Proxy voting trends this year suggest some areas of shareholder concern that could make corporate boards and their companies vulnerable to investor actions. Recent research from The Conference Board shows notable increases in environmental and climate-related proposals, as well as racial equity and civil rights audit proposals filed by shareholders. Directors should consider the growing shareholder attention and support for these issues as confirmation that boards will be under greater scrutiny in coming years to compromise with investors on governance policies that better protect the environment and the rights of workers.
According to The Conference Board analysis, the Russell 3000 saw a record 101 proposals requesting climate-related disclosures filed in 2022—and a record 11 of them were passed. (That’s up from 60 proposals filed in 2021, 50 in 2020 and 70 in 2019. Only 8 climate-related proposals passed in 2021, 3 in 2020 and zero passed in 2019.)
The Conference Board analysis also reports that Russell 3000 shareholders filed 43 proposals seeking racial equity or civil rights audits this year. Shareholders forced votes on 31 of the 41 proposals filed and 8 resolutions passed.
Corporate boards will need to pay greater attention to these areas of ESG for the following reasons:
• Potential Lawsuits. Environmental and social issues have motivated shareholders to push companies to take action in these areas in recent years. Governance watchdogs have suggested that companies that have made previous commitments to address racial equity issues (such as pay disparity or discrimination in hiring and promotion) or environmental and climate-related goals may find themselves under greater pressure next year to show how they are addressing those commitments. This is partly the cause of the increasing number of shareholder proposals on these topics this year.
If shareholder proposals seeking change in these areas are defeated, lawsuits aimed at getting the company to meet promised commitments may follow. Such lawsuits can lead to financial penalties and fines from regulators as well as reputational damage that can affect the company’s revenues, the ability to attract investors, and the ability to attract the best employees.
• Negative votes against directors. Neglecting shareholder concern about these issues can push investors to vote against incumbent directors in future board elections. The largest institutional shareholders have already indicated that they are prepared to vote against directors who did not vote for certain governance best practices such as board diversity. In July, the Wall Street Journal reported: “investors have cited climate change as a reason for opposing the election of a management back director at 225 U.S. companies.” Expect that trend to continue as the politics of climate change intensifies leading up to and beyond the 2020 mid-term elections. While votes against the re-election of directors don’t always lead to their removal, it does create a lack of confidence in the markets and can affect a company’s management from being effective in a number of areas, including securing financing for deals.
• Takeover bids. While it may not be the most likely outcome, constantly butting heads with large shareholders can lead to proxy fights or takeover bids. If the direction the management and the board is steering the company is considered a threat to the company’s overall growth, it may invite activist investors to make an aggressive takeover attempt. Companies that do not have a well-conceived climate-change strategy may find themselves at greater risk than they may have been in the past.