This proxy season, companies saw more shareholder proposals than in the past, a change that has been widely attributed to actions by the SEC and its Division of Corporation Finance that had the effect of making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. As discussed in this article in the WSJ, investors are taking the opportunity to press for more changes at companies. Nevertheless, the prescriptive nature of many of the proposals, especially climate-related proposals, has prompted many shareholders, including major asset managers, to vote against these proposals. Will next season reflect lessons learned by shareholder proponents from this proxy season?
According to the WSJ, as of July 29, shareholders submitted 650 proposals to S&P 500 companies, representing an increase from 613 proposals in 2021 and 556 proposals in 2020, according to Esgauge, a data analytics firm. The article reports that, in 2022, except for 12 proposals submitted, all proposals were related to environmental, social and governance issues. If adopted, the SEC’s new proposal to narrow three substantive exclusions under Rule 14a-8 may further exacerbate the difficulty for companies to exclude shareholder proposals.
According to the WSJ, companies have had “to spend more time and money to engage with investors as they submit more proposals.” In addition, proposals have become more prescriptive, “resulting in a lower percentage of proposals gaining majority support. It dropped to 10.6% this year from 16.2% last year, according to Esgauge.”
The article observes that, although almost all shareholder proposals are nonbinding, if they reach majority support or even a substantial level of support—the WSJ suggests that level is 25% to 30% of votes, although some might use a higher threshold—investors expect companies to take some action. A number of instances are cited in the article where companies indicated that they would take or carefully consider the action requested in the proposal after the proposal received more-than-majority support. According to a commentator from an asset manager cited in the article, they believe that “when a proposal has received a solid level of support from investors, that should generally be a signal to the board that this is a material issue to investors and something that they should look into.”
Also to be taken into account is the impact of shareholder engagement and negotiation. In one case cited in the article, engagement with the proponents led the company to ultimately support the proposal, resulting in 98% support for the proposal. The WSJ also cites prolific shareholder proponent, James McRitchie, who advised that he “submitted around 80 shareholder proposals this year. Roughly 30 of those were resolved by agreements with the companies before the annual meetings were held. Companies were able to exclude another 12 from their proxies, he said. The rest were either voted on or will be voted on at coming meetings. Shareholder proposals have naturally become more prescriptive in recent years, Mr. McRitchie said. If a company says it will reduce emissions by 2050, the next step for an investor might be to ask a company for a report on how it will get there, he said.”
What to expect for next year? One commentator anticipated an increase in the number of proposals. Moreover, many proponents were likely to learn the lessons of the 2022 proxy season and tweak their proposals accordingly.