to ideas of responsible ownership”. This results into the following hypothesis:
H1: There is an increase in the level of (non-financial) shareholder engagement at Dutch listed firms, in terms of the amount of questions asked about non-financial concerns relative to the questions asked about financial concerns during the AGM.
This relationship is researched by three differences, that explain the differences between the companies and the AGM’s, e.g. why do some companies have more engaged shareholders than other companies? The three differences used in this research are the characteristics of the company, the characteristics of the AGM and the characteristics of the shareholders’ population.
Page | 20 Also Noked (2013) suggests that shareholder activists target significantly larger companies. This is supported by Knox (2018) who states that “activist investors target increasingly large, global companies”. According to Stathopoulos and Voulgaris (2016), those large firms are the focus of attention for activist shareholders, partly because they are more likely to attract attention. Hence shareholders can expect to have greater public support for their proposals. This results into the following hypothesis:
H2a: The greater the size of the firm, the higher the level of (non-financial) shareholder engagement.
According to Melis and Nijhof (2018), engagement behavior depends on transparency in shareholdings. More transparency can improve shareholders engagement. Transparency makes it possible for shareholders to form a grounded opinion about the performances and to start a dialogue on this matter (Transparency Benchmark, 2017). Arsalidou (2012) suggests that complete transparency by companies enhances engagement. This is supported by Birkmose (2014), who states that “in order to encourage engagement by institutional investors there should be greater transparency about shareholdings”. This results into the following hypothesis:
H2b: The higher the firm’s transparency benchmark score, the higher the level of (non-financial) shareholder engagement.
Additionally, the type of industry makes a difference with regards to shareholder engagement. According to Birkmose (2014), the level and quality of engagement depends on the industry. Uysal et al. (2018) found greater engagement between activists and corporations in environmentally sensitive industries, such as integrated oils, utilities, and energy. This is supported by the research of Herremans, Nazari, and Mahmoudian (2015), who have researched shareholders within the oil and gas industry, and found that within this industry, shareholders are more engaged. This results into the following hypothesis:
H2c: The more environmental sensitive the firm’s industry, the higher the level of (non-financial) shareholder engagement.
Page | 21 According to Rose (2012), it is easier to participate and influence the agenda of the general meeting, as shareholders have the right to put items on the agenda, due to the SRD. Shareholders holding individually or jointly 3% of the company’s stock have a right to submit items for the agenda of the general meeting. Shareholders can submit items on the agenda as either a voting item or a discussion item (Aquila, 2016). As a consequence, it is easier to participate and influence the agenda of the general meeting, which increases the power of the shareholders. Therefore, activist shareholders have an interest in influencing the agenda by putting items on it, as this might improve the level and quality of engagement in their investee companies. This results into the following hypothesis:
H3a: The higher number of agenda items of the AGM, the higher the level of (non- financial) shareholder engagement.
According to Melis and Nijhof (2018), investors can contribute to the engagement with their investee company through attendance at the (annual) shareholders’ meetings. According to Ivanova (2017), shareholder activism in the form of AGM attendance is one form of shareholder engagement. As stated by Micheler (2013), the barriers that make shareholder engagement difficult, could be resolved by for example shareholders attending and voting at the annual general meeting. However, foreign institutional investors are almost never present at general meetings, but mainly vote by proxy, due to geographical distances. Still, according to Loop et al. (2018), those institutional investors have devoted more to corporate governance personnel, which ensures that the right investor representatives are present at the annual general meeting. This results into the following hypothesis:
H3b: The higher the percentage of shareholders present during the AGM, the higher the level of (non-financial) shareholder engagement.
Page | 22 However, much fewer foreign shareholders show up to vote than domestic ones, and foreign investors are almost never present at general shareholder meetings, but mainly vote by proxy (Rose, 2012; Melis and Nijhof, 2018). According to Birkmose (2014), foreign shareholders also find it more difficult to engage with their investee companies due to geographic distance or cultural differences. This results into the following hypothesis:
H4a: The higher the percentage of foreign (institutional) shareholders, the lower the level of (non-financial) shareholder engagement.
