Should Thomson Reuters Disclose More?

Should a Canadian media-turned-technology titan report on potential human rights risks and compare itself to competitors?

Shareholders of Thomson Reuters will be voting at the Annual Meeting of Shareholders, to be held on June 9, on whether or not the Board should produce a human rights risk report that identifies the potential for human rights risks in its business. According to the proposal, the company would then compare its procedures, if any, for identifying and mitigating human rights risk against those of other prominent technology companies. 

What the Proposal Says

In the 2021 proposal, the B.C. Government and Service Employees’ Union General Fund (BCGEU) and the B.C. Government and Service Employees’ Union Defence Fund says that Thomson Reuters has made its products such as CLEAR® available to U.S. Immigration and Customs Enforcement (ICE), which has been used to track/arrest immigrants on a massive scale. It further notes that a bill to be introduced in the U.S. Congress seeks to prevent law enforcement from obtaining personal data from brokers without a warrant, and the Corporation faces a US lawsuit claiming CLEAR® violates privacy laws.

In response, the company notes that “Use of our investigative solutions by any Thomson Reuters customer must be in accordance with applicable laws, rules and, in relation to CLEAR, for certain specified permissible uses authorized by applicable regulations... Thomson Reuters reserves the right to terminate customer accounts if misuse is detected. Thomson Reuters’ contract with ICE for the use of CLEAR expired on February 28, 2021, and ICE does not have a subscription contract for the CLEAR database as of April 2021.”

The company also pointed out that it releases an annual Social Impact Report that addresses how the company manages its sustainability goals, fosters an inclusive workplace and helps drive access to justice and transparency. The Board believes that this report is adequate, and recommends that shareholders vote against the proposal.

Not a New Concern

This is not the first time such a proposal has been filed with Thomson Reuters. In May 2020, the BCGEU and the B.C. Government and Service Employees’ Union Defence Fund filed a proposal asking that the Board produce a human rights risk report addressing how Thomson Reuters assesses its role in contributing to and being directly linked to human rights impacts by end-users, among other asks.

The proposal also pointed out that though historically a media company, Thomson Reuters’s success was increasingly determined by software offerings, and that its practices should now be compared with software-as-a-service (SaaS) companies like Microsoft (MSFT), Amazon (AMZN), Google (GOOGL), Oracle (ORCL), Cisco (CSCO) and Salesforce (CRM).

“Investors are becoming increasingly aware of the risks surrounding technology governance – broadly including the governance of user-generated content on social media platforms; data privacy and security; and the use of technologies by governments, government agencies and police departments. These issues intersect and place an additional burden on technology companies serving content and gathering user information. Last year resolutions at Amazon (AMZN) and Northrop Grumman (NOC) raised concerns about police departments and government use of electronic surveillance and facial recognition technologies. At Alphabet, a shareholder resolution asking the board to set up a human rights risk oversight committee cited potential risks linked to surveillance, digital privacy and sharing of sensitive user information,” points out Morningstar’s director of stewardship research Jackie Cook.

In February this year, Thomson Reuters announced the Change Program, which involves a move from a holding company to an operating company, and from being a content provider to a content-driven technology company.

Who Controls the Vote?

As of January 2019, the Thomson family controls 65% of the company’s shares through Woodbridge Company. In addition, David Thomson is chairman of the board of Thomson Reuters, as well as chairman of Woodbridge. Of Thomson Reuters’ 11 directors, four are related to Woodbridge.

“Though the board composition doesn’t alarm us, Thomson Reuters does routinely make related-party transactions with Woodbridge. In 2016, it sold two loss-making subsidiaries to affiliates of Woodbridge. While these were small transactions, they do raise our eyebrows and make us wonder why these deals were made and what the economic benefit is to the Thomson family. Lastly, we'll note that Woodbridge holds a "founders share," with the power to prevent a change of control or material acquisitions in the event that they're deemed to violate the firm's "Trust Principles." While we don't anticipate this posing a problem, the golden share structure and majority shareholder substantially diminish shareholder influence over operations,” points out Morningstar analyst Rajiv Bhatia.

It's About Risk Mitigation

If the Thomson family controls 65% of the vote, there’s no hope of getting a majority, especially since the board has recommended an ‘Against’ vote. The 2020 shareholder proposal filed by BCGEU got 7.56% of the vote.

(BCGEU pointed out that it calculated total votes cast “for” over total votes cast excluding Woodbridge's shares. 112 million minority shares that were voted. Of those, 33 million were voted for, arriving at a 29.5% of the non-controlled vote.)

But the point isn’t necessarily that the vote should get a majority, says Paul Finch, Treasurer and CFO of BCGEU. “Shareholder proposals such as these are not binding. The efficacy of the proposal lies in the education of investors, and the public at large. Companies are often sensitive to public perception, and oftentimes, that is enough to influence change,” he points out.

For investors who choose to engage with companies, issues such as those involving human rights, are a very real risk. To Finch, getting a majority is not as important as raising investor awareness, and especially observing how the company responds to the proposal and the vote. If the company responds in a way that invites engagement, it’s a good sign, especially if the company takes steps to address and mitigate the risk. “The company is not necessarily paying attention to the percentage of investors who voted one way or another. The first question to the company is: Is this an issue? The next thing the company considers is how concerned are investors? Then it looks to public perception. Finally, all of this plays into overall risk mitigation, and as investors, we care about risk mitigation” Finch says.

"Finch raises really important points about the role that shareholder resolutions play in influencing companies to take action on environmental and social risks. Smaller investors are often not heard by companies until they file shareholder resolutions. This is probably more so the case with companies like Thomson-Reuters, where the shareholding structure insulates the board to a degree. The resolution can then lead to meaningful dialogue. It's up to the company's senior management and board to take advantage of the insights that investors like BCGEU bring to engagements,” Cook says.