A different type of proxy “off-season”

“This proxy season marked an inflection point,” said Pamela Marcogliese, partner at Freshfields Bruckhaus Deringer LLP, on the June KPMG Board Leadership Center (BLC) Quarterly Webcast. “Support for very specific environmental and social proposals continued to decrease, but that doesn’t mean support for ESG issues, in general, is in decline.”

Speaking with BLC Senior Advisor Stephen Brown, Marcogliese shared highlights of recently concluded annual meetings, shareholder proposals, and activist campaigns, while looking forward to how engagement might proceed over the course of the next year.

“Expect the next wave of proposals to reflect the cultural reality in context,” said Brown. Indeed, with landmark Supreme Court case decisions over the past two years impacting reproductive rights, racial preference in college admissions, and the first amendment rights of businesses, Brown and Marcogliese expect shareholders to seek more information on how companies may react.

Recently, some shareholder proposals have what Marcogliese referred to as an “anti-ESG” stance, such as by asking companies to take more explicit action to study the effects of net-zero policies or carbon reduction, or even walk back support of shareholder-endorsed racial equity audits. Such proposals gained little support, but their presence on the ballot is indicative of a more permissive US Securities and Exchange Commission (SEC). The SEC has granted fewer no-action letters, compelling companies to settle or bring items to a vote. Such inaction is inline with the recently adopted Universal Proxy Rule, which puts all director nominees—including the management slate and the dissident slate—on the same proxy ballot, said Marcogliese.

Only 2 out of nearly 200 environment-related shareholder proposals received majority support through June 15, according to Freshfields’ analysis of data from Institutional Shareholder Services. But the SEC’s pending climate rule, currently slated to be finalized this fall, could mandate many of the disclosures that some investors have been requesting over the years. The adoption of “stringent rules” by the EU, which will go live over the next 18 months, could challenge companies operating in Europe to reconcile US versus non-US disclosures rules, said Marcogliese.

“We have also seen an increasing tendency for investors to hold individual directors accountable for perceived deficiencies in a variety of areas,” said Marcogliese. For example, instead of using their votes to enforce overboarding policies, institutional investors are now putting that responsibility back on nominating and governance (nom/gov) committee chairs, expecting them to evaluate their own members’ abilities to hold multiple board seats. Without a clear policy or action, the investors would now vote against a nom/gov committee chair instead of the perceived overboarded directors.

“Companies should pay attention to the published policies from major investors,” said Marcogliese. “You don’t have to do what they say, but you should have a position that’s defensible.”

Marcogliese also added that there has been an uptick in boards adding additional committees. “Decisions out of Delaware continue to address the board’s duty of oversight, monitoring company risks, and addressing red flags appropriately,” said Marcogliese. Cyber risk is commonly cited, but also financial and environmental and social risks. “These are all mission-critical.”

“A lot of ‘ESG’ is simply about operational risk,” said Brown.

Find the webcast replay and proxy season recap presentation from Freshfields at boardleadership.kpmg.us.