Alliance Advisors has just released its 2021 proxy season review, a season they characterize as “dynamic,” as investors stepped forward to express their views on a variety of environmental and social topics. At least 34 E&S shareholder proposals won majority support, compared to 21 proposals last year. And over a dozen shareholder proposals on diversity, climate change and political spending won with votes in excess of 80%. There were also some new entries among the shareholder proposals—such as requests for racial audits, access to COVID-19 medicines and say on climate—that received support averaging around 30%, a level that Alliance characterizes as “remarkably” good for first timers. Alliance acknowledges that these results did not come entirely out of the blue, as large asset managers such as BlackRock and Vanguard had previously signaled that they might take steps this season to more closely align their proxy voting records with their advocacy positions.
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For example, BlackRock's Investment Stewardship Report for the 2020-2021 proxy voting year reported that BlackRock Investment Stewardship supported 35% of shareholder proposals (297 out of 843) in the 2021 proxy period, compared to 17% (155 out of 889) the previous year. And, this year, BIS voted against the election of 255 directors as a result of climate-related concerns, an increase from only 55 in the prior year. This year, BIS reported, on behalf of clients, it supported 64% of the environmental shareholder proposals, 35% of the social shareholder proposals and 32% of governance shareholder proposals. Last year, BIS said that it supported 6.3% of the environmental shareholder proposals, 6.8% of the social shareholder proposals and 17.1% of governance shareholder proposals. In the 2020-21 proxy year, BIS voted against management over concerns about social issues at 36 companies. In addition, BIS supported 35 out of 100 social-related shareholder proposals, including 27 out of the 75 shareholder proposals at U.S. companies. By comparison, in the 2019-20 proxy year, BIS supported eight out of 114 social-related proposals. These proposals addressed topics such as racial equity audits, diversity and disclosure of EEO-1 data.
Diversity
Board/management diversity. Recent social unrest over systemic racial injustice has highlighted the issue of racial inequity, and with it, diversity became a high-profile investor concern. Alliance reports that, because women now hold 24.3% of the board seats among the Russell 3000, shareholder proposals for board diversity instead “took aim at boards with no apparent racial or ethnic diversity.” Of the four proposals submitted to a vote, three received support over 70%, while a proposal on executive diversity, which was unopposed by the board, won 93.8% support. The New York City Comptroller‘s Boardroom Accountability Project 3.0 succeeded in a different way, as all of its 2021 proposals, except one pending, were withdrawn as companies reached agreement with the proponent.
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The Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity, calls on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller's Office, companies would commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs are selected. Project 3.0 was initiated in 2019 and purported to be “the first time a large institutional investor has called for this structural reform for both new board directors and CEOs.” Notably, Project 3.0 indicated that the Comptroller's Office would “file shareholder proposals at companies with lack of apparent racial diversity at the highest levels.” The Comptroller's Office characterized the initiative as the “cornerstone” of its Boardroom Accountability Project, which “seeks to make meaningful, long-lasting, and structural change in the market practice so that women and people of color are welcomed in the door and considered for every open director seat as well as for the job of CEO.” (See this PubCo post.)
Alliance suggests that shifts in investor policy to hold nominating committee chairs accountable may have contributed to both enhanced disclosure regarding the racial/ethnic compositions of boards (disclosed by 71% of the S&P 500 compared to only 30% in 2020) as well as director votes, as “some 95 nominating/governance committee chairs received negative votes in excess of 30%, a sizable increase from 55 in the first half of 2020.” Of those with negative votes, 85% did not provide diversity disclosure (although, Alliance acknowledges, it's hard to determine the cause of the votes).
Workforce diversity. There have been increasing calls for disclosure of EEO-1 reports, which are filed with the federal government and provide a breakdown of workforce demographics, and for reports on the efficacy of companies' efforts at diversity, equity and inclusion. State Street Global Advisors has indicated that, in 2022, it will begin voting against comp committee chairs at S&P 500 firms that do not disclose their EEO-1 reports, and letter-writing campaigns by the New York City Retirement Systems have led 62 S&P 100 firms to disclose or commit to disclosing their EEO-1 data. Other engagement has also pressured companies to disclose the data. Alliance reports that, as a result, only three proposals for EEO-1 disclosure were submitted to a vote; in two instances, they received over 80% support.
Proposals for DEI reports requested information about process as well as assessments of program effectiveness related to promotion, recruitment and retention of protected classes of employees. Alliance indicates that, of the six proposals requesting DEI reports that went to a vote, three received majority support. However, other proposals framed as requests for assessments of whether written policies or unwritten norms at the company reinforced racism in company culture received only between 11% and 12% of the vote in favor.
