A quick look back at the 2021 proxy season shows that shareholder activism is on the rise. Specific issues have garnered particular interest across different shareholder groups and a little analysis can give boards some clues about which areas they might want to consider engaging investors on prior to next year.
The Sullivan & Cromwell 2021 Proxy Season Review made the following observations:
• Shareholders submitted a record 733 proposals in the first half of 2021;
• Social/political proposals made up 40 percent of the first half submissions in 2021, up 39 percent over the first half of 2020;
• Proposals on employee-related diversity, equity and inclusion (DEI) and social capital management issues saw the largest increase;
• Board diversity proposals received an average 59 percent support;
• Almost three-quarters of the governance-related proposals involve structural governance issues, with a focus on amending existing shareholder rights (written consent, proxy access and special meetings);
• Environmental proposals comprised 16 percent of all submissions and increased 40 percent over the first half of 2020. When voted on, environmental proposals received an average 41 percent support;
• Proposals linking compensation to environmental performance metrics increased by 29 percent.
The high number of proposals seems to indicate that shareholders want to have a greater say in how the companies they invest in are run. Environmental, social and governance-related (ESG) issues were among their top priorities. Specifically, the stakeholders focused on diversity-related issues, environmental and shareholder rights issues most. Boards should expect to see more shareholder proposals in these areas filed next year as shareholders look to gain more control over corporate decisions. Armed with this knowledge, corporate boards may want to consider how they will handle shareholder actions involving these issues and others before they are hit with shareholder proposals in the future.
• Diversity-related issues – With the SEC’s recent approval of Nasdaq’s proposal on board diversity, any board that has not stated its position on board diversity or moved to add diverse members to its ranks will be pressured to do so – even if they are not traded on the Nasdaq Exchange. The push for board diversity has been building for more than two years and with board diversity proposals receiving 59 percent support on average, pushing back against these proposals runs the risk of making the board seem out of step with peers. Boards should be proactive by either adding diverse members or crafting a reason why board diversity is not necessary and defending it to all stakeholders.
When it comes to diversity, equity and inclusion issues, each company might consider whether employees would stage walkouts, file lawsuits or quit because they believe the company’s values are not aligned with DEI principles. Boards should discuss strategies for dealing with any of these eventualities should they arise. More importantly, directors need to find out where their employees and investors stand on DEI policy and determine how closely their stakeholder’s views are in alignment with the board.
• Shareholder rights – Proposals to strengthen shareholder rights could be an indication that investors don’t have faith in the board’s leadership and want to take some decision-making power away from the board. Meeting with shareholders and hearing their concerns about shareholder rights will give directors an idea why shareholders may want to make changes and exactly how many shareholders want similar changes. This information will help the board craft an informed strategy on dealing with shareholder rights proposals.
• Environmental proposals – Environmental concerns are among the fastest growing shareholder concerns, with shareholders wanting more information about how a company’s climate strategy affects future growth to requiring that mandated climate-related metrics be incorporated into executive compensation plans. Shareholders have even asked for a “say-on-climate” vote (similar to the say-on-pay vote) this year, indicating just how important the issue has become.
After hedge fund Engine No. 1 won three board seats in its now historic proxy fight with ExxonMobil, boards can expect more shareholders to file shareholder proposals demanding companies disclose and potentially change their climate change/environmental policy. Instead of waiting for confrontations through shareholder proposals, companies should be more proactive and engage shareholders in talks about environmental issues in an attempt to understand their concerns and clearly articulate the board’s position on these issues. By the time you get to a proxy fight, it may be too late to make any adjustments that won’t cost board seats.