Additionally, during the AGM’s Q&A session, it makes a difference whether a private or an institutional shareholder participates in the session. According to Melis and Nijhof (2018), institutional investors are insufficiently engaged in the governance of their investee company, and are being overly focused on short-term revenue. Shareholder engagement, if focused on the short term, can have undesirable consequences (Micheler, 2013), and institutional investors generally refrain from qualitative shareholder engagement. This is supported by Ivanova (2017), who states that “institutional investors have traditionally adopted a passive approach and have refrained from challenging management’s decisions”. Moreover, according to Birkmose (2014), companies’ shortcomings can be tackled more effectively if institutional investors engage more, acting as owners instead of being ‘absentee landlords’. This results into the following hypothesis:
H4b: The higher the percentage of institutional participants in the AGM’s Q&A session, the lower the level of (non-financial) shareholder engagement.
Page | 23 + - H2a+H2b+H2c H3a+H3b H4a+H4b
Figure 1: Conceptual model
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3. Methodology
In this chapter, the methodology is described. The research design consists of the research method and sample, and is followed by an overview of the variables used in this research. The research design ends with the method of data analysis, which is used to test the hypotheses as established in chapter two.
3.1 Research method and sample
In this research, a quantitative analysis was conducted. In order to analyze the relationship between the level of (non-financial) shareholder engagement, and the company’s characteristics, AGM’s characteristics and shareholders’ population characteristics, information was gathered for 2012, 2013, 2014, 2015, 2016 and 2017. The information gathered was on Dutch listed firms, as listed in AEX, the Amsterdam Exchange index. This is a stock market index composed of Dutch companies that trade on Euronext Amsterdam (Euronext, 2018). The final sample of firms included 37 Dutch listed firms. From these firms, the AGM transcripts were gathered for 2012, 2013, 2014, 2015, 2016 and 2017. Not all transcripts were available online. One major Dutch listed firm was not included in the sample, namely Shell, because no AGM transcripts are publicly available online. See appendix I for an overview of the included firms in the sample, and the years that the AGM transcripts were available.
Page | 25 3.2 Dependent variables
Level of (non-financial) shareholder engagement
This research focused on the level of shareholder engagement, specifically the level of shareholder engagement for non-financial issues. The level of shareholder engagement is measured by total number of questions asked during the AGM, including the financial and non-financial questions, and the total length of the answers given to the questions asked. The level of non-financial shareholder engagement is measured by the number of non-financial questions, both in terms of absolute value and relative value as a percentage of the total number of questions asked. The level of non-financial shareholder engagement is also measured by the length of the answers given to the non-financial questions, both in terms of absolute value and relative value as a percentage of the total length of the answers given to the questions asked.
The total number of questions asked during the AGM is measured by the total number of questions that were asked during the Q&A session of the AGM, this includes the financial questions and non-financial questions. The questions were all coded in ATLAS.TI.
The total length of the answers given to the questions asked is measured by the number of the characters of the answers on the total number of questions asked during the Q&A session of the AGM. After the answers on the total number of questions were coded in ATLAS.TI, the number of characters that was used for the answers could be found in the program. This represents the lengths of the answer given to the total number of questions asked.
The number of non-financial questions asked during the AGM is measured by the number of non-financial questions that were asked during the Q&A session of the AGM. The topics of the non-financial questions were established through grounded theory and on basis of that, a distinction between the financial topics and non-financial topics was made. See appendix II for an overview of these topics. The questions were all coded in ATLAS.TI.
Page | 26 For example, if there is an absolute value of 4 non-financial questions asked, then only this information is known, and it is of importance to see if there is a trend in the number of financial questions asked during the timeframe. But if there is a relative value of 50% of non-financial questions asked, then it is also known that the other 50% consists of non-financial questions asked.
The length of the answers to non-financial questions is measured by the number of the characters of the answer on the non-financial questions asked during the Q&A session of the AGM. After the answers on non-financial questions were coded in ATLAS.TI, the number of characters that was used for the answers could be found in the program. This represents the lengths of the answer on non-financial questions.
