Alliance Advisors, a proxy solicitation and corporate advisory firm, has just posted its 2021 Proxy Season Preview, a useful introduction into the major themes of this season—well worth a read. First, and most obviously, there is COVID-19 and its direct and indirect impact. The pandemic is having a significant direct impact this year—not just in necessitating recourse to virtual-only annual meetings again this season—but also in focusing the attention of investors and proxy advisors on “how well corporate leaders navigated the crisis and protected business operations, liquidity and the health and welfare of employees.” But the pandemic has also had a somewhat surprising broader indirect impact. While it was widely anticipated that the challenges of COVID-19 would overwhelm any other concerns, the impact appears to be otherwise, as the pandemic has highlighted our increasingly precarious condition, including the effects of climate change, and intensified our social and economic inequality—all issues that are front and center this season. The Preview predicts that environmental and social proposals “are likely to see stronger levels of support in view of last year’s record 21 majority votes… and more assertive investor policies on diversity, climate change and political spending.”
Below are some of the highlights of the Preview:
The Preview anticipates that, in light of the effect of COVID-19, executive compensation will be intensely scrutinized, particularly the extent to which executives have “shared the pain” with employees and shareholders. The Preview contends that “it will be incumbent upon compensation committees to clearly explain the rationale behind any discretionary adjustments and resulting pay outcomes.” While proxy advisor ISS may be flexible with respect to reasonable adjustments to short-term incentive plans if the business rationale is clear, the Preview indicates, some institutions have been steadily opposed to pay adjustments. The Preview reports that there has already been “some negative investor reaction” in early say-on-pay votes.
The pandemic also focused attention on worker health and safety, leading to favorable votes on human rights due diligence proposals at some companies, the Preview reports. Companies are also being asked to issue reports on efforts to protect workers’ health and safety, to offer paid sick leave and, for some pharmaceutical companies, “to explain how government financial support for the development of COVID-19 vaccines and therapeutics is being taken into account in pricing and access decisions.”
A new initiative organized by The Shareholder Commons has led to the submission of over a dozen proposals to Delaware companies requesting that they convert to public benefit corporations. Other proposals initiated by TSC and others have asked for reports on “the economic and social costs created by traditional corporate structures that favor shareholder returns over other stakeholder interests,” although, the Preview reports, most of those proposals have been excluded as ordinary business. Another series of proposals that the Preview reports have been largely excluded (on the basis of substantial implementation) are “corporate purpose” proposals submitted to signatories of the Business Roundtable’s Statement on the Purpose of a Corporation (see this PubCo post), designed to highlight the dissonance between the essence of the Statement and some of the actions taken by the targeted companies.
Another governance issue that has been reflected in shareholder proposals is worker representation on boards, a common practice in Germany. Some of the proposals submitted by James McRitchie request adoption of a version of the “Rooney Rule” that would require the field of board candidates to include non-management employees. The Preview reports that, so far, the proposals have not received substantial support, but that “McRitchie stated on his website that the proposal was ‘an opening gambit’ and he would have withdrawn if the companies had agreed to take any significant step to increase worker voices on the board, such as appointing a formal workforce advisory panel or designating a director to be a liaison with workers.”
Recent social unrest over systemic racial injustice, especially following the death of George Floyd, has pushed racial inequity into sharp relief. The Preview observes that renewed public attention to this issue has “shifted the focus of diversity initiatives from gender to race and ethnicity,” and investors are looking at corporate diversity at all rungs of the corporate ladder and asking for transparency and change. According to the Preview, “shareholder proposals addressing equality in the workplace have increased four-fold over 2020.”
The Preview indicates that, while only 5.4% of directors at Russell 3000 companies are Black, the number increased in the second half of 2020, “accounting for 18.5% of new board appointments, according to BoardProspects.” The increases may also be due in part to new legislation in California (see this PubCo post) as well as proposed new listing requirements at Nasdaq. (See this PubCo post.) In light of these changes, the Preview indicates that “a number of investors and proxy advisors upgraded their board diversity policies for 2021….However, most have stopped short of setting specific racial/ethnic targets due to a lack of consistent, transparent information. Among large investors, State Street Global Advisors (SSGA) is taking the most aggressive approach this year by penalizing nominating committee chairs at S&P 500 and FTSE 100 boards that do not disclose their racial/ethnic makeup.” Various investor groups have also been pressuring companies to follow the “Rooney Rule,” a policy requiring the consideration of women and minorities for every open board seat.
