The 2023 Proxy Season May Be the Most Challenging Yet Expect more shareholder proposals, more big “A” activism, and less support for directors

A new report by The Conference Board forecasts that the 2023 proxy season is bound to be even more challenging than in previous years. The report identifies several factors that will contribute to a tumultuous season ahead, including:

• The overall volume of shareholder proposals will likely continue to rise.
• There will be an increase in “anti-ESG” proposals, which often ask for the same action as “pro-ESG” proposals but have different rationales and consequences if they are approved.
• Asset managers have adopted policies that will lead to more votes against directors on, among other things, governance practices and problematic compensation packages.
• Investors’ diminishing tolerance for adjustments, discretion, and special grants in executive compensation is expected to result in lower levels of support for company say-on-pay proposals.
• Big “A” shareholder activism is likely to rise, due in part to the current economic environment and the implementation of the SEC’s universal proxy rule.

The insights on the 2023 proxy season are based on a review of management and shareholder proposals at Russell 3000 companies for (full years) 2021 and 2022, as well as recent discussions with leading US public companies and institutional investors with over $20 trillion in assets under management.

The Conference Board produced the study with ESG analytics firm, ESGAUGE, in collaboration with Russell Reynolds Associates and Rutgers University's Center for Corporate Law and Governance. Insights from the new analysis include:

1. Overall Takeaways: Shareholder Proposals
   • 2022 saw a sharp rise in the volume of shareholder proposals in the Russell 3000.
     • E&S proposals drove the increase: In total, 871 proposals were filed in 2022 compared to 798 in 2021. And of the 871 proposals filed last year, 512 were E&S proposals.
     • E&S proposals saw high withdrawal levels: 34 percent of such proposals were withdrawn. At the same time, compared to 2021, E&S proposals were less likely to be omitted, a result of the SEC’s Staff Guidance on the omission of certain types of shareholder proposals.
     • Governance proposals were, yet again, most likely to come to a vote: 82 percent were voted on.
   • Average support for shareholder proposals dipped to 31 percent in 2022 from 35 percent in 2021.
     • Driving the decrease: It is attributed to declining support for both governance and E&S proposals. In fact, average support in all E&S areas (including environmental, social, and human capital management proposals) declined compared to 2021.
   • The 2023 Proxy Season: What to Expect
     “Declining average support for shareholder proposals on environmental and social topics is not a sign of ESG backlash but does reflect factors that could continue into 2023,” said Merel Spierings, author of the report and researcher at The Conference Board ESG Center. “These include the nature of the proposals, especially those that are of lower quality, less relevant to the company’s business, or reflect overreach by the proponent; the rationale offered by the proponent; the nature of the recipient, such as companies that already have strong ESG records; and investors seeking common ground with companies on E&S issues.
2. Governance Proposals: 2022 Highlights
   • In 2022, the number of filed and voted on governance proposals declined in the Russell 3000.
     • Governance proposals decreased: 272 proposals were filed versus 316 in 2021. Additionally, the number of proposals voted on dropped from 241 in 2021 to 222 proposals in 2022.
     • Average support also declined but still surpassed that of E&S proposals: Average support decreased, going from 41 percent in 2021 to 37 percent in 2022. Still, more of such proposals passed compared to E&S proposals (15 percent versus 11 percent).
   • Proposals on special shareholder meetings surged.
     • A dramatic rise: Special shareholder meetings increased markedly from 37 in 2021 to 115 in 2022. Furthermore, a vast majority (96 percent) came to a vote.
     • Average support increased: The average support of these proposals also grew, from 34 percent in 2021 to 37 percent in 2022.
     • Passage also increased: Whereas 4 proposals passed in 2021, 8 passed in 2022.
   • The 2023 Proxy Season: What to Expect
     “It’s important not to ignore the G in ESG. In fact, we expect that governance proposals will be both more likely to go to a shareholder vote–and receive higher levels of support at annual meetings—than environmental and social proposals,” said Paul Washington, Executive Director of The Conference Board ESG Center. “Major institutional investors are taking a harder line on governance issues, such dual-class shares, staggered boards, over boarding, and board diversity. By contrast, as they are trying to separate the wheat from the chaff in environmental and social proposals, they are quite open to listening to companies explain the real-world implications of approving shareholder proposals in those areas.”
3. Environmental Proposals: 2022 Highlights
   • In 2022, the number of environmental proposals filed and voted on increased sharply in the Russell 3000.
     • Environmental proposals surged: 2022 saw 146 proposals filed, compared to 85 in 2021. And 65 were voted on, compared to 31 in 2021.
     • Driving the increase: It was driven by climate-related proposals, of which 102 were filed.
     • But average support declined: While more proposals passed compared to 2021, as a result of more proposals coming to a vote, average support declined, from 40 percent in 2021 to 34 percent in 2022.
   • Plastic pollution was the most successful environmental topic in terms of average support.
     • Average support dipped but was still higher than other E&S topics: Average support ticked down to 52 percent from 53 percent in 2021. Still, it was the only E&S topic receiving average majority support in 2022, compared to five topics in 2021.
   • 2023 Proxy Season: What to Expect
     “Climate-related proposals will likely continue being a dominant theme in 2023 but expect a growing number of proposals on certain other environmental topics,” said Umesh Chandra, Executive Director of ESGAUGE. “Companies should anticipate increasing levels of shareholder proposals on issues such as biodiversity, plastic pollution, and deforestation.”
4. Human Capital Management and Social Proposals: 2022 Highlights

