Amid Increasing Demand for ESG Disclosure,
Voting Support for Shareholder Resolutions on Environmental and Social Issues is Rising
A study by The Conference Board and Rutgers Center for Corporate Law and Governance (Rutgers CCLG) finds that voting support on proposals regarding companies’ sustainability practices has been steadily rising over the last few years, even though such proposals are still rarely approved. The main impetus comes from issues that have taken center stage in recent proxy seasons, such as the disclosure of corporate political contributions and lobbying activities, investigating the impact of climate change on the business, and the efforts to fill existing gender pay gaps.
Conducted in collaboration with FactSet and data mining firm IRGS Analytics, Proxy Voting Analytics (2015-2018) reviews more than 2,500 annual general meetings (AGMs) held at Russell 3000 corporations in the January 1 and June 30 period. The study details aggregate data on shareholder proposals, management proposals, proxy contests, and other shareholder activism campaigns, segmenting such data for 11 business sectors in accordance with GICS, the Global Industry Classification Standard. To highlight differences between small and larger companies, findings in the Russell 3000 sample are also compared with those for companies that, at the time of their AGM, were in the S&P 500 index. The publication is part of The Conference Board Corporate Intelligence portfolio of benchmarking data and analysis on board practices, executive and director compensation, corporate communications and investor relations, corporate sustainability, and corporate citizenship and philanthropy.
Proposals related to social and environmental policies of corporations received, on average, the support of just 25.7 percent of votes cast at general meetings. “This finding indicates that shareholders of U.S. public companies continue to believe that the board of directors and senior management are better suited to determine the business viability of certain sustainability activities, and that one-size-fits-all policies may lead to inefficiencies or capital misallocations,” said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and the author of the report. “However, our study also unveils a number of trends suggesting that the demand for additional disclosure in this area will continue to grow in the coming years.”
Besides the increase in the volume of these resolutions, two factors may be indicative of their future. First, even though almost all of the proposals fail to receive a majority vote, there is a clear upward trend with respect to average support levels. For resolutions on political contribution disclosure and lobbying, the 28 percent for votes of 2018 represented an uptick from the 24.6 percent in 2017 and the 24 percent in 2015. Resolutions on human rights went from 10.7 percent in 2017 to 17.5 percent in 2018. Health issue-related resolutions received the support of 21.4 percent of votes cast in 2018, up from 18.8 percent in 2017 and only 6.1 percent in 2015. Further, the study reports that abstention rates have dropped from 10.9 percent of votes cast in 2014 to a mere 2.5 percent this year—a figure consistent with the abstention rate that The Conference Board has observed for years for resolutions on executive compensation and corporate governance. Only a handful of social and environmental policy proposals passed in 2018. They include two at energy company Kinder Morgan Inc. (NYSE: KMI), for the publication of a sustainability report and the assessment of the risk that policies requiring the company to address climate change may pose to the business; and one sponsored by Calvert Investment Management at transportation company Genesee & Wyoming (NYSE: GWR), requesting the setting of greenhouse gas emission targets.
“Traditional corporate governance issues that kept investors and corporations busy in the last years, such as majority voting and board declassification, appear to be well past their peak hour, possibly because of saturation,” said Matteo Gatti, Professor of Law at Rutgers Law School and affiliated with the Rutgers CCLG. “In 2018, investors centered their attentions on the right to call special meetings by shareholders, which was the top corporate governance-related resolution at Russell 3000 corporations, while majority voting and declassification barely made the list.”
Other key findings from the report:
- Activity in the area of executive compensation by investment funds affiliated with labor unions continued to soften as those shareholders either ceased their proxy voting initiatives or showed new interests, especially in social and environmental policy issues. The 2018 season marked another sharp decline in the number of shareholder resolutions submitted by multiemployer investment funds affiliated with labor unions, such as the United Brotherhood of Carpenters and Joiners of America or the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). There were only 45 resolutions filed by this type of proponent in 2018 (7.05 percent of the total), down from the 80 resolutions (11.02 percent) of 2015 and the 151 of 2010. This means that, in total, proposal volume by labor-affiliated funds dropped 70.2 percent from 2010 levels, a phenomenon that is partially responsible for the lower aggregate volume of shareholder proposals recorded in 2018. Most commentators agree that the gradual, steady decline is attributable to the introduction of the say-on-pay vote and the federal regulation imposing more widespread executive compensation disclosure, which had traditionally been main topics of concern for labor unions. Some of these investment funds, including the Sheet Metal Workers’ National Pension Fund, have completely exited the activism scene in the last few years, while others have scaled back their involvement.
