Environmental, Social & Governance Briefs

Recent blog posts focused on “E&S” shareholder proposals on human capital management, environmental issues, and corporate political activity. But the “G” in ESG is still a hot topic for investors, as demonstrated by the success of governance proposals in this year’s proxy season.

Here are some of the key observations on governance proposals in 2021. We’re tracking and reporting on these – and other – shareholder voting trends at Russell 3000 firms in partnership with ESG data analytics firm ESGAUGE, leadership advisory and search firm Russell Reynolds Associates, and Rutgers University’s Center for Corporate Law and Governance.

• The total number of filed governance proposals declined modestly in 2021, but some topics saw a significant increase in volume. In the Russell 3000, during the first half of 2021, shareholders filed 284 governance proposals, down from 299 in the same period last year and 313 in 2018. Shareholders submitted fewer proposals on topics such as director nominee qualifications (two in 2021 versus nine in 2020), special meeting rights (37 in 2021 versus 43 in 2020), separate CEO/chairman positions (39 in 2021 versus 46 in 2020), and board declassification (10 in 2021 versus 18 in 2020). But there was a noteworthy rise in proposals on written consent, which represented the largest category of governance proposals for the second year in a row (79 in 2021 versus 62 in 2020), proxy access (36 in 2021 versus 18 in 2020), and supermajority provisions (33 in 2021 versus 22 in 2020).

• Consistent with previous years, compromise or the omission of governance proposals was difficult to achieve, especially compared to E&S proposals. In 2021, 219 (or 77 percent) of filed governance proposals came to a vote, compared to 238 (or 80 percent) in 2020. By contrast, 158 out of 348 (or 45 percent) of E&S proposals came to a vote. Moreover, all proposals filed on director nominee qualifications, dual-class structure, and board size came to a vote, as well as 27 out of 36 (or 75 percent) of proxy access proposals.

• Average support for governance proposals reached record levels in 2021, both compared to previous years and to other types of proposals. In the Russell 3000, in the first half of 2021, support for governance proposals averaged at 40 percent, versus 27 percent in 2020 and 32 percent in 2018, and compared to 32 percent average support in 2021 for E&S proposals.

• More governance proposals received majority support compared to last year. Of those governance proposals that came to a vote, 40 (or 18 percent) received majority support, versus 32 (or 13 percent) in 2020. The 18 percent that passed compares to 22 percent for E&S proposals. Average support for certain proposals was notably high in 2021—board size (99 percent), board declassification (88 percent), and supermajority provisions (86 percent)—with all such proposals that came to a vote passing. And more proposals on supermajority provisions received majority support than any other topic in the 2021 proxy season (19 out of 19 of such proposals passed). But some proposals were less successful in terms of receiving majority support, including those on proxy access, dual class structure, splitting the CEO and Chairman positions, and director nominee qualifications.

• While companies in all business sectors except for the energy sector received governance proposals, those in health care and industrials faced the most investor attention. Roughly one-third of all governance proposals were filed and voted with such companies. (This is different from E&S proposals, as roughly one-third of those proposals were filed with companies in the consumer discretionary and financial sectors.) Additionally, both in absolute and relative terms, mid- and small-cap companies received more governance proposals than other types of proposals, indicating smaller companies’ continued misalignment with some investor expectations in traditional governance areas.

What does it mean for 2022?

Companies that are out of alignment with investor expectations in areas such as supermajority provisions, written consent, special meeting rights, staggered boards, and proxy access should be prepared to receive proposals and for them to pass. CEOs and boards, especially at smaller and mid-cap companies, should consider revising governance practices that are already common among larger caps. By removing wedge issues, they are less likely to be exposed not only to shareholder proposals but also “Big A” activism aimed at changing the board and/or the strategic direction of the company.

If you’d like to drill down on this year’s vote results, I encourage you to sign up for a demo of the ESG Advantage Shareholder Voting Screening Tool. It lets you generate customized reports on shareholder and management proposals based on topic, proponent, outcome, and company from 2018 through the current proxy season in the full Russell 3000. Best of all, with a single click, you can see the text of the proposal and the vote results — no need to navigate multiple filings or databases.