On the Ballot: Preliminary Shareholder Proposal Trends
We have officially entered proxy season, and our Thought Leadership today covers preliminary insights from shareholder proposals.
Setting the Stage
As we discussed last week, there are several forces in motion contributing to this year’s annual general meeting.
- Buy-side focus on ESG matters has proven steadfast despite “ESG backlash”
- Regulatory efforts continue to mount, altering the disclosure landscape
- New, invigorated proxy advisor guidelines have changed the way issuers discuss burgeoning topics such as sustainability and DEI
In 2022, a higher volume of shareholder proposals – a direct result of a November 2021 SEC bulletin that altered the way the department enforces issuers’ ability to exclude certain shareholder proposals from the proxy – resulted in overall declining support, particularly on environmental and social (E&S) topics, amid investor views that resolutions were overly prescriptive.
And that trend has continued. The 2023 proxy season has seen a notable decrease in the number of U.S. firms negotiating on E&S issues, according to the latest annual Proxy Preview Report Update published by activist firm As You Sow.
So far1, 124 E&S proposals have been Withdrawn compared to 273 at this same time in 2022, with the proportion of Withdrawn proposals representing roughly half the amount as last year. In essence, a lower number of withdrawn proposals indicates that shareholders have become less successful at pressuring companies to act without a vote, suggesting we are slated to see more resolutions being brought to proxy in 2023.
Preliminary Insights into Proxy Season Proposals
To gain a deeper understanding of the most up to date 2023 proxy season trends, we analyzed the DEF 14A filings of U.S. companies greater than $1B in market cap across all sectors.
Out of the 476 proxy statements filed to date2, 171 shareholder proposals have been submitted for vote by proxy across 76 companies, representing 16% of the companies analyzed, in line with our findings at this time last year.
Financials, Healthcare, and Industrials have received the largest number of shareholder proposals thus far.
Key Findings and Themes
While early in the season, Governance shareholder proposals are leading the way, followed by Social, a reversal relative to 2022.3
Compensation, DEI, GHG emission targets, and lobbying disclosures are some of the most frequent proposals to date, as well as reducing the ownership threshold required for shareholders to call a special meeting.
That said, everything from operational exposure to China to reports examining the reputational impacts from plant-based milk upcharges are on the ballot in 2023
When digging into each proposal type, our analysis of 171 shareholder resolutions reveals:
36% (+12 pts YoY) have proposed Governance resolutions:
38%
Compensation, particularly regarding termination pay caps, along with including legal/compliance costs as a part of financial performance measures used to determine compensation
−38%
Split Independent Chairman and CEO
−17%
Voting Rights
−7%
Miscellaneous, including amending committee charters and issuing additional legal settlement disclosures
28% (-1 pt) have proposed Social resolutions:
44%
Diversity, equity, and inclusion, including requests for independent audits, employee composition reports, and pay-equity analyses
16%
Human rights, specifically calling out operational exposure in China, as well as the impact to indigenous rights, ethical sourcing commitments, and transparency reports
13%
Reproductive rights risk assessment
8%
Patent exclusivity impacts, specifically detailing the effects on product access from patent extensions
19%
Miscellaneous, including product pricing, food safety, health impact disclosure (negative externality report), and workers’ rights
15% (+5 pts YoY) have proposed Environmental resolutions:
72%
GHG emission reduction targets and, for financials, commitments to reduce or eliminate the practice of underwriting emissions-intensive companies
12%
“Just Transition” disclosure4, detailing the social impacts of clean energy transition efforts
8%
Climate change risk audit and report
8%
Miscellaneous, including plastic reduction commitments and integrating GHG reduction targets into executive compensation
15% (+4 pts YoY) have proposed Political Disclosure resolutions:
62%
Lobbying activities disclosure
35%
Political spending and affiliation disclosure
3%
“Proposal requesting that the Company avoid supporting or taking a public policy position on controversial social and political issues”
6% (-17 pts) have proposed Special Meeting resolutions:
91%
Reduce the threshold to call a special meeting with management, with the vast majority requesting a 10% minimum; of note, more companies in 2023 now provide shareholders the right to call a special meeting versus last year, resulting in a decline in the overall count of special meeting proposals
9%
Shareholder right to act by written consent
Themes by Sector
- Healthcare, Industrials, Materials, and Consumer Discretionary companies are seeing a large number of Governance proposals
- Financials are receiving more Environmental-related resolutions than any other proposal type
- Consumer Staples and Tech investors are focused on Social resolutions
Themes by Market Cap
The vast majority of proposals, 90%, have been submitted to large- and mega-cap companies, up from 86% in 2022
- That said, while most shareholder proposals at this time last year were submitted to large caps, thus far in 2023, most resolutions have been weighted toward mega caps
In summary, three things to keep in mind as we navigate this year’s proxy season:
- Fewer withdrawn shareholder proposals on E&S matters suggests more polarizing resolutions are being brought to proxy: Following the 2021 SEC shift in enforcement, more and more issuers are contending with E&S matters which, until recently, could be excluded from proxy on grounds that they were unrelated to the Company’s business activities or that the Company was already taking steps to address the issue at hand. When responding to proposals in public filings and in conversations with investors, be measured in your communications and not defensive; connect back to the efforts currently in place as a part of the firm’s holistic ESG strategy and refocus the narrative on all the Company is doing on this front for key stakeholders. You can also address what you plan to do, but then make sure you do it.
- With more governance resolutions entering the fray, ensure compensation terms are clearly articulated and understood by the investment community, particularly in the context of new pay vs. performance disclosure rules targeting executive pay: With governance resolutions centering largely on compensation terms, investors will be keenly focused on new company disclosures requiring there be a relationship between total compensation and issuer-selected financial performance measures for each of the five most recently completed fiscal years.
- Stave off activism with proactive strategies and meaningful engagement with shareholders: Activists are largely targeting companies in the large- and mega-cap space; however, companies of all sizes should proactively identify areas of risk where shareholders could poke holes in your business strategy – ESG being one of them – and address them immediately to avoid an activist doing it for you in a public forum. Pay particular attention to feedback received from key stakeholders in the past, and prioritize the issues brought up by investors and the ratings agencies to determine the ones that you can easily address or others that you can put on the table for future consideration. Perception Studies are a best practice.
- As of March 20, 2023
- Filed between November 1, 2022, and March 21, 2023
- All year-over-year comparisons are based on preliminary findings versus this time last year
- OECD: “A ‘just transition’ ensures environmental sustainability as well as decent work, social inclusion, and poverty eradication”