The percentage length of the answers to non-financial questions is measured as a relative value of the variable ‘length of the answers to non-financial questions’. This value was calculated by dividing the length of the answers to non-financial questions by the total length of the answers given. It is chosen to also measure the relative value in this research, in addition to the absolute value, as this tells something with regards to the length of the financial questions asked. For example, if there is an absolute value of 4000 on the length of the answers to non-financial questions asked, then only this information is known, and it is of importance to see if there is a trend in the length of answers given to non-financial questions asked during the timeframe. But if there is a relative value of 60% of on the length of the answers to non-financial questions asked, then it is also known that the other 40% consists of the length of answers to financial questions asked.
3.3 Independent variables Company characteristics
Page | 27 The transparency benchmark provides transparency in corporate social reporting among the largest companies in the Netherlands (Transparency Benchmark, 2017). The Dutch government requires companies to be transparent about their Corporate Social Responsibility (CSR) policies and activities. The score varies from 0-200, based on several factors. The transparency benchmark score measures the transparency in the companies’ annual reports, and not the concrete activities of the results in the area of CSR. The scores for 2012-2017 were gathered through the website of the Transparency Benchmark.
The industry type is measured by the categorization of industries from the transparency benchmark score (Transparency Benchmark, 2017). There are 16 different industries, according to Transparency Benchmark (2017): banking and insurance, construction and maritime, consumer products, services, energy, oil and gas, trading, industrial products, media and communications, pharmaceuticals, retail, technology, transport, universities and medical centers, real estate, and food and beverage. Out of those 16 industries, 12 industries are represented by the sample firms. See appendix III for an overview of the industries per company. A dummy variable was created for the industry type, where environmental sensitive industries are labeled as 1, and non-environmental sensitive industries are labeled as 0. The environmental sensitive industries in this research are construction and maritime, industrial products, pharmaceuticals, and transportation. See appendix IV for an overview of the frequencies per industry.
AGM characteristics
The AGM characteristics are measured by the agenda items of the AGM and the percentage of shareholders present at the AGM. The agenda items are measured by the total number of agenda items that were discussed during the AGM. This number can be found in every firms’ AGM transcript, and is coded in ATLAS.TI.
Page | 28 Shareholders’ population characteristics
The shareholders’ population characteristics are measured by the percentage of foreign shareholders, and the percentage of institutional participants in the Q&A session of the AGM. The percentage of foreign shareholders for the years 2012-2017 was gathered through ORBIS which provides (historical) information regarding the firm’s ownership data and current shareholders. The percentages of shares of direct and total shareholders that did not have ‘the Netherlands’ as country were added up and this represents the percentage of foreign shareholders.
The percentage of institutional participants is measured by the number of institutional shareholders that participates in the Q&A session during the AGM, divided by the total number of participants in the Q&A session. For every question asked, it is identified in the AGM transcript whether this person is an individual/private shareholder, or represents (an) institutional shareholder(s), and each participant is coded in ATLAS.TI. The number of institutional participants was divided by the total number of participants and this resulted in the percentage of institutional participants.
3.4 Control variables
Page | 29 3.5 Data analysis
Page | 30
4. Findings
In this chapter, the empirical findings are analyzed and interpreted. 4.1 Descriptive statistics
First the descriptive statistics are analyzed. In this research, the variables ‘year’ and ‘industry
type’ serve as a dummy. Before the descriptive statistics can be analyzed, the data needs to be
checked for issues regarding missings, scales and spreads. Since there are no issues with this, the descriptive statistics can be analyzed. First, the normal distribution of each variable is checked by the mean and median, histogram and boxplot. Second, the symmetry is checked, because if there are outliers, a regression analysis cannot be estimated. Last, the Skewness and Kurtosis is checked. Both should not have values below -1,5 or above 1,5 in order to have an acceptable range of normal distribution (Huizingh, 2007). Three variables were found to have too much Skewness, and were right-skewed. These variables are two dependent variables (length non-financial answers, and total length answer), and one independent variable (firm size). As these variables are of importance in a regression, especially the dependent variables, a log transformation was created for those three variables. This transforms the variable with a natural logarithm, which makes the variable less skewed (Huizingh, 2017). A new descriptive statistics model was run, and no issues were found. Now the descriptive statistics can be analyzed. See table 2 for the descriptive statistics of the variables.
