Alliance Advisors has just released its 2021 proxy season review, a season they characterize as “dynamic,” as investors stepped forward to express their views on a variety of environmental and social topics. At least 34 E&S shareholder proposals won majority support, compared to 21 proposals last year. And over a dozen shareholder proposals on diversity, climate change and political spending won with votes in excess of 80%. There were also some new entries among the shareholder proposals—such as requests for racial audits, access to COVID-19 medicines and say on climate—that received support averaging around 30%, a level that Alliance characterizes as “remarkably” good for first timers. Alliance acknowledges that these results did not come entirely out of the blue, as large asset managers such as BlackRock and Vanguard had previously signaled that they might take steps this season to more closely align their proxy voting records with their advocacy positions.
Diversity
Board/management diversity. Recent social unrest over systemic racial injustice has highlighted the issue of racial inequity, and with it, diversity became a high-profile investor concern. Alliance reports that, because women now hold 24.3% of the board seats among the Russell 3000, shareholder proposals for board diversity instead “took aim at boards with no apparent racial or ethnic diversity.” Of the four proposals submitted to a vote, three received support over 70%, while a proposal on executive diversity, which was unopposed by the board, won 93.8% support. The New York City Comptroller‘s Boardroom Accountability Project 3.0 succeeded in a different way, as all of its 2021 proposals, except one pending, were withdrawn as companies reached agreement with the proponent.
Alliance suggests that shifts in investor policy to hold nominating committee chairs accountable may have contributed to both enhanced disclosure regarding the racial/ethnic compositions of boards (disclosed by 71% of the S&P 500 compared to only 30% in 2020) as well as director votes, as “some 95 nominating/governance committee chairs received negative votes in excess of 30%, a sizable increase from 55 in the first half of 2020.” Of those with negative votes, 85% did not provide diversity disclosure (although, Alliance acknowledges, it’s hard to determine the cause of the votes).
Workforce diversity. There have been increasing calls for disclosure of EEO-1 reports, which are filed with the federal government and provide a breakdown of workforce demographics, and for reports on the efficacy of companies’ efforts at diversity, equity and inclusion. State Street Global Advisors has indicated that, in 2022, it will begin voting against comp committee chairs at S&P 500 firms that do not disclose their EEO-1 reports, and letter-writing campaigns by the New York City Retirement Systems have led 62 S&P 100 firms to disclose or commit to disclosing their EEO-1 data. Other engagement has also pressured companies to disclose the data. Alliance reports that, as a result, only three proposals for EEO-1 disclosure were submitted to a vote; in two instances, they received over 80% support.
Proposals for DEI reports requested information about process as well as assessments of program effectiveness related to promotion, recruitment and retention of protected classes of employees. Alliance indicates that, of the six proposals requesting DEI reports that went to a vote, three received majority support. However, other proposals framed as requests for assessments of whether written policies or unwritten norms at the company reinforced racism in company culture received only between 11% and 12% of the vote in favor.
Alliance also reports that there were eight proposals requesting “an independent racial equity audit to assess whether a company’s policies, products and services contribute to discrimination,” aimed at determining whether the actions of companies were consistent with their public statements in support of racial justice. The proposals averaged 31.1% support.
Environmental
Climate. Among environmental proposals, Alliance reports, those addressing climate dominated, with “nearly a third directed at oil and natural gas companies, electric utilities and the transportation sector. Big oil recorded some of the highest votes, including three seeking a substantial reduction of Scope 3 emissions.” Requests for reports on the financial impact of the International Energy Agency’s Net Zero 2050 Scenario also received close to majority support.
“Say on climate” is a new proposal that, just like “say on pay,” asks companies to hold annual advisory votes on their climate policies and strategies. Alliance reports that the proponent plans to submit the proposal to 100 companies in the S&P 500 by the end of 2022. Of the four proposals that went to a vote, three received over 30% support, and one that was framed as a binding bylaw received only 7%. Two companies that just went ahead and requested votes on SOC received over 90% approval. Interestingly, there seem to be mixed views on these proposals. For example, Alliance points out that Glass Lewis “expressed concern that SOC votes could result in a rubber stamping of weak climate strategies.”
Other. Alliance also identified “dramatic shifts in investor voting patterns” in connection with other environmental proposals relating to spills, waste and deforestation, many of which received approvals at the 70% and 80% levels.