However, diversity considerations have not been limited to the board. The Preview reports that “[w]orkforce diversity has catapulted to one of the top shareholder proposal categories in 2021 with over 60 resolutions of various types filed.” Over 30 proposals have called for disclosure of companies’ EEO-1 Surveys, which provide “workforce demographics by gender, race and ethnicity across 10 job categories.” According to the Preview, last year, two institutional investors requested disclosure of that data and, since then, that data has been released by approximately 46% of the 100 largest companies by market cap in the S&P 500. Beginning in 2022, the Preview reports, State Street Global Advisors will vote against compensation committee chairs at S&P 500 firms that do not disclose their EEO-1 Survey responses. There have also been proposals asking companies to publish an annual report assessing companies’ DEI efforts, as well as proposals asking companies to apply the Rooney Rule across the workforce. In addition, to provide transparency, several proposals have requested companies to perform independent racial equity audits and to disclose global median gender and racial pay gap data.
The Preview suggests that proposals related to climate “may gain momentum this year due to more favorable investor voting policies.” For example, in his 2021 letter to CEOs, BlackRock’s Fink asked companies to disclose a “plan for how their business model will be compatible with a net zero economy”—that is, “one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC.” (See this PubCo post.) And BlackRock Investment Stewardship has stated that, “where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium- and long-term targets, we may vote against the directors we consider responsible for climate risk oversight.” (See this PubCo post.) The Preview reports that, where companies have not provided adequate disclosure about material risks or “support for the proposal would accelerate progress,” BlackRock will be more likely to support shareholder proposals. For the second half of 2020, BlackRock, globally, voted in favor of 89% of environmental proposals and 50% of all E&S proposals.
According to the Preview, the climate-related proposals for this year are primarily focused on “carbon transition planning and setting GHG emissions reduction goals.” One particular target of climate activists recently has been financial institutions’ financing of fossil fuel assets; however, the key proponent withdrew all of its 2021 proposals after the major banks “pledged to reduce their financed emissions to net-zero by 2050 and to disclose and measure their progress.” The Preview also reports that several proposals have been submitted for 2021 “calling on carbon-intensive firms to proactively lobby—both directly and through their trade associations—for climate policies aligned with the Paris Agreement goals.” One emerging trend identified in the Preview is “activist stewardship,” passive investors together with activist hedge funds conducting proxy fights to promote desired change at companies that have otherwise been resistant. Another new initiative has been “say on climate” proposals, which the promoter seeks to have adopted by at least 100 S&P 500 firms by the end of 2022.
The Preview predicts that shareholder support for proposals requesting disclosure of political spending and lobbying “is likely to rise in the 2021 proxy season. Last year, seven resolutions received majority votes and another 15 garnered support in the 40% range. According to Majority Action, an additional eight proposals would have been approved if BlackRock and Vanguard Group had supported them.”
However, recently, some institutional investors have shifted gears and are starting to support some of these proposals for political spending disclosure. The Preview reports that the Center for Political Accountability found that “40 out of 69 large investors increased their backing of political contribution resolutions between 2019 and 2020.” And even BlackRock has changed its tune to some degree, indicating that it “will seek confirmation from companies—either through engagement or disclosure— that their corporate political activities are consistent with their public statements on material and strategic policy issues. It expects companies to monitor the policy positions taken by their trade associations and provide an explanation where inconsistencies exist.” According to the Preview, Vanguard “also appears to be moving away from its longstanding opposition to politically-focused resolutions.” Both asset managers supported a lobbying disclosure proposal for the first time.
Following the events of January 6, a number of companies announced that their corporate PACs had suspended—temporarily or permanently—their contributions to one or both political parties or to lawmakers who objected to certification of the presidential election. The Preview considers these suspensions to be “largely symbolic” because most “are temporary and the amounts involved are relatively small.” However, since then, “companies, trade groups and asset managers are facing heightened pressure to reexamine their approaches to political spending.” Various groups have “asked BRT members to permanently end all political contributions, including through direct donations to politicians, PACs, Super PACs and 527 committees or through trade associations and social welfare organizations” or have advocated that large asset managers “not only hold their portfolio companies accountable for their political spending practices and disclosure—including by voting against directors—but also to reassess and disclose their own political giving.” The Preview reports that some asset managers have “suspended PAC donations to the Republican objectors,” while others “have paused all PAC activity.”