   
   Human Capital Management Proposals

   • In 2022, the number of human capital management proposals grew substantially, and more of such proposals came to a vote.
     • HCM proposals increased: 2022 saw 175 proposals filed compared to 134 in 2021. Among these proposals, 100 were voted on compared to 56 in 2021.
     • But relatively fewer proposals passed, and average support declined: 14 passed compared to 13 in 2021. Average support also dropped from 36 percent in 2021 to 27 percent in 2022.
     • Proposals on racial equity and civil rights audits gained traction: 43 proposals were filed compared to 9 in 2021. And this year, 31 were voted on compared to 9 in 2021. Furthermore, last year’s proposals were likely to go to a vote (72 percent) and received significant shareholder support (33 percent).

   Social Proposals

   • In 2022, the number of social proposals increased. Compared to other E&S areas, these proposals came to a vote most frequently.
     • Social proposals rose: 2022 saw 191 social proposals filed compared to 176 in 2021. Moreover, 136 were voted on versus 98 in 2021.
     • But passage and average support declined: 5 proposals passed compared to 15 in 2021. Average support also dropped, from 28 percent in 2021 to 22 percent in 2022.
   • Shareholders’ focus on corporate political activity continued.
     • Corporate political activity proposals increased: 98 proposals were filed compared to 75 in 2021. Among these proposals, 58 were voted on compared to 50 in 2021.
     • Traditional lobbying proposals were most likely to come to a vote: As was the case in 2021, among corporate political activity proposals, those relating to traditional lobbying were most likely to come to a vote (76 percent).
     • The health-related lobbying proposal had a successful debut:New in 2022 was the proposal on health-related lobbying. The three proposals that went to a vote reached an average support of 42 percent.
       • That marks the third-highest level of average support for any E&S proposal, only behind plastic pollution and employee arbitration policy proposals.
   • 2023 Proxy Season: What to Expect
     “Although companies may choose to implement shareholder proposals that receive majority support, they will still want to keep a cost-benefit analysis in mind when doing so,” said Merel Spierings, author of the report and researcher at The Conference Board ESG Center “For example, companies have invested substantial resources in producing reports on racial equity audits, only to find that the resulting report received little, if any reaction, including from the proponent and major investors who supported a shareholder proposal on the topic.”
5. Management Proposals: 2022 Highlights

   Director Elections

   • In 2022, average support for directors continued to decline in the Russell 3000.
     • Average support decreased slightly: Average support for directors dipped to 94 percent from 95 percent in 2021.
     • As in prior years, directors at the smallest companies received the lowest average levels of support: Directors at companies with revenues under $1 billion received 90 percent average support, while directors at companies with revenues above $1 billion received 95 percent average support.
   • The 2023 Proxy Season: What to Expect
     “Looking ahead, support for director elections will likely continue declining. In 2023, major institutional investors will not wait for a shareholder proposal to address governance topics,” said Justus O’Brian, Co-Head, Board & CEO Advisory Partners of Russell Reynolds Associates. “Rather, companies whose governance practices are out of alignment with investor expectations will see a decline in support for incumbent directors even without a shareholder proposal on the ballot. These negative votes will likely concentrate on members of committees that are—or should be—responsible for the subject matter.”

   Say-on-Pay

   • In 2022, average support for company say-on-pay proposals declined.
     • Average support decreased in the Russell 3000: It dipped to 89 percent from 90 percent in 2021.
     • The share of proposals receiving between 50 to 70 percent approval rate rose: The share increased from 4 percent in 2021 to 6 percent in 2022.
       • 70 percent often marks the threshold below which proxy advisors and investors more closely scrutinize companies’ responsiveness to shareholder concerns.
   • The 2023 Proxy Season: What to Expect
     “In the upcoming proxy season, the levels of support for say-on-pay proposals will continue declining. The number of companies receiving a negative say-on-pay vote will likely further increase, especially at companies that are not providing sufficient context and detail on executive compensation decisions,” said Matteo Gatti from Rutgers Law School's Center for Corporate Law and Governance. “Moreover, investors’ tolerance for adjustments to programs is diminishing, making them more likely to vote against say-on-pay proposals.”