Navigating Uncertainty as Proxy Season 2025 Unfolds

Issues raised during a highly uncertain and politicized environment complicate questions before public companies. Nonetheless, as corporate boards enter the 2025 proxy season, they should remain focused on their key areas of oversight and the risks and consequences, legal and otherwise, of executive orders and almost daily shifts in federal policies and regulations. Sustainability initiatives — from climate change to diversity, equity, and inclusion goals — provide much of the substance seen so far in shareholder proposals. We highlight key issues with perspectives from Farient.

 

Say-on-Pay trends:

Shareholder support for Say-on-Pay (SOP) proposals rebounded slightly in 2024, with fewer instances of failed votes. In its Proxy Season Review (US, September 2024), proxy adviser ISS noted that the Say-on-Pay failure rate was the lowest it had ever observed. Still, 29% of S&P 500 companies and 25% of Russell 3000 companies received less than 90% support in 2024 (one of the highest levels of <90% support since SOP began), indicating investors are still voicing concerns with executive pay through their votes, even if the SOP proposal still passes.

Farient’s perspective: Companies should continue to monitor changing shareholder and proxy advisor expectations and ensure their pay decisions and disclosures align with their corporate strategy. This year, investors and proxy advisors are zeroing in on incentive measures and targets and flagging any pay actions that appear to create a pay-for-performance disconnect. Investors will likely raise concerns when CEO pay levels do not align with the shareholder experience. Votes against SOP may be on the rise.

 

Regulatory changes and tariffs:

Companies and their boards will have to monitor and deal with regulatory changes at the federal level – some of these changes impact companies’ key strategic decisions (e.g., where and when to invest in a new factory) and could impact future performance expectations. The imposition of tariffs on imports of aluminum, steel, and Chinese products, and the threat of additional tariffs, pose challenges when setting incentive program financial targets.

Farient’s perspective: To address uncertainty, compensation committees may need to consider wider incentive goal ranges or adjustments to performance metrics irrespective of changes to tariffs or other regulations outside of management’s control.

 

Human capital management and ESG expectations:

Not long ago, investors focused on understanding the value of human capital and ESG initiatives. That tide has turned. Examples of companies downplaying or stepping back from DEI are reported almost daily. Google is among the latest major US companies to step back from its DEI commitments in the first weeks of a new presidential administration. Google told media outlets it was reviewing the president’s executive orders to reverse DEI initiatives in the federal government and among federal contractors, of which Google is one.

Proposals calling for companies to cease DEI efforts have been filed by the National Center for Public Policy Research so far at 11 companies, according to its website. Apple, Goldman Sachs, McDonald’s, and PepsiCo are among those companies where proposals will be voted on. Apple, which holds its annual meeting on February 25, recommends its shareholders vote no. Meanwhile, ISS this week said it would “no longer consider the gender and racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at US companies” beginning with shareholder reports issued on or after February 25, 2025.

Farient’s perspective: Companies with DEI incentive measures must review those measures to ensure they comply with the latest laws and regulations and, at minimum, manage the legal risks associated with DEI policies. To do so, companies should work with their legal counsel to review all DEI policies and related practices and assess the risk of each to determine what should remain in place, be removed, or be modified.

 

AI and cybersecurity reporting:

The board oversees AI and cybersecurity governance. Effective governance involves identifying, assessing, and mitigating risks associated with technology. Companies should implement robust risk management processes to address potential issues such as data breaches, biased algorithms, and regulatory noncompliance. The board should, according to SEC guidance, integrate ethical considerations into the AI governance framework although there is no statutory requirement to do so.

Farient’s perspective: Boards should receive regular updates on AI and cybersecurity initiatives, understand the material risks and opportunities associated with the technologies, and ensure that the company’s AI practices align with its overall strategy. The intricacies and complexity of newer oversight areas may require boards to seek additional training.

 

Equity grant disclosure requirements:

Effective for fiscal years beginning after April 30, 2023, calendar year-end public companies must comply with new disclosure requirements relating to stock option awards and stock appreciation right (SAR) awards granted close in time to a company’s release of material non-public information (MNPI). For many companies, this impacts disclosures in 2025 covering FY 2024.

Farient’s perspective: Companies must describe their policies and practices regarding the timing of options and SAR grants concerning the release of MNPI in narrative and tabular formats. Companies with fiscal years ending December 31 are drafting these disclosures for the first time and are eager to see how other companies have complied with the new rule. Early filers, including Apple, Deere, Intuit, and Visa provide noteworthy disclosure examples.

 

Performance-based equity (PSUs):

Some investors and compensation thought leaders have expressed concerns about the efficacy of performance-based equity, arguing that such awards do not lead to improved business performance and may be inflating executive pay levels. In recognizing and potentially sharing these concerns, ISS has adopted policies for greater transparency in PSU design, measures, and goals. In its 2025 policy, ISS will focus more on PSU disclosure and design, particularly for companies exhibiting quantitative pay-for-performance (P4P) misalignment. ISS views non-disclosure of forward-looking goals, poor disclosure of closing-cycle vesting results, and non-rigorous goals negatively.

Farient’s perspective: PSUs are particularly effective in aligning executive compensation with long-term company performance. They are favored when incentivizing executives to meet specific performance targets over a multi-year period. However, compensation committees should be aware of potential pitfalls when using PSUs, such as setting unrealistic performance targets or failing to effectively align the metrics with the company’s strategic goals. Majority-performance-based long-term incentive (LTI) programs remain favored among proxy advisors and investors, but the pressure is on to demonstrate they create pay and performance alignment.

 

Clawback disclosures:

The SEC’s mandatory clawback rule, which became effective in October 2022, created a new floor from which proxy advisors and investors have since ratcheted up expectations. For instance, in its 2025 policy, ISS added a new twist this proxy season, stating in an FAQ that a clawback policy will not be viewed as “robust” unless it applies to both time-based and performance-based vesting equity awards. For its part, Glass Lewis believes clawback policies should authorize recovery of incentive compensation from executives in the event of material misconduct, reputational failure, or risk management.

Farient’s perspective: Directors should review existing policies, ensure that they meet the SEC’s requirements, apply discretionary components where it makes sense (e.g., for cases of executive misconduct), and be aware that clawbacks are likely to be an area of focus for the Commission. SEC Chair-elect Paul Atkins has criticized components of the Dodd-Frank Act which mandated the SEC adopt the clawback rule, among other provisions.