Insights for What’s Ahead

• There was a sharp increase in the number of shareholder proposals filed and voted in 2022, driven by a growth in environmental and social proposals, suggesting that investor focus on ESG is accelerating. As of mid-July 2022, shareholders have filed a total of 813 proposals in the Russell 3000 and 642 in the S&P 500—the highest volume reported in each index in the last five years. Environmental and social shareholder proposals drove the increase, with Russell 3000 companies receiving 471 such proposals in 2022, compared to 403 in 2021, 339 in 2020, and 328 in 2018. Corporate boards should regard these demands as an opportunity for engagement, not only with the proponent but also with the firm’s major investors. Executives need to ensure their boards are fluent on the issues being raised, including mapping their corporate disclosures against investor policies and key stakeholder concerns. Boards should also consider making direct conversations between corporate directors and major shareholders an ongoing component of their shareholder engagement practices, focusing on the link between ESG issues and the company’s business strategy.

• Climate-related disclosure dominated the 2022 proxy season, with 1 out of 4 voted resolutions on this topic gaining majority support at annual shareholder meetings—an unprecedented performance for this proposal type. Companies that have not yet done so should consider the benefits of a process to gather the information outlined by the SEC in a March 2022 proposed rule that may become effective in the coming months. In particular, companies should be able to articulate: 1) their governance of climate-related risks and relevant risk management processes, 2) the likelihood that any identified risks may have a material impact on their business and consolidated financial statements in the short, medium, or long term, 3) how any identified climate-related risks have affected or are likely to affect their strategy, business model, and outlook, and 4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of their consolidated financial statements as well as on the financial estimates and assumptions used in the financial statements.
• Shareholder proposals on racial equity and civil rights audits have gained considerable traction in a short time. In the examined 2022 period, shareholders in Russell 3000 companies filed 43 proposals requesting companies to commission a third-party audit of the impact of their corporate policies, practices, products, and services on the civil rights of stakeholders, including ethnic and other minorities. This proposal type was first introduced in 2021, when nine went to a vote but none received majority support.^[2] This year, 31 of those 43 civil rights audit proposals were voted on and eight passed. Many boards may hesitate to endorse this practice: civil rights and racial equity audits can be costly, lengthy, and quite complex to conduct; their scope may be questioned, and their results disputed, which could exacerbate the problem they were meant to address. However, there may be situations where an audit is in fact warranted—for example, when the board believes that the company faces heightened litigation or reputational risk due to a corporate culture problem or is concerned about the possible misuse of advanced technology the company has adopted (think of facial recognition or technology acquiring sensitive customer data). In these situations, the main responsibilities of the boards include selecting a competent and independent auditor, clearly defining the scope of the audit, and determining to what extent the conclusions should be made public.

• Shareholders’ focus on corporate political spending continues, which should prompt boards that have not already done so to exercise oversight in this area and ensure that the company has the appropriate policies and controls in place to manage risk. In 2022, shareholders voted on 53 political spending proposals—including requests for disclosure on monetary contributions offered to political campaigns and on lobbying activities. Of those, four at large companies passed and 11 reached a support level of more than 40 percent of votes cast. The board should ensure that management has a thorough internal vetting process, including assessing whether the company’s political activities are consistent with its stated values.^[3]
• Directors and executives should be aware that some investors are now specifically targeting smaller firms on declassifying boards and adopting a majority voting standard. During this proxy season, shareholders granted majority support to five resolutions to declassify the board structure as well as four resolutions to change the standard for the election of directors from plurality to majority voting. Both practices have been widely adopted, and the few resolutions filed in these areas target smaller organizations. While some companies in that cohort have thus far remained immune to changes in their director election system, things may change. In particular, boards should take a careful and holistic look at changing their director election practices. Plurality voting and staggered boards can be seen as protections against activism; however, as shown by these shareholder proposals, they can also invite activism. Staggered boards can also be perceived as an impediment to board refreshment, and companies may wish to consider shifting to annual elections if it helps them adjust the composition of the board in a way that keeps pace with strategic needs.
• Support for company proposals on say-on-pay resolutions and director elections has declined. Senior executives and board members should be aware that institutional investors have introduced voting policies to hold individual business leaders accountable for shortcomings in the ESG area. The analysis of the last four years of say-on-pay resolutions shows a decline in average support level, higher failure rates, and a rising number of Russell 3000 companies receiving less than 70 percent for votes, a threshold that may attract additional scrutiny from proxy advisors and investors. Average support levels for board-proposed candidates in director elections have also been declining. In 2022, 75 directors nominated by management did not get elected—a multiple of the number recorded only a few years ago. While many factors can lead to a decline in investor support for directors, proxy advisors and major institutional investors have recently amended their voting policies to indicate their intention to hold specific board members accountable for perceived ESG shortcomings. Board members and C-suite executives should therefore remain educated about ESG issues of concerns to the investment community and the proxy advisors that often influence institutional votes. They can do so by maintaining open lines of communication with their largest shareholders throughout the year, by monitoring voting policies and stewardship reports, by benchmarking their company’s ESG disclosure practices against its peers, and by tracking the outcome of resolutions submitted during the proxy season (including those that were withdrawn from the voting ballot after private engagements).

About the 2022 Proxy Season Heat Maps

Proposals on topics that fall above the Y-axis demarcation line are those for which it was difficult to negotiate a withdrawal or to omit from the voting ballot. Proposals on topics that sit right of the X-axis demarcation line received high levels of shareholder support when voted on. And along the borders are the topics that could very well migrate into the red zone this upcoming proxy season.

Upper right-hand quadrant: Shareholder Proposals in the Red Zone

• Proposals on topics that were hard to get withdrawn or omitted and that received high levels of shareholder support when going to a vote.
• These proposals will very likely continue to create the most friction between companies and proponents, so boards will want to make engagement and disclosure on these topics, especially on corporate political activity, a high priority.

Lower right-hand quadrant: Shareholder Proposals in the Orange Zone

• Proposals for which it was somewhat easier to negotiate a withdrawal or seek their omission but still received high levels of shareholder support when going to a vote.
• These topics will likely continue to present challenges to boards, especially board diversity, workplace diversity, and climate-related issues. And these topics may move into the red zone if proponents become less willing to negotiate because of the high level of shareholder support these proposals receive.

Upper left-hand quadrant: Shareholder Proposals in the Yellow Zone

• Proposals on topics that were difficult to negotiate away or omit from the proxy statement but that received—on average—not as much support as their counterparts in the red zone.
• Even though these proposals garner lower levels of average support, boards should be mindful that with a little boost from institutional investors, some of these proposals (e.g., on gender/racial pay gap, human rights, and dual class structure) could migrate into the red zone in the 2022 proxy season. Therefore, board attention for these topics is warranted.

Lower left-hand quadrant: Shareholder Proposals in the Green Zone

• Proposals on topics that were rather easy to get withdrawn or omitted and received lower levels of shareholder support.
• Generally speaking, these proposals are least contentious and need less board attention. However, proposals on these topics still need to be monitored, as over time they can be modified to receive higher shareholder support and proponents can become less willing to negotiate a withdrawal.

The project is conducted by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with leadership advisory and search firm Russell Reynolds Associates and Rutgers University’s Center for Corporate Law and Governance (CCLG).