Political spending
There has also been a significant increase in support for proposals relating to political spending disclosure and lobbying. According to Alliance, support for proposals requesting disclosure of political contributions increased on average by almost 10 percentage points, from 38.6% in 2020 to 48.1% in 2021, including six majority votes. Average support for lobbying disclosure proposals increased to 39.2% from 32.7% in 2020, including three majority votes.
Alliance observes that, while, historically, BlackRock and Vanguard have opposed proposals for political spending disclosure, both have indicated that they might vote in favor under some circumstances.
Alliance reports that it observed a significant shift in support for proposals that specifically addressed potential inconsistency between “companies’ political contributions or affiliations and their publicly stated values and policies.” Of three proposals requesting a “congruency analysis” of political spending against corporate values, the vote averaged 38.4% in 2021, compared with around 6% when these proposals were last submitted to votes (at different companies) in 2016 and 2015. Proposals also requested information regarding the alignment between lobbying activities and public pronouncements on climate goals. Alliance reports that seven companies agreed to provide the disclosure and five proposals received over 60% support.
COVID-19
Proposals asking pharma companies to report on pricing and access to COVID-19 vaccines and therapeutics averaged 31.2% support, according to Alliance. Most worker health and safety proposals, such as proposals to provide paid sick leave, were omitted as “ordinary business,” but one proposal to protect workers’ rights was supported by the board and received 95.3% votes in favor.
Corporate governance
Alliance reports that proposals for governance changes—written consent, special meetings, proxy access and independent board chairs—were the most common shareholder proposals this proxy season. Many were directed at repeat targets, but, with one exception, support largely fell compared with the prior year. Support for lowering the threshold vote (mostly to 10%) to call special meetings fell to 34.5%, which Alliance says is the lowest in 10 years, and support for independent board chair proposals fell to 30.6% from 35% in 2020. The exceptions were proposals to adopt written consent, where the average vote increased this year to 11.4% from 7.9% in 2020, but that was still below the level recorded in the past three years (15% to 20%). Nevertheless, Alliance reports that there were 41 majority votes for governance proposals, compared to 42 last year, with “universally accepted measures such as board declassification and the repeal of supermajority voting posting the highest margins.”
There were also several proposals to companies that signed the Business Roundtable’s 2019 Statement on the Purpose of a Corporation requesting that they convert to public benefit corporations. As you may recall the BRT Statement moved “away from shareholder primacy” as a guiding principle and outlined in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. (See this PubCo post.) None of the shareholder proposals did well, tallying votes below 4% in most cases, with only one at almost 12%.
Similarly, proposals advocating worker participation on boards, whether through application of the Rooney rule or otherwise, also fared poorly—below 10%—although one garnered almost 18% in favor.
Compensation
Expectations were high that compensation adjustments related to COVID-19 would have a significant effect on say on pay, but according to Alliance, that did not really materialize—at least relative to other concerns. Through June, average support for say on pay was 90.9%, up slightly from 90.5% last year. In addition, although the failure rate increased to 2.4% from 2.1 last year, only 6.5% of companies received approvals below 70%, compared with 7.4% last year. Among the S&P 500, however, there were 16 say-on-pay vote failures, which Alliance characterizes as “record protest votes,” including among some companies that actually reduced CEO pay, compared to 12 during all of 2020. And there were 10 narrow wins among the S&P 500.
Alliance cites several comp consultants for the proposition that this year’s failures were more likely the product of pay-performance misalignment than COVID-19. For example, Semler Brossy attributed 75% of failed say-on-pay votes among the Russell 3000 to pay-for-performance disconnects, problematic pay practices and/or special awards and mega grants, but only 1/3 to pandemic-related actions. Similarly, “Equilar posited that the pandemic likely exacerbated shareholder criticism of CEO pay that was already viewed as unnecessarily high.”
What’s next?
Alliance notes that the pending changes tightening Rule 14a-8 could have some impact on shareholder proposals this coming year. Looking forward, however, a new effort to amend Rule 14a-8 is on the SEC’s short-term agenda, and could involve attempts to backtrack on the amendments that were adopted last year. Also on the agenda are potential rulemakings regarding climate change disclosure, board diversity and human capital disclosure, all of which have been the subject of recent shareholder proposals, but could make some shareholder proposals superfluous. (See this PubCo post.)