Alliance also reports that there were eight proposals requesting “an independent racial equity audit to assess whether a company's policies, products and services contribute to discrimination,” aimed at determining whether the actions of companies were consistent with their public statements in support of racial justice. The proposals averaged 31.1% support.
Environmental
Climate. Among environmental proposals, Alliance reports, those addressing climate dominated, with “nearly a third directed at oil and natural gas companies, electric utilities and the transportation sector. Big oil recorded some of the highest votes, including three seeking a substantial reduction of Scope 3 emissions.” Requests for reports on the financial impact of the International Energy Agency's Net Zero 2050 Scenario also received close to majority support.
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The EPA defines Scope 3 emissions as emissions that “are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization's scope 1 and 2 boundary. The scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization. Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization's total GHG emissions…. Scope 3 emission sources include emissions both upstream and downstream of the organization's activities.” According to the Greenhouse Gas Protocol, Scope 3 emissions are “other indirect emissions from up and down the value chain, such as outsourced activities and emissions that occur in materials or products before the company acquires them and after it sells them.” (See this PubCo post and this PubCo post.)
“Say on climate” is a new proposal that, just like “say on pay,” asks companies to hold annual advisory votes on their climate policies and strategies. Alliance reports that the proponent plans to submit the proposal to 100 companies in the S&P 500 by the end of 2022. Of the four proposals that went to a vote, three received over 30% support, and one that was framed as a binding bylaw received only 7%. Two companies that just went ahead and requested votes on SOC received over 90% approval. Interestingly, there seem to be mixed views on these proposals. For example, Alliance points out that Glass Lewis “expressed concern that SOC votes could result in a rubber stamping of weak climate strategies.”
Other. Alliance also identified “dramatic shifts in investor voting patterns” in connection with other environmental proposals relating to spills, waste and deforestation, many of which received approvals at the 70% and 80% levels.
Political spending
There has also been a significant increase in support for proposals relating to political spending disclosure and lobbying. According to Alliance, support for proposals requesting disclosure of political contributions increased on average by almost 10 percentage points, from 38.6% in 2020 to 48.1% in 2021, including six majority votes. Average support for lobbying disclosure proposals increased to 39.2% from 32.7% in 2020, including three majority votes.
Alliance observes that, while, historically, BlackRock and Vanguard have opposed proposals for political spending disclosure, both have indicated that they might vote in favor under some circumstances.
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In a December 2020 commentary, BlackRock asserted that, with regard to shareholder proposals regarding disclosure of political spending or lobbying activities, where it “notes material inconsistencies with stated public policy priorities, [BlackRock] may support a shareholder proposal requesting additional disclosure or explanation for such inconsistency. In making [its] assessment, [BlackRock] will review information disclosed by the company, as well as third-party research for industry peer comparison.”
However, Pensions & Investments reports, in a late January 2021 letter to BlackRock Chairman and CEO Laurence Fink, almost “two dozen fiduciaries of public retirement plans and others expressed concern over BlackRock's internal practices and stewardship stances on companies' political spending and lobbying activity.” While they appreciated the “evolution” of BlackRock's position as expressed in the December commentary, the letter blasted BlackRock for a “historic failure to support efforts by other shareholders to promote greater transparency regarding political spending and lobbying at S&P 500 companies, including voting against all 48 such proposals in the 2020 shareholder season. In those cases, eight proposals would have received majority support if BlackRock had supported them and 19 would have received support of a majority of shareholders if both BlackRock and Vanguard had supported them, they said.” [Italics added.] The letter chastises BlackRock for its failure to support these proposals and for shielding “issuers from much-needed transparency and accountability on policy influence activities that impact sustainable value creation. While we welcome BlackRock's recognition of the risks to investors from misaligned corporate political spending in its December commentary, BlackRock's updated proxy voting guidance from December 2020 still does not offer sufficient clarity to clients and issuers on the standards to which it will hold boards on political spending disclosure.” Without transparency, the letter contends, how would investors be able to “identify and hold boards accountable for these misalignments”? The letter finally asks for BlackRock's commitment to “supporting shareholder proposals calling for greater disclosure, and…voting against those board members charged with the responsibility for overseeing such spending who have failed to do so.” (See this PubCo post.)
In BlackRock's Investment Stewardship Report for the 2020-2021 proxy voting year, BlackRock indicated that it voted in favor of at least four political spending and lobbying proposals where it “determined increased transparency would help shareholders' understanding of these companies' political activities and how they aligned with each company's strategic policy positions and long-term performance.”
Alliance reports that it observed a significant shift in support for proposals that specifically addressed potential inconsistency between “companies' political contributions or affiliations and their publicly stated values and policies.” Of three proposals requesting a “congruency analysis” of political spending against corporate values, the vote averaged 38.4% in 2021, compared with around 6% when these proposals were last submitted to votes (at different companies) in 2016 and 2015. Proposals also requested information regarding the alignment between lobbying activities and public pronouncements on climate goals. Alliance reports that seven companies agreed to provide the disclosure and five proposals received over 60% support.
