- Proposal preparation: Be ready for ESG proponents
We are amidst a paradigm shift with respect to investor support of environmental and socially oriented shareholder proposals, addressing wide-ranging topics such as: emissions reductions targets, pollution, diversity, equity and inclusion, climate transition reporting, political spending, human rights — and the list continues to grow.
In this rapidly evolving landscape, historic voting decisions alone are no longer a clear predictor of future outcomes. Understanding how to respond to
shareholder proposals requires holistic evaluation and thorough understanding of the proponent, your investors, and your company's ESG profile to determine likely voting outcomes and potential paths to settlement. Even if your company seems at low risk for shareholder proposals, it's important to maintain awareness of the current landscape and how it translates into investors' evolving expectations, particularly as ESG considerations are increasingly influencing director election determinations1.
Proposal volume and support are increasing
The ESG proposal landscape is constantly changing, and as a result your company faces more significant governance and reputational risk from more directions than ever before. With the prevalence of ESG comes a wealth of themes that investors can use as tools for enacting corporate change. Therefore, it's of the utmost importance to invest adequate time and resources to follow and understand the evolving proposal landscape, in order to prepare for and respond to proponent enquiries, campaigns or proposals.
We witnessed record-high support for proposals addressing the following issues: political spending, plastic pollution, greenhouse gas emissions, deforestation and board and workforce diversity, as well as management-supported proposals relating to climate change, diversity, equity and inclusion (DE&I) and human rights.
Average support increased across ESG proposals, with environmental proposals accounting for the largest year on year increase. Overall, 71 shareholder proposals passed in 2021, with almost half of them (33) addressing environmental or social issues. This is a considerable increase compared to a total of 45 passing in 2020 and 50 in 2019, but consistent with investors' significant focus on ESG-related issues, and accompanying revisions to proxy voting guidelines to incorporate that focus heading into the peak 2021 proxy season. These results reveal that investors' heightened focus on ESG risks and opportunities is having a meaningful impact on stewardship decisions.
The 2021 U.S. proxy season produced unprecedented results including 787 shareholder proposals submitted throughout the season. Almost half of passing proposals addressed E&S issues.
Climate change was the prevailing theme across the vast majority of the 36 environmental proposals that reached a vote, 13 of which passed.
Meanwhile, of the 122 socially focused shareholder proposals that went to a vote, 20 passed. The majority of those were related to political spending and diversity-related matters.
There were 246 governance proposals that reached a vote, with 38 passing. Most of these were related to majority voting standards and shareholder action by written consent.
Develop a strategy in response to proposals
Receiving a shareholder proposal can often trigger unexpected organizational "emotions" and burden already packed schedules — but an organized and considered approach can help diffuse the situation.
The first step in preparing to respond to a shareholder proposal is to gain a comprehensive understanding of each proponent's background and motivations. Some of the questions you can ask are: Who is this shareholder or advocacy group? What are the proponent's motivations in submitting this proposal? Have they sponsored similar proposals in the past? If so, what were the outcomes?
Over the last 18 months, company purpose has been thrust firmly into the spotlight, meaning now more than ever, organizations must work to adequately understand investor needs and expectations. Conducting a broad analysis of your shareholder base assists your organization to form a comprehensive understanding of the composition of your shareholder base, their priorities and motivations in the constantly evolving ESG landscape. Undertaking this analysis assists in refining the strategies available to your organization to help you achieve a successful outcome.
Shareholder proponents often submit their proposals in order to open a line of communication with an organization. Depending on the proponent, if you are willing to start an early dialogue, you are more likely to foster a positive relationship and reduce the likelihood of receiving future proposals. It's important to keep in mind that every proponent is unique and will require a considered, tailored response.
To further bolster your strategy, look to understand whether the proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis are likely to support the proposal and what impact those recommendations may have on your investors. Proxy advisory recommendations can at times, significantly influence proposal vote outcomes, so this is an important step in setting your company up for a successful outcome.
Ensure you have a vantage point for any situation
You need a partner that can help you navigate through the complexity. When you partner with Georgeson, you'll be working with a team that can help you control your outcomes by preparing your executives, the board of directors — and you — to respond to the broad spectrum of investor proposals and be equipped to defend against them, if necessary. Importantly, we can advise you on your best course of action based on potential outcomes.
Georgeson's experienced advisors will support you throughout the year, working to mitigate the effects of any unexpected situations. Leverage our decades of experience in understanding how proxy advisors and institutional investors think and act in varying situations — and learn how to counteract any negative developments.
1State Street Global Advisors (SSGA) may vote against board members at S&P 500 companies that are laggards based on their R-Factor scores and cannot articulate how they intend to improve. In addition, beginning in 2022, SSGA may vote against directors at companies that consistently underperform their peers year on year.