Alliance Advisors, a proxy solicitation and corporate advisory firm, has posted its 2023 Proxy Season Preview, an analysis of trends from the 2023 proxy season. Its principal message: ESG proposals saw sagging results again this year, “continuing a downward trend” from 2021. Although the number of shareholder proposals submitted to U.S. public companies was substantial (958 as of June 30, 2023, compared with 987 for all of 2022), Alliance Advisors reports that there was a dramatic decline from last year in “average support across all categories of shareholder proposals,” and “the number of majority votes plunged from 80 in 2022 to 28 in the first half of 2023.” More specifically, according to Alliance, average support on governance proposals fell to 29.9% in 2023 from 37.4% in 2022 and 38.4% in 2021, and there was a bit of a roller-coaster effect on compensation-related proposals, where average support declined to 23.7% in 2023 from 31.4% in 2022 but increased from 21% in 2021. Most pronounced was the change in average support for environmental and social (E&S) proposals, which declined to 18.3% in 2023 from 27.3% in 2022 and 37.2% in 2021. Will it turn out that 2021 was the “high-water mark” for shareholder proposals on ESG? The report explores trends in shareholder proposals and examines what may account for the flagging voting results.
Governance proposals: Alliance attributed the decreases in average support for governance proposals to a number of factors. First, Alliance noted a shift in focus among the members of the Chevedden group—who, Alliance asserts, are responsible for almost three-quarters of the governance and compensation proposals—to proposals on independent board chairs, executive severance pay and advance notice bylaws, all of which generated relatively few majority votes. In 2023, only 8% of Chevedden group proposals submitted received majority support as compared to 15% last year. In addition, Alliance viewed the group’s emphasis on proposals for independent board chairs as “poor targeting,” given that they “rarely ever receive majority support since most companies with non-independent chairs have robust lead director positions.” Alliance also noted that the Chevedden group seems to have withdrawn from proxy access proposals. Instead, the group appears to have substituted a “new initiative on universal proxy-related bylaws,” submitting proposals to 31 companies “to seek shareholder approval of certain advance notice bylaw amendments that deal with the timing of nominations and disclosure requirements for shareholder nominees and nominating shareholders’ affiliates.” Fifteen of these proposals were submitted for votes with only 12.3% average support.
A second factor, Alliance highlighted, was that board opposition to governance proposals generally increased: in 2021, 13 governance proposals that received majority support received no board opposition, while this year, there were only four instances—proposals to eliminate supermajority voting—that garnered majority votes where boards either supported or did not object to the proposals. Although proxy advisor Glass Lewis’s support for governance proposals rose in 2023 to 74% (up from 62% in 2022), including support for the new initiative on universal-proxy-related bylaws, support from ISS on governance proposals declined to 51% in 2023 from 76% in 2022.
Alliance also put a spotlight on a notable new topic among governance proposals. With new amendments to the Delaware General Corporation Law, effective August 1, 2022, permitting companies to seek shareholder approval of charter provisions that would largely eliminate the personal liability of specified officers for breaches of the duty of care—basically, an extension of DGCL Section 102(b)(7) for directors—over 270 companies proposed these charter amendments. (See this PubCo post.) Of the 249 proposals submitted for a vote in the first half of 2023, Alliance reports that “all but 39 passed,” and, of those that failed, almost half of the companies had supermajority vote requirements. Interestingly, Glass Lewis opposed all of the proposals, to little effect, “on the basis that shareholders should not relinquish their right to sue corporate officers for claims of negligence and breaches of fiduciary duty of care,” but ISS supported “all but 45 proposals (18%), which were largely at controlled companies or companies with dual-class stock structures or other governance features considered undesirable by ISS. ISS reasoned that decisions regarding a company’s response to shareholder litigation should not be made by a board that lacks accountability.”
In addition, Alliance noted the introduction of universal proxy cards, which allow shareholders to split their votes between management and dissident candidates. (See this PubCo post.) Alliance concluded that, although the use of UPCs has “not produced the anticipated surge in board contests,” they do appear to be
“aiding activists in unseating incumbent directors through proxy fight votes and settlements. According to DMI and The Activist Investor, ten proxy contests have gone to a vote since the SEC rule went into effect last September, and dissidents have won at least one board seat in six of them. That compares to seven seats won in 23 fights from September 2021 to the end of the 2022 proxy season. UPCs may also be incentivizing companies to reach quick and early settlements. Between Jan. 1 and May 31, 2023, DMI reported 46 settlements, with the insurgents attaining 87 board seats. During the same period in 2022, 45 settlements were reached, but the dissidents secured only 77 board seats. The increase in support for activists may be attributable to other factors as well. Unlike previous years, many companies’ stock prices were down in the 12 months leading up to the 2023 proxy season, resulting in losses for investors.”