COVID-19
Proposals asking pharma companies to report on pricing and access to COVID-19 vaccines and therapeutics averaged 31.2% support, according to Alliance. Most worker health and safety proposals, such as proposals to provide paid sick leave, were omitted as “ordinary business,” but one proposal to protect workers' rights was supported by the board and received 95.3% votes in favor.
Corporate governance
Alliance reports that proposals for governance changes—written consent, special meetings, proxy access and independent board chairs—were the most common shareholder proposals this proxy season. Many were directed at repeat targets, but, with one exception, support largely fell compared with the prior year. Support for lowering the threshold vote (mostly to 10%) to call special meetings fell to 34.5%, which Alliance says is the lowest in 10 years, and support for independent board chair proposals fell to 30.6% from 35% in 2020. The exceptions were proposals to adopt written consent, where the average vote increased this year to 11.4% from 7.9% in 2020, but that was still below the level recorded in the past three years (15% to 20%). Nevertheless, Alliance reports that there were 41 majority votes for governance proposals, compared to 42 last year, with “universally accepted measures such as board declassification and the repeal of supermajority voting posting the highest margins.”
There were also several proposals to companies that signed the Business Roundtable's 2019 Statement on the Purpose of a Corporation requesting that they convert to public benefit corporations. As you may recall the BRT Statement moved “away from shareholder primacy” as a guiding principle and outlined in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. (See this PubCo post.) None of the shareholder proposals did well, tallying votes below 4% in most cases, with only one at almost 12%.
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A “public benefit corporation,” according to the Delaware General Corporation Law, “is a for-profit corporation…that is intended to produce a public benefit…and to operate in a responsible and sustainable manner. To that end, a public benefit corporation shall be managed in a manner that balances the stockholders' pecuniary interests, the best interests of those materially affected by the corporation's conduct, and the public benefit or public benefits identified in its certificate of incorporation.” To put it another way, as described in this article in the Institutional Investor, a PBC is a corporation that is “legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders' wallets….” Delaware legislation signed into law in 2020 makes it easier to slip in and out of PBC status. (See this PubCo post and this PubCo post.)
Similarly, proposals advocating worker participation on boards, whether through application of the Rooney rule or otherwise, also fared poorly—below 10%—although one garnered almost 18% in favor.
Compensation
Expectations were high that compensation adjustments related to COVID-19 would have a significant effect on say on pay, but according to Alliance, that did not really materialize—at least relative to other concerns. Through June, average support for say on pay was 90.9%, up slightly from 90.5% last year. In addition, although the failure rate increased to 2.4% from 2.1 last year, only 6.5% of companies received approvals below 70%, compared with 7.4% last year. Among the S&P 500, however, there were 16 say-on-pay vote failures, which Alliance characterizes as “record protest votes,” including among some companies that actually reduced CEO pay, compared to 12 during all of 2020. And there were 10 narrow wins among the S&P 500.
Alliance cites several comp consultants for the proposition that this year's failures were more likely the product of pay-performance misalignment than COVID-19. For example, Semler Brossy attributed 75% of failed say-on-pay votes among the Russell 3000 to pay-for-performance disconnects, problematic pay practices and/or special awards and mega grants, but only 1/3 to pandemic-related actions. Similarly, “Equilar posited that the pandemic likely exacerbated shareholder criticism of CEO pay that was already viewed as unnecessarily high.”
What's next?
Alliance notes that the pending changes tightening Rule 14a-8 could have some impact on shareholder proposals this coming year. Looking forward, however, a new effort to amend Rule 14a-8 is on the SEC's short-term agenda, and could involve attempts to backtrack on the amendments that were adopted last year. Also on the agenda are potential rulemakings regarding climate change disclosure, board diversity and human capital disclosure, all of which have been the subject of recent shareholder proposals, but could make some shareholder proposals superfluous. (See this PubCo post.)
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In October 2020, the SEC adopted amendments to Rule 14a-8 to modify the eligibility criteria for submission of shareholder proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post. Former SEC Chair Jay Clayton observed that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needed some work, and former Commissioner Jackson characterized the proposal as swatting “a gadfly with a sledgehammer.” (See this PubCo post.) Now, with a new majority in charge, Corp Fin may propose new amendments regarding shareholder proposals under Rule 14a-8. In March, Senator Sherrod Brown introduced a resolution to disapprove these rules under the Congressional Review Act, but the resolution was not adopted. (See this PubCo post.) The amendments, which became effective on November 2, will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The SEC agenda identifies 4/22 as the target date for issuance of a new proposal.
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