As we sit squarely in the middle of proxy season, we have a useful vantage point from which to consider already announced shareholder proposals and anxiously await investor feedback on those matters presented for shareholder votes. From this vantage point, corporate directors can better anticipate and prepare for trends that may ultimately be presented to them.
If the most recent shareholder proposals can be considered a guide, directors should plan on a busy wrap-up to this proxy season. This is the case given continued investor focus on environmental, social, and governance (ESG) matters, renewed pressures on diversity, equity, and inclusion (DE&I) initiatives, and increased attention to the corporation’s social voice. All of these issues must be considered against the backdrop of the war in Ukraine and the twin economic pressures of increasing inflation and the prospect of an economic slowdown.
Corporate boards should keep their fingers on the pulse of possible investor interest in these and other nontraditional topics emerging from the 2022 proxy season.
Public company shareholders can submit proposals for consideration at a corporation’s annual meeting through a well-established process that is administered by the US Securities and Exchange Commission (SEC). The SEC requires proponents to satisfy certain procedural and substantive requirements before a proposal is included in a company’s proxy statement. The SEC views the shareholder proposal process as fundamental to shareholder democracy and it is actively involved in adjudicating disputes between companies and proponents as to whether a company may properly exclude a shareholder proposal from its proxy statement.
In November 2021, the SEC issued guidance in which it scaled back the basis on which companies could properly exclude shareholder proposals. In applying the “ordinary business” exclusion, in which companies are permitted to exclude a proposal if it deals with a matter relating to the company’s ordinary business operations, the SEC had historically focused on the nexus between a policy issue and the company’s business, which led to many shareholder proposals being excluded where nexus was lacking. In the recent guidance, the SEC clarified that it will no longer focus on the nexus between the policy issue and the company but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In so doing, the SEC indicated it will consider whether the proposal raises issues with a broad social impact such that it transcends the ordinary business of the company. For example, a proposal relating to greenhouse gas emissions would not be excludable solely because greenhouse gas emissions are not a significant business issue for a company since climate change has broad societal impact.
What We’ve Seen to Date
A variety of indicators, including SEC data, suggests that the volume of shareholder proposals submitted during this proxy season will meet or exceed the heightened pace of the last several years. Many of these proposals fall into the ESG field. Indeed, recent news report noted that more than 500 ESG-related shareholder proposals had been submitted by mid-March, which reflects a 22 percent increase compared to the same time last year.
Significant and potentially controversial resolutions continue to be proposed outside of the ESG area, including those dealing with topics such as new product risk and the conduct of business in countries with authoritarian governments.
Based on available data, many of the resolutions submitted to date can be allocated into the following categories:
Corporate Governance: Resolutions in this bucket focus on special meeting thresholds, employee representation on corporate boards, use of an independent board chair, director background evaluations, DE&I and civil rights expertise for directors, written consent practices, continued use of dual class shares, virtual shareholder meetings, and director retirement requirements.Environmental: Resolutions relate to the removal of certain ingredients or practices from the supply chain, environmentally sensitive packaging, terminating support of fossil fuel initiatives, greenhouse gas emission controls, ending deforestation, environmental justice audits, limitation of natural gas use, recycling commitments, climate change risks, and food and water equity matters.Discrimination: Proposals target the institution of civil rights and DE&I audits, workplace non-discrimination, and management diversity commitment.Human Rights: Proposals relate to human rights violations in countries where a company conducts business, forced labor in the supply chain, use of child labor, human rights audits in certain international business lines, and the rights of indigenous peoples.Lobbying: Resolutions target the alignment of lobbying activity and support of the Paris accords.Executive Compensation: Proposals focus on pay equity gaps along gender and racial lines, review and approval of executive severance and termination pay, restatement clawbacks, limitation of the use of options and bonuses, deducting legal defense costs from incentive compensation, regulating changes to compensation metrics, and golden parachutes.Political Spending: Proposals suggest banning the practice.Business Practices: Resolutions relate to conversion to a Delaware public benefit corporation or California social purpose corporation, employment agreement concealment clauses, anticompetitive business practices, arbitration of securities law matters, the development of certain controversial products, investments in certain industries and products, and paid sick leave.
Primary Lessons and Projections from the Proxy Season
Midway through the 2022 proxy season, the following lessons and projections can be gleaned by boards:
ESG-related initiatives will remain front and center, particularly as climate change-related policy initiatives move forward and environmental incidents are highlighted in the media.Social justice issues are primarily (but not exclusively) focused on the performance of racial, gender, and DE&I audits. Human rights concerns remain of interest with proposals relating to international companies.Proposals remain with respect to traditional governance issues such as the status of the lead independent director, board composition, and director background evaluations.There is continuing interest in resolutions aimed at curtailing certain controversial business practices.Greater attention may be given to board commitments to compliance in response to evolving Delaware decisions on board oversight of mission-critical risks.There may be a need to respond to governance-related proposals arising from recent challenges to state diversity statutes and from pressure to increase director refreshment in order to make room for additional diverse directors.Increased emphasis on director effectiveness may lead to additional demands for enhanced full board and individual director evaluation processes.New resolutions may arise from the acute social issues of the day, including legislation and judicial decisions regarding abortion, voting rights, and sexual preference, and their impact on a company and the culture of its workforce.
Overarching lessons relate to both the enduring value associated with a board commitment to direct engagement with major shareholders and the ability to respond to acceptable resolutions with internal reviews and other measures intended to address shareholder concerns in as confined and restricted a way as possible.
Michael W. Peregrine and Eric Orsic are partners at McDermott Will & Emery.
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