- The rate of withdrawals of shareholder proposals doubled from a few years ago as companies voluntarily implement their own reforms. In 2018, the number of voluntary withdrawals of shareholder proposals in the Russell 3000 (11.1 percent of the total submissions in the Russell 3000, up from 8.7 percent in 2017 and a mere 5.9 percent in 2012), when combined with omissions by management, exceeded the number of granted SEC no-action letters to companies seeking exclusions. Withdrawn proposals were mostly submitted by gadfly investors and the investment vehicles of stakeholder groups and religious orders—all investor types that rarely elevate these matters to an outright proxy solicitation and would rather use the precatory proposal as a tool to receive the attention of their portfolio companies on issues of concern. However, in 2018, 23 of the 71 withdrawn proposals were sponsored by investment advisers (mostly, of hedge funds), for which the decision to drop the request was likely the result of private discussions or settlements with management. Moreover, following the introduction of voting guidelines on board responsiveness by proxy advisory firm ISS, withdrawals may be prompted by the company’s decision to either voluntarily implement the requested change or to submit its own proposal on the same topic to mitigate the risk of wide opposition to management’s nominees to the board of directors. Under its policy, ISS recommends that institutions voting on director elections exercise close scrutiny in those situations where a company failed to implement a precatory shareholder proposal that had received majority support of votes cast at a prior AGM.
- As large groups of institutional investors reduced their 14a-8 filings or shifted their attention to new topics, the percentage of voted proposals winning the support of a majority of shareholders reached a new low and not a single resolution related to executive compensation passed in 2018. The percentage of voted shareholder proposals receiving majority support has inexorably declined since 2009, from more than 20 percent to less than 11.2 percent in the Russell 3000 sample and from 17.3 percent to eight percent in the S&P 500. This downward trend is attributable to a decline in the volume of proposals on topics that are traditionally widely supported by shareholders (for example, majority voting and board declassification) and an increase in the share of a new type of shareholder resolutions (including those on environmental and political issues) that do spark a debate on emerging corporate policies but that fail to obtain majority support. In the examined 2018 general meeting period, on average, more than 70 percent of votes on shareholder proposals submitted by other stakeholders, other institutions, and religious groups were against the proposal. The highest level of votes for was observed for proposals by public pension funds (41.4 percent), individuals (35.7 percent), and hedge funds (35.1 percent). Public pension funds and individuals had the highest percentage of voted proposals receiving majority support (25 and 12 percent, respectively). It is notable that none of the executive compensation proposals voted during the period received majority support in 2018.
- In the year of the nascent #MeToo movement, large pension funds have become more vocal about the need for safe work environments while other shareholders have urged prominent companies to address gender pay gaps and link executive compensation to human capital management. The #MeToo movement has barely turned one year old. In a first sign of the significance of the current climate, a couple of large and influential public pension funds (CalPERS and Blackrock) followed the early example of the New York State Common Retirement Fund and were receptive of recommendations included in a recent publication by the Council of Institutional Investors (CII), announcing revisions to their voting policies meant to promote corporate practices combating sexual harassment in the workplace. Walmart (NYSE: WMT), Facebook (NASDAQ: FB), Alphabet (NASDAQ: GOOG) and Texas Instruments (NASDAQ: TXN) were among the recipients of gender pay gap proposals in 2018. There were eight such proposals in the Russell 3000, with five that advanced to a vote at the target companies’ AGMs. Socially responsible investment fund Arjuna Capital filed one for the third consecutive year at Google’s parent company, Alphabet, in the wake of a U.S. Department of Labor investigation as well as leaked employee-gathered data suggesting gender pay gaps across the workforce. None of the proposals of this type, including the Alphabet one, passed. However, at least in some cases, their influence appeared to extend beyond the annual shareholder meeting vote. Following the filing of Arjuna’s proposal, for example, Google published wage data showing a zero percent statistically significant pay gap for 89 percent of its employees worldwide.