Page | 31 DESCRIPTIVE STATISTICS
Variable N Mean Standard
deviation
Minimum Maximum
Dependent variables
Total questions 101 20,19 8,636 5 49
Total length answers* 101 9,447 0,612 8,29 11,11
Non-financial questions 101 7,37 3,959 1 21
% Non-financial questions 101 36,270 9,509 5,26 60,00
Length non-financial answers* 101 8,409 0,741 5,87 10,10 % Length non-financial answers 101 37,415 10,489 2,17 62,55 Independent variables Firm size* 101 10,077 1,274 7,15 12,82 Transparency score 101 152,22 42,933 0 199 Agenda items 101 13,81 4,328 3 26 % Shareholders present 101 71,141 13,535 32,92 99,34 % Foreign shareholders 101 70,821 23,726 10,76 99,84 % Institutional participants 101 57,530 13,929 20,00 100,00 * natural logarithm of original variable.
Table 2: Descriptive statistics
Page | 32 Figure 2: Line plot trend average financial and non-financial questions 2012-2017 In table 3, an overview of the mean absolute and relative values of the questions and participants is showed. From the table it can be concluded that compared with 2012, in 2017 less financial questions were asked, and less private shareholders participated in the Q&A session. Thus, more non-financial questions were asked, and more institutional shareholders participated in the Q&A session in 2017, compared with 2012.
2012 2013 2014 2015 2016 2017 Financial questions 13,19 73,50% 12,30 64,96% 11,65 66,31% 10,76 61,78% 10,40 60,63% 10,45 65,58% Non-financial questions 5,19 26,49% 6,56 35,04% 6,23 33,68% 6,61 38,22% 6,66 39,17% 6,16 34,42% Private participant 3,14 44,21% 2,71 39,96% 3,00 41,49% 3,24 42,05% 2,94 40,23% 3,07 38,94% Institutional participant 3,82 55,79% 3,71 60,04% 3,96 58,51% 3,83 57,95% 3,94 59,77% 4,11 61,06%
Page | 33 4.2 Correlation analysis
CORRELATION MATRIX
1 2 3 4 5 6 7 8 9 10 11 12
1. Total questions 1,00
2. Total length answers 0,849** 1,00
4.3 Regression analysis
Last, the regression results are analyzed in order to test the hypotheses of this research. Before testing the hypotheses, the models were checked whether they meet all assumptions in order to have a valid model. These assumptions are multicollinearity, outliers, normality and homoscedasticity (Saunders et al., 2009). The assumptions were checked for all the six regression models of the dependent variables.
Multicollinearity
First, the assumption of multicollinearity needs to be checked. Multicollinearity refers to high correlation among the independent variables. The VIF (Variance Inflation Factor) measures the impact of collinearity between the variables. If the VIF value exceeds 10, this signals multicollinearity (Huizingh, 2007). For all the six models the VIF values are below 10, so the independent variables are unique enough, and can be used simultaneously within the model.
Outliers
Second, the assumption of outliers of the residuals needs to be checked. Outliers are observations that are distant from other values in the sample. To check for outliers, the minimum and maximum of the standard residual statistics should not exceed -3,5 and 3,5. For all the six models, no outliers were found.
Normality
Third, the assumption of normal distribution of the residuals needs to be checked. To check for normal distribution, the histogram and the P-P plot of the dependent variable should be normal distributed. This means that the histogram should have a ‘bell curve’, and in the P-P plot the residuals (dots) needs to be on the straight line, as they are plotted against the normal distribution. For all the six models, the residuals are normally distributed.