Compensation proposals: Alliance found that compensation proposals submitted by shareholders generally fell into two buckets: proposals addressing excessive severance benefits and proposals for gender and racial pay equity. There were 51 excessive severance proposals this year (compared to only 18 last year), all submitted by members of the Chevedden group. Average support was 24.8% compared with 45.2% last year (with four majorities in both years.) There were also 14 proposals that received less than 10% support. Alliance posited that the significant variation in results reflected the fact that a number of the targeted companies already had policies in place limiting termination payments. There were also 17 proposals submitted on gender and racial pay equity with average support of 33.8% and one majority, a decline from 42.6% and two majorities last year.
Alliance observed that say-on-pay proposals (submitted by management) “showed generally improved results” compared to 2022. While average support was largely in line with last year, the “failure rate was down considerably, in part due to less opposition from ISS. Through June, 46 Russell 3000 firms (2.1%) and 11 S&P 500 firms (2.5%) failed SOP, compared to 60 Russell 3000 firms (3%) and 19 S&P 500 firms (4.5%) during the same period in 2022. The majority were first-time failures.” Alliance also found that the first year of disclosure under the SEC’s new pay-versus-performance rules (see this PubCo post) “did not appear to have impacted SOP votes.”
E&S proposals. Average support for E&S proposals slipped—in some cases dramatically—this year, with average support declining to 18.3% in 2023 from 27.3% in 2022 and 37.2% in 2021. According to Alliance, environmental proposals secured majority votes for only two proposals this season, compared to 16 majority votes in 2022. Social proposals, such as proposals for workplace diversity and worker safety, won majority votes in five instances. Alliance attributed these declines to a variety of causes, including what they termed “lower quality proposals,” resulting from the issuance in 2021 of Staff Legal Bulleting 14L. That SLB relaxed some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under previous SLBs, making exclusion of shareholder proposals on the basis of ordinary business or economic relevance—particularly proposals related to environmental and social issues—more of a challenge for companies. (See this PubCo post.) As a result, Alliance reported, Rule 14a-8 no-action requests decreased by 25% from last year. In addition, some large asset managers, such as Blackrock, voted against a number of E&S proposals that they viewed to be “overly prescriptive or targeted companies that have already made meaningful progress on the issue raised.” Alliance pointed out that, for the “first quarter of 2023, BlackRock did not support any environmental proposals and backed only 11% of social proposals globally.”
Alliance also cited more board opposition, less support from proxy advisors and “growing anti-ESG sentiment” as other reasons for lower average support for E&S proposals. In particular, in 2023, only one E&S proposal, on climate-aligned lobbying, was not opposed by the board, while in 2022, seven proposals went unopposed. Proxy advisors also supported fewer E&S proposals, with ISS supporting only 41%, compared with 55% in 2022 and 66% in 2021. Similarly, Glass Lewis supported only 33% this year, compared with 42% in 2022 and 61% in 2021. For example, on proposals related to GHG emissions, Alliance reports that “ISS endorsed about two-thirds of the 2023 resolutions, compared to all of the 2022 proposals, while Glass Lewis has backed only 30% this year, down from 61% last year.” And finally, Alliance speculated that “intense scrutiny from Republican federal lawmakers and state officials” may have made large institutional investors and proxy advisory firms “more reluctant to support ESG initiatives. Conservative investors also ramped up their “anti-ESG” filings—predominantly on social issues—from 67 in 2022 to 108 in 2023. Typically, these receive only single-digit support. However, even when factoring out these proposals, average support for E&S resolutions was still considerably lower than in 2022.” (See this PubCo post, this PubCo post and this PubCo post.)
