Proxy Season Recap: Nuanced Results for SOP, ESG Issues

The 2023 proxy season plugged along with more whimpers than roars. Most annual general meetings take place in public each year between January and June. Even though AGMs typically draw few shareholders, votes taken on proposals and director elections generate insights into the mood of investors—and as any seasoned director knows some investors are mission driven.

Relying on various sources including insights from Farient’s Data Analytics Team (DAT) we present our Top 10 takeaways—all are important. Voting results cited throughout this assessment represent slightly more than 90 percent of the companies issuing proxies among the S&P 500, MidCap 400, and SmallCap 600 as of August 18, 2023. Credit is also given to law firms—most notably, Gibson Dunne & Crutcher, Sullivan & Cromwell, and Wachtell, Lipton, Rosen & Katz—whose detailed recaps are worth a read for those interested in a deeper understanding of how various issues are trending. It’s also worth noting that certain activist investors and “gadflys” file proposals at multiple companies, which makes year-over-year voting trends informative, and underscores the importance of boards understanding the makeup of their shareholders.

 

1. This was a big year for the overall number of proposals submitted. In 2023, that number increased 2% to 889 proposals—the highest number since 2016. Up significantly were proposals related to executive compensation: 108% from 2022, with a large proportion seeking shareholder approval of certain executive severance agreements. Compared to the 2022 proxy season, the number of both environmental and social proposals also increased, up 11% and 3% respectively, and 68% and 24% respectively, compared to 2021. In contrast, governance proposals overall declined 14%, and civic engagement (i.e., lobbying and political spending) proposals declined 6%.

2. The five most frequent proposal topics in 2023, representing 43% of all shareholder proposal submissions, were:

• Climate change
• Independent chair
• Nondiscrimination and diversity related
• Shareholder approval of certain severance agreements
• Special meetings

Of these, all but one—shareholder approval of certain severance agreements—was in the top five in 2022.

3. Backlash against environmental, social, and governance (ESG) measures is construed to be turning the tide against such initiatives. ESG is like a four-letter word but there is evidence that corporate initiatives while perhaps being downplayed or recast to avoid use of the term, there were fewer votes overall in support of ESG measures. Nonetheless, there also was an uptick in proposals on other environmental issues including biodiversity, deforestation, and plastics pollution.

Anti-ESG filers focused on rolling back climate as parts of the world burned, oceans heated up, and ice caps melted. But here’s the thing: companies continue to move toward stakeholder incentives in executive pay, an increase supported for the last three years by Farient’s Global Trends research. ESG themes will continue to matter to institutional investors, regardless of yearly vote outcomes, says Katie Frame, a London-based active ownership manager at Schroders. “It’s not necessarily the end of the conversation,” she told Pensions & Investments.

Climate-related proposals were the largest group of environmental shareholder proposals by a significant margin, representing 80% of environmental proposals (and 17% of all proposals) submitted in 2023. Average support for these proposals, however, saw their lowest rates in at least three years. Similarly, ISS support for climate proposals decreased: ISS recommended voting for 47% of climate proposals, down from 61% in 2022. Some analysts have said the shift is likely due to an increase in more prescriptive proposals from activist investors that went to a vote.

There were 150 climate-related proposals submitted in 2023, up from 130 proposals in 2022 and 83 proposals in 2021. Moreover, many S&P companies now tie executive compensation to performance metrics that include climate goals. The US Securities and Exchange Commission is expected to finalize new climate-related reporting rules this fall with an effective date early in 2024.

4. Support for Say on Pay was marginally better overall than in years’ past. Our data (through July 31) shows 70% of companies in the S&P 500 won support from at least 90% of votes cast on their executive compensation. That’s higher than last year’s figure of 69% of S&P 500 companies over the same period, and the first time there has been an increase since 2018, when 81% of the index won 90% or more support for their executive pay. Even so, this is more a reflection of a return to pre-pandemic vote levels. During the first two years of the pandemic, some pay plans were justifiably adjusted to, for example, relax performance goals or add retention awards to ensure stabilization at the top as uncertainty ruled.

At the other end of the spectrum, only 2.5% of S&P 500 companies received less than 50% support for their executive pay through July, down from 3.9% last year and from 3.5% in 2021. (Shout out: This data was originally reported by Ross Kerber at Reuters’ Sustainable Finance newsletter.)

Another nuance in this year’s proxies were SOP comments from smaller, ESG-aligned impact investors and European institutional investors. Despite some of the retreat witnessed in the US market, global capital—particularly that originating from European investment firms—are still pushing for climate-related performance measures.

5. The first year of pay versus performance disclosures saw most companies playing the middle of the fairway. Of the S&P 500, 58% showed only a graph, 32% provided a graph and narrative, 9% had narrative only, and 2% showed only a table. Farient’s PvP Tracker, launched earlier this year, aggregates PvP data including compensation actually paid (CAP) and pay-for-performance alignment. Farient’s Trackers—which also include CEO Pay, Pay Ratio, and CEO Wealth—are user friendly and accessible through Farient.com.

6. Severance agreements were the most common shareholder proposal related to executive compensation, increasing from 44% in 2022 to 63% this season. Seven proposals asked for inclusion or reporting on social and environmental performance metrics in executive compensation, such as GHG emissions and maternal morbidity. In the aftermath of the US Supreme Court’s decision to overturn Roe v. Wade, proposals seeking maternal morbidity reporting were up from just two in 2022, but down from 15 in 2021. Overall, executive compensation proposals at R3000 companies more than doubled this season, with 75 proposals in 2023 compared to 36 in 2022.

7. Nondiscrimination and diversity were the subjects of the largest subcategory of social proposals at 26%. Gaining some traction were proposals focused on reproductive- and human-rights assessments. Interestingly, most of the reproductive rights initiatives were proposed by Arjuna Capital. The Boston-area sustainable investment firm gained notoriety in 2014 when it teamed up with As You Sow and after negotiation withdrew a proposal at Exxon Mobil seeking a report on how it would adapt its business model to align with decarbonizing the economy by reducing its dependence on fossil fuels. Similar proposals filed in subsequent years saw increasing shareholder support and in 2017 the oil giant agreed to issue such a report.

The 2023 proxy season also saw a rise in social proposals directly challenging ESG measures. These included proposals requesting that companies, among other things, roll back plans to undertake a racial equity audit, conduct a cost/benefit analysis of DEI programs, conduct a racial equity and “return to merit” audit, and report on risks of supporting reproductive rights.

8. Proposals filed to separate the chair and CEO roles were the most frequent among governance topics, which were down overall. There were 85 proposals calling for independent board chairs, up from 50 proposals in 2022. Of the 85 independent board chair proposals submitted, at least 70 were filed by longtime corporate activist John Chevedden or his associates, including Kenneth Steiner and Myra Young, and nine were submitted by the National Legal and Policy Center (NLPC), which according to Gibson, Dunne & Crutcher, has “historically not focused on the submission of proposals related to governance topics.”

9. Director elections for the first time this season were held using a universal proxy card (UPC). The conventional wisdom is that the UPC makes voting easier for the shareholders who vote by proxy, which constitute most shareholders. The UPC is also considered a magnet for more shareholder activism and activist-nominated directors, but there was little sign of such activism this season.

10. Sometimes, it pays to be small. The largest companies were targeted: 83 percent all of proposals were filed at S&P 500 companies versus 79 percent for the same index and period in 2022.