Homoscedasticity
Last, the assumption of homoscedasticity needs to be checked. This can be checked by the scatterplot, which shows the standardized residuals versus the standardized predicted values. The residuals (dots) should be scattered evenly around the zero-line in order to have constant residuals. For all the six models the residuals remain constant.
Page | 36 In table 5, the summary of the regression analysis for all the six models can be found. Each model represents a dependent variable, with model 1 being ‘total questions’ and model 2 ‘total length answer’. These two models measure the level of shareholder engagement. Model 3 represents the dependent variable ‘non-financial questions’, model 4 ‘% non-financial questions’, model 5 ‘length non-financial answer’, and model 6 ‘% length non-financial answer’. These four models measure the shareholder engagement for non-financial issues.
SUMMARY REGRESSION ANALYSIS
M1 M2 M3 M4 M5 M6 Variable β β β β β β Firm size 0,251** 0,305** 0,273** 0,124 0,273** 0,031 Transparency score 0,111 0,161 0,071 -0,113 0,078 -0,188* Environmental sensitive industry -0,045 0,022 -0,095 -0,096 -0,088 -0,236* Agenda items 0,226** 0,166 0,321** 0,244** 0,193* 0,114 % Shareholders present 0,092 -0,072 0,087 0,082 0,030 0,173 % Foreign shareholders -0,294** -0,263** -0,235** 0,045 -0,229* 0,014 % Institutional participants -0,078 -0,100 -0,021 -0,157* -0,095 -0,067 Adjusted R2 0,288 0,266 0,374 0,301 0,290 0,272 F value 5,039** 4,023** 6,974** 5,296** 4,404** 4,107** N 121 101 121 121 101 101 * p < 0,05. ** p < 0,01.
Table 5: Summary regression analysis
Page | 37 Hypothesis 1 states that there is an increase in the level of (non-financial) shareholder engagement at Dutch listed firms, in terms of the amount of questions asked about non-financial concerns relative to the questions asked about financial concerns during the AGM. From the graph in figure 2, it can thus be concluded that there is a slight increase in the relative value of non-financial questions asked, and a slight decrease in the relative value of financial questions asked. As such, hypothesis 1 is supported.
Now the remaining hypotheses can be tested using the regression models. All models are significant, as the F value is significant (p < 0,01). Model 3 ‘non-financial questions’ is the strongest model, as the adjusted R2 is 0,374. This is the extent to where the dependent variable is explained by the independent variables. So 37,4% of the variation in non-financial questions are explained by the independent variables in this model. The hypothesis will be analyzed in two groups. The first group consists of model 1 ‘total questions’, model 3 ‘non-financial questions’, and model 4 ‘% non-financial questions’, as these models represents the level of (non-financial) questions. The second group consists of model 2 ‘total length answer’, model 5 ‘length non-financial answer’, and model 6 ‘% length non-financial answer’, as these models represents the level of the length of answers on (non-financial) questions.
Page | 38 Thus this hypothesis is also supported as a higher percentage of foreign (institutional) shareholders decrease the level of financial) questions asked, and thus the level of (non-financial) shareholder engagement. H4b states that the higher the percentage of institutional participants in the AGM’s Q&A session, the lower the level of (non-financial) shareholder engagement. Thus this hypothesis is also supported as a higher percentage of institutional participants decrease the level of financial) questions asked, and thus the level of (non-financial) shareholder engagement.
