Activist shareholders achieved a higher rate of success on public policy resolutions during this year’s proxy season, driven by changes from the Securities and Exchange Commission and investor pressure on companies to tackle environmental, social and governance issues.
Environmental and social resolutions edged out governance for the first time as categories with the most majority-supported proposals, according to Gibson, Dunn & Crutcher LLP.
Resolutions focused on climate change and diversity made up 45 percent of proposals that received majority support, a group of nine attorneys from Gibson Dunn’s securities regulation and corporate governance practice said in a July 11 client note. Meanwhile, governance made up 38 percent of proposals with majority support.
The attention on ESG stewardship is unlikely to slow as investors expand the range of issues they want to engage on, despite vocal opposition from Republicans.
“The 2022 proxy season marked the first time that two notable social proposals received majority support,” the lawyers said. “First, after none of the equity civil rights/racial equity audit proposals voted on received majority support in 2021, eight such proposals have received majority support in 2022" at companies including Apple Inc., The Home Depot Inc. and McDonald’s Corp.
“Second, after failing to receive majority support in prior seasons despite focused campaigns by a number of shareholders, two proposals requesting a report on gender/racial pay gap received majority support in 2022” at The Walt Disney Co. and Lowe's Companies Inc.
The U.S. proxy season generally takes place from mid-April to mid-June, when many companies have annual meetings.
In total, investors have voted on 282 ESG resolutions at annual meetings so far this year, up nearly 60 percent from the same period in 2021, according to findings released last week by As You Sow, the Sustainable Investments Institute and Proxy Impact. Shareholders have cast majority votes favoring 34 ESG resolutions.
Besides diversity proposals, shareholder resolutions focused on climate change and the environment made up the bulk of successful proxy votes.
A proposal from Christian Brothers Investment Services asked Exxon Mobil Corp. to publish an audited report outlining how the International Energy Agency’s modeling for a net zero economy by 2050 would impact the “assumptions, costs, estimates, and valuations” underlying the company financial statements.
The resolution garnered 52 percent of votes cast at Exxon’s annual meeting despite the board’s recommendation for investors to vote against it.
Meanwhile, a resolution from Hermes Equity Ownership Services Ltd. called on Chevron Corp. to issue a report on the reliability of methane emission disclosures. Some 98 percent of votes cast were in support of the measure after the company’s board of directors recommended shareholders vote in favor of the resolution.
The success is partly due to recent moves by the SEC. Last year, the agency said it will be more likely to require companies to hold shareholder votes on public policy issues such as the environment and worker arbitration than it was during the Trump administration. The agency also repealed three legal bulletins issued from 2017 through 2019.
That led companies to sharply curtail requests to block shareholder resolutions last year compared to previous proxy seasons, Gibson Dunn attorneys said. Additionally, the SEC last week proposed to amend criteria for excluding proposals, which will force companies to jump through additional hoops when seeking to prevent shareholders from voting on corporate proposals.
It appears likely that the SEC staff’s guidance “and the related collapse in success rates for no-action requests in 2022, will continue to embolden shareholders to submit an increasing number of social and environmental proposals in the years to come,” the Gibson Dunn lawyers said. "The number of proposals voted on in coming proxy seasons seems unlikely to abate.”
The action at companies this year was particularly significant because investors were restricted by several Trump administration SEC rules, said Andrew Behar, CEO of As You Sow, which partners with investors who have shares in certain companies to represent them in proxy season. Shareholders could only file one resolution per company, limiting investors’ overall engagement.
“We were restricted to limit the number of resolutions we could file at all, and yet it seems like more proponents felt this is an important way to communicate to companies and they rose to the occasion,” Behar said in an interview.
Prior to filing any resolutions with the SEC for the 2022 proxy season, As You Sow engaged with more than 200 companies on ESG issues. Over 60 percent of those conversations ended with executives agreeing with the nonprofit to improve their record on emissions, diversity and similar issues.
“Shareholders continue to use this method of communicating with the companies they own effectively, and I think that's a good thing,” Behar said. “That shows that shareholder democracy is strong. Companies are also listening.”
The investment community expects those trends to continue. In the past month, several investment firms including Clean Yield Asset Management, Trillium Asset Management and Nia Impact Capital said they will hold companies accountable for ensuring their employees’ access to abortion and reproductive health services following the Supreme Court’s overturn of Roe v. Wade.
Nia founder and CEO Kristin Hull said the firm had been engaging with its portfolio companies in the months leading up to the court decision and is now sending letters to those companies to follow up on their plans to support workers. Employee retention is a material risk to companies, and it is investors’ fiduciary duty to do what they can to protect their portfolios, she said.
“Our activism is a way to really get to know our companies well, and doesn’t an investor want to know what’s underneath the hood or inside that battery pack?” Hull said in a virtual fireside chat. “Whatever the metaphor is that we’re using these days, I do see that change does happen one conversation at a time. When they’re not listening or responding as quickly as we need, we do use shareholder activism.”
Republicans have ramped up attacks on shareholder activism and the SEC’s proposed regulations.
House GOP members attempted to use the six-bill fiscal 2023 spending package (HR 8294) to derail the SEC’s proposed climate risk disclosure rule through amendments in the Financial Services bill (HR 8254).
The House's Democratic majority rejected amendments they see as undermining the agency’s proposals, but the provisions lend insight into how a Republican-controlled House could use appropriations to hamper the agency's efforts if the party gains control of the chamber in November.
“We are concerned with the volume of rules being proposed by the SEC and that they are doing too much too fast and are not focused on their core mission,” House Appropriations ranking member Kay Granger, R-Texas, and Rep. Steve Womack, R-Ark., said in a report accompanying the bill. “We believe many of the SEC’s proposals will increase compliance costs and hinder capital formation.”
Caitlin Reilly contributed to this report.