- Shareholders’ right to call special meetings tops the list of corporate governance-related resolutions, while issues that had galvanized investors for over a decade barely made the list. The historical analysis by topic of filed shareholder proposals on corporate governance shows that issues on which shareholders had frequently been putting pressure on companies for over a decade barely made the list of submissions for 2018. For example, only five proposals on the adoption of majority voting in director elections went to a vote at Russell 3000 companies in the first six months of 2018, down from 14 in the same period of 2017; according to an earlier edition of the study, there were 27 in 2014. Similarly, there were only five voted proposals on board declassification in 2018, down from the nine in 2015, 29 in 2013 and 44 in 2010. Instead, it was the request to allow shareholders to call special meetings that topped the 2018 list of governance-related proposals by volume. Their proponents were primarily individual investors (including John Chevedden, Kenneth Steiner, and corpgov.net publisher James McRitchie). Investors voted on 58 of these resolutions at Russell 3000 companies in the first six months of the year, a number that doubled the one The Conference Board recorded in the same time period of 2017 (23 resolutions) and was more than three times as big as the one seen in 2015 (17 resolutions) and 2013 (10 resolutions).
- Although activism campaign announcements in the Russell 3000 were up in 2018, the number of campaigns related to a shareholder meeting declined, as some hedge funds choose to agitate for change without even filing a shareholder proposal. In the first half of 2018, activist investors announced 254 campaigns against Russell 3000 companies, compared to 240 in the same period in 2017 (a 5.8 percent uptick). Activism campaign announcements include proxy contests, exempt solicitations, and any other public announcement of the investor’s intention to agitate for change at a target organization—whether through a press release, an appearance on a CNBC talk show, a Twitter chat, or the filing of a lawsuit. However, the number of campaigns pertaining to a vote at a Russell 3000 shareholder meeting held in the January 1-June 30 time period declined slightly in 2018, to 147 from the 149 of the prior year. The discrepancy between announcements and campaigns related to a shareholder vote indicates that a growing number of activists are agitating for change without even filing a shareholder proposal. For example, on February 2018, Barington Capital sent a letter and detailed presentation to the Chairman and CEO of restaurant chain Bloomin’ Brands, Inc. (NASDAQ: BLMN), recommending that the company should implement a variety of measures to improve shareholder value—including the spin-off of its smaller brands, measures to enhance guest experience and improvements to the company’s corporate governance and board composition (in particular, the addition of new independent directors with strong backgrounds in the restaurant industry). The letter was publicly disseminated though a press release but it was not followed by an explicit threat of a proxy fight or an exempt solicitation.
- Proxy contests were the only type of activist campaign related to a shareholder vote to increase among Russell 3000 companies in 2018. However, the outright success rate of dissidents reached a record low this year, with the majority of such contests resulting in settlements.Among types of activist campaigns related to a shareholder vote, proxy contests were the only one that registered an increase in 2018. Activists engaged in 34 proxy contests against Russell 3000 companies that held a shareholder meeting in the first six months of the year, compared to 28 launched in the corresponding 2017 period, 49 in 2015, 35 in 2013 and 23 in 2010. Companies in the consumer discretionary sector faced seven solicitations and companies in the industrials sector were exposed to six; there were four contests in each of the energy, financials, real estate and information technology sectors, while only one in the telecommunications sector. Hedge funds have consistently been the most active dissident type. In 2018, they mounted 19 (or 55.9 percent of the total) of the voting fights against management, followed by other stakeholders (6 proxy contests, or 18.2 percent of the total), investment advisers (six contests, or 17.6 percent), and individuals (2 contests, or 5.9 percent). The vast majority of such contests (23, or 67.6 percent) were motivated by an attempt to gain a seat on the board of directors. In 2018, for the first time since The Conference Board began tracking proxy contest outcomes, the majority of initiated proxy contests resulted in a settlement between the dissident and the company, where the company made certain concessions to obtain the support of the activist investor. By the same token, in 2018 the outright success rate by dissidents was the lowest recorded by The Conference Board since 2010, where dissidents won only one of the 23 proxy contests mounted then against Russell 3000 companies (or 4.3 percent).
Source: Proxy Voting Analytics (2015-2018)
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