In model 2 ‘total length answer’ there is a significant positive relationship with firm size, as β = 0,305 (p < 0,01), and there is a significant negative relationship with percentage foreign shareholders, as β = -0,263 (p < 0,01). In model 5 ‘length non-financial answer’, there is also a significant positive relationship with firm size, as β = 0,273 (p < 0,01), and with agenda items as β = 0,193 (p < 0,05). There is a significant negative relationship in model 5 with percentage foreign shareholders, as β = -0,229 (p < 0,05). In model 6 ‘% length non-financial answer’, there is a significant negative relationship with transparency score as β = -0,188 (p < 0,05), and with environmental sensitive industries as β = -0,236 (p < 0,05). Hypothesis 2a, hypothesis 3a and hypothesis 4a have already been supported. H2b states that the higher the firm’s transparency benchmark score, the higher the level of (non-financial) shareholder engagement. Thus this hypothesis is not supported, as a higher benchmark score decreases the length of (non-financial) answers, and thus the level of (non-financial) shareholder engagement. H2c states that the more environmental sensitive the firm’s industry, the higher the level of (non-financial) shareholder engagement. This hypothesis is also not supported, as a more environmental sensitive industry decreases the length of (non-financial) answers, and thus the level of (non-financial) shareholder engagement.
Page | 39
5. Discussion
In this chapter, the conclusions of the research and its implications are discussed. Moreover, the limitations of the research are described and suggestions for future research are made.
5.1 Conclusions and implications
Page | 40 It can be concluded that firm size, agenda items, the percentage of foreign (institutional) shareholders, and the percentage of institutional participants explain the differences between the companies and the questions they receive during the AGM. A greater firm size and a higher number of agenda items of the AGM contribute positively to the level of (non-financial) shareholder engagement. Moreover, a higher the percentage of foreign (institutional) shareholders, compared to Dutch shareholders, contribute negatively to the level of (non-financial) shareholder engagement, as well as a higher percentage of institutional shareholders participating during the Q&A session. The fact that this study found no significant evidence for the relationship between the percentage of shareholders present during the AGM and the level of (non-financial) shareholder engagement could be explained by the fact that foreign institutional investors are almost never present at the general meetings due to geographical distances, and more than 80% of shares of Dutch listed companies are held by large global institutional investors (Micheler, 2013; Abma et al., 2017). This is also consistent with research of Melis and Nijhof (2018), where foreign institutional investors evaluated themselves a 3,9 (on scale from 1-10) on attendance at the AGM, and Dutch institutional investors evaluated themselves a 6,8. According to Birkmose (2014), the costs of engagement, conflicts of interest and the lack of effective shareholders’ rights are issues that explain shareholder passivity in listed companies. Due to these issues, shareholders are discouraged to engage with their investee company. Moreover, certain types of investors lack interest in the long-term governance of the companies they invest in, and this has encouraged short-term behavior in the market. However due to stewardship codes and the Shareholders Rights Directive (SRD), shareholders are empowered with legal instruments to engage proactively with firms, which encourage long-term behavior (Rose, 2012; Fenwick and Vermeulen, 2018).
Page | 41 The most effective way to stimulate engagement is to create opportunities to meet with shareholders throughout the year, and not only during the annual meetings, in order to improve long-term value (Mehta, 2018). In order to make engagement with shareholders as productive as possible, managers must be able to describe their strategy for long-term growth (Loop et al., 2018). Foreign (institutional) shareholders have a negative effect on the level of (non-financial) shareholder engagement. However, nowadays large international shareholders have the power, and Dutch (institutional) shareholders cannot compete with them. It is therefore of importance to managers to be aware of this negative relationship.
This research contributes to existing literature on shareholder engagement within the academic framework and adds the perspective of Dutch listed firms, as it seemed that this has not been investigated before. Previous studies of Louche and Lydenberg in 2006 and of Ivanova in 2017 mainly focused on the UK context. Although the empirical context is the Netherlands, the institutional investor community in the Netherlands is international and consists of some of the largest global investors representing the institutional investor community worldwide (Melis and Nijhof, 2018). This study sheds light on the role of (institutional) investors in behaving in shareholder engagement regarding non-financial issues, as larger firms were found to have more engaged shareholders. However, a high percentage of foreign shareholders is found to have a negative impact on the behavior of shareholder engagement.