With regard to specific environmental proposals, Alliance reported that average support for proposals to set and disclose GHG emissions reduction goals fell to 25.3% in 2023 from 43.6% in 2022. According to Alliance, this year’s proposals were more specific—asking for adoption and disclosure of near- and long-term targets for reducing Scope 1, 2 and 3 emissions, compared to proposals in prior years that just “asked for details about companies’ carbon transition plans.” Alliance also observed that, since 2020, climate activists have focused on disparities between companies’ net-zero public pledges and their lobbying activities. These proposals secured five majority votes in 2021, but received only 27.1% average support this year (excluding one majority vote for a proposal supported by management). Including that management-supported proposal, average support in 2023 was 34.4%, compared with 31.6% in 2022 and 61.4% in 2021.
Social proposals included proposals “addressing human capital issues, such as workforce diversity, racial equity, anti-discrimination policies, workplace health and safety, and workers’ right to organize.” There were also proposals on employee benefit plans (abortion-care access), paid sick leave and 401(k) plans. Alliance observed that none of these proposals has “been successfully excluded as ordinary business since 2021”; however, average support has decreased. For example, average support for proposals on workplace harassment and discrimination policies declined to 26.2% in 2023 from 40.6% in 2022.
While 34 proposals for DEI reporting were submitted this year, Alliance reported that only six were actually submitted for votes—with the remainder withdrawn as a result of negotiation—with average support of 26.9% support and one majority vote. Because more companies are now disclosing EEO-1 data, proposals requesting disclosure of that data have declined. Conservative activist, the National Center for Public Policy Research, submitted 16 proposals requesting companies to conduct audits to assess the potential discriminatory impact of their DEI policies and their impact on business, with support averaging 1.7%. In light of the recent SCOTUS decision on the use of affirmative action at universities, we may see more of these proposals in the future. In 2022, average support for proposals requesting racial equity audits was 44.9%, including eight majority votes and about 20 negotiated withdrawals. This year, average support fell to 22.3%. Alliance suggested that a decline in support from proxy advisors may have been at least partially responsible, with ISS recommendations in favor dropping from 77% of proposals last year to 33% this year, and Glass Lewis recommending in favor of 82% of proposals in 2022, compared to 60% this year. Alliance noted that, in some cases, proponents that were dissatisfied with adequacy of the racial equity audits undertaken refiled proposals or even opposed reelection of the audit chair.
Surprisingly, abortion-related proposals, including proposals on the impact of state abortion policies, data privacy (i.e., limiting the use of personal digital data for the enforcement of state laws that ban or restrict abortion access), and abortion healthcare coverage, received only average support of 11.3%. Alliance suggested that ISS and Glass Lewis opposed all of the resolutions other than a data privacy variation—a reversal for ISS from 2022, when it backed some proposals.
Non-climate proposals addressing “values congruency”—that is, proposals challenging the disparity between a company’s publicly espoused values and policies and its political spending— have also experienced a decline in average support, according to Alliance, from 36.3% in 2022 to 25.4% in 2023. That seems to be the case even though the number of proposals on this topic has been climbing in recent years, from five in 2021 to 17 through the first half of 2023. Alliance observed that prior proposals “often referenced inconsistencies related to a company’s stance on climate change. However, in the wake of last year’s Dobbs decision, nearly two-thirds of the 2023 resolutions took issue with company donations to politicians and organizations trying to weaken abortion rights.”
In conclusion, Alliance advised that several events may factor into the calculation for shareholder proposals in the future. For example, the SEC may adopt proposed amendments to Rule 14a-8 that would narrow some bases for exclusion of proposals. (See this PubCo post.) Even more significant would be adoption by the SEC of some version of its climate proposal. (See this PubCo post, this PubCo post and this PubCo post.) Alliance posited that, if the SEC dropped the requirement for disclosure of Scope 3 emissions, “shareholder proponents may continue to press for disclosure and reduction targets through private ordering. In view of the receding votes on this year’s climate resolutions, their challenge will be getting major institutional investors on board. Stepped up opposition to ESG activism at the state and federal level will continue to have a chilling effect on asset managers’ proxy voting.” Finally, with next year being an election year, Alliance suggested that anti-ESG efforts were likely to intensify, and anti-ESG legislation from the House Financial Services Committee, highlighted during “ESG Month” (see this PubCo post), while unlikely to be signed into law, may nevertheless “set the stage for future legislation depending on the outcome of the 2024 elections.”
[View source.]
