The 2022 proxy season is the busiest ever, with shareholders set to vote on a flurry of new environmental and social proposals. It is also a turning point for shareholders hoping to push companies on ESG, as more ambitious shareholder proposals meet concerns about the global economy.
Shareholders submitted a record number of proposals to U.S. companies this year, riding the tailwinds of the successes of the 2021 proxy season and benefitting from the Securities and Exchange Commission’s revised guidance that made it tougher for companies to restrict proposals from ballots. Some long-term shareholder took the opportunity to push companies to raise their ambition on environmental and social issues, but this annual meeting season has also seen shareholders reluctant to support those more ambitious proposals. Case in point: Politically conservative shareholder groups submitted a record number of their own proposals this year, seeking to rein in the process.
This proxy season, however, is moving ahead, and it is far from business as usual. Investors are reviewing a higher quantity of proposals and also looking at bolder proposals across new focus areas from social justice to carbon accounting.
First the numbers:
- 924 ESG proposals were submitted to companies this year, a record number, according to data tracked by investor intelligence firm Georgeson. Because some proposals are usually withdrawn after companies and shareholders negotiate, when all is said and done, about 621 proposals are likely to have been put in front of shareholders at U.S. companies in 2022, up from about 400 in 2021, Georgeson said.
- Shareholder proposals on environmental and social issues are getting less support in early voting. Semler Brossy reports the number of social and environmental proposals that received majority support from shareholders so far this year is down 11 percentage points and 20 percentage points, respectively, compared to the same period last year.
- 73 percent of 60 institutional investors said they expected ESG oversight to be a bigger issue in their votes for corporate directors this year, according to a survey from the EY Center for Board Matters, signaling investors are broadly looking for ways to increase their influence on companies beyond proposals.
Proxy season is always a sign of the times
The increase in ESG funds under management has predictably led to an overall increase in shareholder engagement. Faced with a bear stock market, inflationary pressures and recession warnings, institutional investors this proxy season are under more pressure from their clients to show how they engage with companies on ESG, whether it is by voting, submitting proposals or meeting with boards and investor relations teams.
Proxy voting is in many ways the essence of shareholder stewardship — the one chance a year for investors with long-term holdings to share their views with companies. Heading into a year with some economic pressure, there might be more short-term activists and more investors that vote with their feet, so ESG-focused shareholders are trying harder to make sure their points get across this year.
A less dramatic proxy season this year might just mean that shareholders and companies are finding common ground more easily.
It would be a mistake to focus too much on the numbers in this year’s annual meeting season. In a difficult macro environment, where U.S. market regulators are seriously planning to begin requiring comparable climate disclosures across the market and shareholders might face tougher rules to submit proposals, shareholder proposals are set to act more like a temperature check on ESG issues, regardless of whether they garner enough votes to pass.
Shareholder proposals always face long odds, and majority support is the exception to the rule. When a proposal gets less than majority support, it’s not a failure. It’s just a sign that shareholders were more likely to abstain or withhold their votes on that topic for any number of reasons. Shareholder proposals that get just 10 percent or 20 percent support from investors aren’t "voted down" or "rejected" — they are often still strong enough to send a message to a board of directors that investors care about a particular issue.
A winning (non-binding) shareholder proposal might mean a company has to issue a report, change a policy or conduct an audit. The outcomes often arrive unceremoniously a year later, but investors generally fight to get a shareholder proposal on the ballot knowing they might not win. In a challenging macroeconomic environment, the greatest use of shareholder proposals is to serve as that proverbial "canary in the coal mine" — a powerful reminder to a company’s leadership of an issue it might not be addressing.
What shareholders are backing in 2022
Before this proxy season, shareholder support for environmental proposals had grown as steadily as ESG, reaching an average of 40 percent support in 2021 for 404 proposals, according to data firm Broadridge. That support level is likely to decline this year, particularly as companies face so many more proposals. Amazon shareholders had 15 shareholder proposals on the ballot this year, and Alphabet shareholders faced 17 proposals, but none received majority support.