5.2 Limitations
Page | 42 Another limitation is the availability of information, especially for the theoretical framework, as engagement with public companies is a subject much talked about, but about which empirical data are available only to a limited extent (Melis and Nijhof, 2018). Moreover, the variable regarding the nationality of shareholders (‘percentage foreign shareholders’) is also subject to limitation. The data was gathered through ORBIS, which lists the country of the shareholders. The research included all the shareholders which did not have ‘the Netherlands’ listed. However, the country in ORBIS represents the country where the shareholder is located. It could be a Dutch shareholder who is located in Bermuda, which counts as a foreign shareholder then in this research, while in fact it would have been a national shareholder. Another limitation is the percentage of shareholders present. From the AGM transcripts, there were quite some complaints from shareholders that several AGM’s did take place at the same time and date, so shareholders needed to choose where to go as they did not have the opportunity to attend all they want to attend. This negatively influences the percentage of shareholders present during the AGM. Moreover, it is also a limitation that the percentage of shareholders present are only known, and not the distinction between the actual percentage of institutional and private investors of the firm’s shareholders. From the AGM transcripts, it is only known from the participants in the Q&A session whether they are a private or institutional investor. The last limitation is that there are five firms in the sample size that are trading on Euronext Amsterdam, but have their registered offices in other European countries. Those firms are included in the sample as Dutch listed firms, but they are not Dutch. As of different legislation for companies and shareholders in these countries, less data was available on these companies, as they for instance did not identified the participants of the Q&A session.
5.3 Future research
Page | 43
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Page | 47
Appendices
Appendix I: Overview sample firms and AGM transcripts ……….. 48
Appendix II: Overview topics financial and non-financial questions………..….. 50
Appendix III: Overview companies and industries ………….…………..……… 51
Page | 48 Appendix I: Overview sample firms and AGM transcripts
Company Overview AGM transcripts (‘x’ indicates that there is no
transcript available)
2012 2013 2014 2015 2016 2017 Reason Aalberts Industries NV
ABN Amro Group NV x x x Public firm since
2015 Aegon NV
Ahold Delhaize NV x Not available
online Air France-KLM
Akzo Nobel NV
Altice NV x Not available
online Aperam SA
Arcadis NV x Not available
online ArcelorMittal SA
ASM International NV ASML Holding NV
ASR Nederland NV x x x x Public firm since
2016 BAM Group NV
Boskalis Westminster NV Corbion NV
Delta Lloyd x x Merger with NN
Group since 2017 DSM NV
Eurocommercial Properties NV
x x x Public firm since
Page | 49 2012 2013 2014 2015 2016 2017 Reason
Flow Traders NV x x x Public firm since
2015 Fugro NV
Galapagos NV Gemalto NV
GrandVision NV x x Public firm since
2015
Heineken NV x Not available
online
ING Group NV x Not available
online KPN NV
NN Group NV x x Before 2014 part
of ING Group Philips NV
PostNL NV
Randstad Holding NV
RELX NV x Not available
online SBM Offshore NV
Unibail-Rodamco SE x Online available
in French Unilever NV
Vopak NV
Wolters Kluwer NV x Not available
online
Total 29 29 33 35 36 33 195
Page | 50 Appendix II: Overview topics financial and non-financial questions
Topics financial questions Topics non-financial questions Audits/internal control Absent percentage/sick rate employees Balance sheet/cash flow/capital Accident/incident rates
Company strategy Animal testing
Competitors Biodiversity
Dividend policy CO2 reduction/emission
Financial results Customer/employee surveys satisfaction
Foreign markets Discrimination under employees
Growth rates Employee rights
Innovation/R&D Employees with disabilities
Interest rates Firing of employees
Investments Font size/format annual report (readability)
Management composition Green energy
Mergers and acquisitions Green ICT usage
Production process Green transport
Profits and loss GRI reporting
Raw materials Health of customers (smoking, 0,0% alcohol)
Remuneration policy Human rights
Reorganization Labour rights
Retirement funds Language AGM (English/Dutch)
Share prices/profit/dividend per share Nationality Board/management
Suppliers Percentage women Board/management
Presence Board at AGM Recycling
Safety Health Environment (SHE) Sustainability reporting
Training/development program of employees Transparent reporting
Water usage
