2022 proxy season sustains focus on ESG, with some twists

“By and large, this proxy season has very much been a continuation of prior years,” said Pamela Marcogliese, partner at Freshfields Bruckhaus Deringer LLP, “but there’s also been an inflection point” in how directors, shareholders, and regulators are approaching current corporate governance issues.

Marcogliese joined KPMG Board Leadership Center (BLC) Senior Advisor Stephen Brown to discuss proxy trends during a recent KPMG BLC webcast.

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“Proxy proposals can pinpoint trends that help directors understand the sentiment of their shareholders,” said Brown. “They can also inform directors about expectations and help prepare for next year, making them aware of a competitive advantage that might emerge from tackling an issue that was on another company’s ballot.”

Moving in different directions

Due to a Staff Legal Bulletin from the U.S. Securities and Exchange Commission (SEC) issued last fall, “a lot more shareholder proposals went to a vote this year,” said Marcogliese. In the past, “companies were able to seek no-action relief from the SEC if a proposal sought to ‘micromanage’ the company or was focused on broader societal implications.”

As a result, fewer no-action letters were requested (and granted) and shareholders took up significantly more proposals than in the past. For example, 208 environmental and social shareholder proposals were considered for Russell 3000 companies from January to June of this year, compared to 131 during the same period in 2021. And only 9 percent received majority support, compared to 27 percent in 2021.

Indeed, large institutional investors had signaled that they were less likely to support emerging proposals that were seen as “too prescriptive.” Geopolitical volatility and ongoing supply chain challenges, for example, “may make it unrealistic for shareholders to hold companies accountable in an environment where there aren’t great alternatives,” said Marcogliese.

“Diversity continues to be a very important focus for shareholders, particularly at the board and management level, but it has also been a focus with respect to the entire organization,” said Marcogliese. The ongoing commitment to diversity remains even though California courts struck down two laws that mandated levels of board diversity for public companies headquartered there.

“Nationally, there has been such tremendous progress on this front—without much legislation or regulation—through shareholder proposals and shareholder campaigns,” said Marcogliese. Even forthcoming diversity rules for Nasdaq-listed companies are “comply or explain” and not mandated. Marcogliese highlighted that 30 percent of S&P 500 company directors are women, compared to only 16 percent in 2011, and 92 percent of S&P 500 boards include at least one racially/ethnically diverse director.

Governance proposals and activism trends

“It’s really important for a company to be able to describe and defend why its set of governance choices make sense,” said Marcogliese, observing that proposals calling for splitting the chair and CEO roles and lowering the threshold for calling a special meeting continue to hit proxies. “Investors have been receptive to those arguments when companies have put them forward. What we find when we start working with companies is that they have very good reasons for their governance choices, they just haven’t communicated them.”

“For hedge fund activists, there has been a lot of activity lately where environmental and social issues are part of the story,” said Marcogliese, even if most activity “primarily has a strategy or M&A focus.”

“I think investors are starting to be very, very thoughtful about what does get supported by proxy votes, and what is not as compelling,” she said.

Unlike the past four years, in which hedge fund activists saw most of their director candidates elected in proxy contests, this year, a majority of activist director candidates were appointed by settlement. This trend may continue with the upcoming Universal Proxy Rules, which require the proxy card to include all director candidates in contested elections, including those nominated by dissident shareholders. The rules go into effect for shareholder meetings after August 31. Marcogliese sees several possible impacts: “First, it will be easier to target individual directors. Second, shareholders may feel more comfortable voting for marginal change. And third, we may see an increase in the volume of proxy contests.”

Get ready to engage

With the comment period for the SEC’s proposed rules related to climate change now closed, “the most productive thing companies can do now is to take stock of where they are, figure out where the biggest gaps are, and come up with at least a broad plan of where to start if the rules were to be adopted,” said Marcogliese. “Focus on making sure that the company can get into compliance.” 

Indeed, directors on the webcast agreed. Twenty-eight percent said that their engagement with shareholders had increased over the past year and 55 percent said engagement held steady. Only 3 percent said it had decreased.
 

Webcast survey results

In light of proposed climate disclosure rules by the Securities and Exchange Commission, how would you describe the level of maturity of your company's climate-related disclosures and processes today?