Shareholder proposals on the environment appear to be experiencing waning support, despite record submissions. Shareholders submitted 39 percent more environmental proposals to companies this year, according to Georgeson, and many proposals were more aggressive in nature. Proposals more frequently asked companies to increase emissions reporting to include Scope 3 emissions, and financial services firms faced proposals that asked them to stop financing fossil fuels. "Say on climate" proposals asked companies to disclose emissions and their plans to transition to net zero. But few of these proposals have passed so far, as BlackRock warned it was less likely to support environmental proposals this year because it found them too prescriptive.
This doesn’t necessarily mean companies or shareholders care less about the environment but is likely a sign that existing corporate environmental disclosures will face a reckoning around new commitments to net zero and new regulatory frameworks.
One focus for long-term investors this proxy season has been on voicing concerns against dual-class share ownership structures that tend to give early executives and founders a larger vote on their issues.
Earlier environmental shareholder proposals used to ask for simpler tasks — such as creating a sustainability report — but over 92 percent of the S&P 500 and 70 percent of the Russell 1000 had already created sustainability reports by last year. So this year’s proposals focused on more specific issues, asking companies to take it up a notch. Several companies faced proposals about whether their climate lobbying was aligned with the goals of the Paris Agreement and requests to increase reporting on Scope 3 greenhouse gas emissions. Toyota received a shareholder proposal urging it to move faster on electric vehicles. Williams-Sonoma received a proposal asking it to describe how purchased carbon credits fit into its net-zero accounting, but it was ultimately withdrawn.
A handful of environment proposals still got broad support from investors. Amidst growing losses from environmental catastrophes, several insurers were asked to evaluate greenhouse gas emissions associated with their underwriting, investments and insurance policies. Proposals received majority support at Chubb, Travelers and 47 percent support from independent shareholders at Berkshire Hathaway.
As companies face a tight employment market, a lingering pandemic and broader societal concerns about social and racial justice issues, human capital issues got a lot more attention from shareholders in submitted proposals this year.
A series of proposals asked companies to conduct racial equity audits of their staff or civil rights audits, or to disclose more about their plans and policies around diversity, equity and inclusion. Socially focused proposals also asked companies to address race- or gender-based pay gaps and evaluate if their sexual harassment policies were effective. About a dozen of these proposals have been voted on so far this year, while many others were withdrawn as companies and shareholders seemed willing to make agreements in this area. Shareholder proposals on reproductive rights were also new this year, with a proposal at Lowe’s receiving 32 percent support.
While environmental and social proposals draw a lot of attention, governance-related proposals on executive compensation and corporate boards were also a focus during this proxy season.
According to Georgeson, governance proposals this year focused more on issues such as separation of the role of the board chair and CEO or asking companies to keep workforce compensation in mind when setting CEO compensation. That’s a switch from years past, when board diversity proposals dominated and reflects new norms around the diversity of public company boards. Nearly half of all new directors appointed in the S&P 500 last year were people of color and 43 percent were women, according to Spencer Stuart.
One focus for long-term investors this proxy season has been on voicing concerns against dual-class share ownership structures that tend to give early executives and founders a larger vote on their issues. Pension funds in the U.K. and U.S. have launched a campaign against that ownership structure, and it’s likely to continue. Proxy adviser Institutional Shareholder Services has said it will generally recommend withholding votes from directors at all companies with unequal voting rights and multi-class stock structures, beginning in 2023.
This proxy season might end up looking a little muted compared to 2021, when 18 climate proposals received majority support and there was a lot of excitement around Engine No. 1’s successful proxy fight at Exxon Mobil. However, as Ceres noted at the beginning of this annual meeting season, over 100 climate-related proposals — about half of those submitted — were negotiated off of ballots before the votes even started, due to agreements between companies and the shareholder proponents. A less dramatic proxy season this year might just mean that shareholders and companies are finding common ground more easily.