The 2024 proxy season saw another increase in the number of environmental and social shareholder proposals that reached a vote, though support continued a downward trend. However, an increase in support for governance-related proposals buoyed overall shareholder proposal support.
After environmental and social proposals saw a record 33.3% average support in 2021, such proposals only garnered 16.2% support in the latest proxy season, Diligent Market Intelligence, a platform that provides clients with ESG data and analytics, reported earlier this year.
The increase in submissions was propelled by a rise in anti-ESG submissions — which were not well-received by investors — but increased support for governance proposals kept overall ESG resolution approval rates at 23%, according to Morningstar Sustainalytics.
Last month, Diligent Market Intelligence released its 2024 Investment Stewardship report, adding further insight for a retrospective on the proxy year.
Among the governance issues stabilizing support, the report found 91.5% support at S&P 500 and Russell 3000 companies for proposals that put investors in the conversation on executive pay. Additionally, Diligent Market Intelligence Editor In Chief Joshua Black told ESG Dive, there has been a shift in how shareholder proposals are used.
“Investors are increasingly focused on good governance and are taking basic governance structures quite seriously,” Black said in an interview.
Editor’s note: This interview has been edited for length and clarity.
ESG DIVE: Tell me a little bit about your background and what brought you to Diligent.
JOSHUA BLACK: I've been covering shareholder activism, corporate governance for over a decade now. I started a company called Activist Insight, which was rolled up into Insightia, which was then acquired by Diligent in 2022 and have been here ever since.
So lots and lots of job titles, same old seat. But, over the course of that, I've been expanding my coverage, and we've added a lot of data sets since we became part of Diligent. [That has allowed DMI to take a] more holistic view of the shareholder engagement and governance space.
Take me through the trends in this year’s investor stewardship report.
There was a big upswing in support for governance shareholder proposals, which was interesting to us. And it does look like, even with some changes in where those proposals were targeted, there was more support from investors generally.
We saw a lot of support for adopting majority voting, de-staggering [board member terms] or declassifying boards. Things like that, which have always been historically quite popular with investors, were given a little boost in the last year or so.
Compensation was up along with the stock market, but say-on-pay approval rates increased for the second year in a row, which was unusual. Shareholder engagement decline of one time awards and better alignment with performance was probably behind that.
On the theme of governance, we saw a lot of targeted voting around the nomination and governance committee chair on the board.
There's been a big theme of investors moving away from using shareholder proposals as a kind of pretty blunt tool to express their viewpoints to engaging and voting on management resolutions in order to express their viewpoint.
So if you think about it, shareholder proposals are someone else setting the agenda, whereas major investors want to address the same systemic risks with companies across their portfolio. So they're developing policies and ways of voting that express those standards and approaches. There was a lot of voting based on nominating and governance, holding the keys to shareholder rights, board diversity, board composition and independence.
What would you attribute that increased focus on governance and shareholder rights happening at the same time as a continued decline in support for environmental and social resolutions to?
Governance has always been a key component of investor stewardship obligations. It's kind of the first thing [investors] think about when they look at a board and try to assess how a company is run from the outside. In many ways, the [environmental and social components of company strategies] descend from governance.
So “E and S” oversight is important and reflects the overall governance of the company. There's plenty of evidence now that shareholder proposals have kind of moved on from gathering information and promoting transparency at the company level to setting targets, requesting more detailed information on transition plans.
And I think it's fair to say companies aren't on the same page as the shareholder proponents making these proposals. I think what backs that up, to some degree, is not only the investors saying that these proposals are more prescriptive [through their votes], but also through the SEC no-action process excluding more proposals.
I think climate and social issues and things that have traditionally fallen under the “E and S” bracket are still very important to companies. I think they're still engaging on those, they're still monitoring their portfolio for risks. And for companies that maybe have set targets and aren't necessarily backing those up with action, it is moving to a conversation between the investor and the company, increasingly, without the sort of third party involvement of the shareholder proponents.
How much of the decrease in support for environmental and social proposals would you attribute to companies agreeing with investors ahead of time?
A lot of shareholder proponents have got a lot smarter about negotiating withdrawals, and that process has definitely become kind of smoother and better practiced. Companies are finding ways to avoid the hassle or the spotlight of having one of these [proposals] on their ballot.
In many cases, it helps further the understanding of what the company is actually doing.Their environmental and social journey, record and strategy is often buried away. And the engagement with both shareholder proponents and institutional investors gives them an opportunity to lay out exactly what they've been doing and the progress they've made.
What trends do you expect we’ll see in the 2025 proxy season?
We'll see a lot of shareholder proposals. We're seeing them on all kinds of topics now. We're probably going to see more, not political, but partisan groups involved in this. There will probably be some shareholder proposals around [diversity, equity and inclusion], and there will be some uncomfortable topics for companies.
I think there will be more on the governance trend, including more proposals for majority votes and declassifying boards. Independent board chairman proposals come up quite frequently, and those can be ones to watch out for.
There will still be plenty of environmental, social ones. I don't know if there will be so many around lobby, political lobbying next year. But we tend to see those around election cycles, so if not next year, then probably quite soon after.
What is driving increased support for independent board members?
It's been a long-term trend. The concept is not new, but there are situations in which it is going to become particularly relevant.
There are companies that are succession planning and thinking about changing leadership or concentrating power by combining the CEO and chairman roles. There's probably been a fair amount of turnover of leadership with the pandemic that kind of skewed some tenure as people stayed on, and then suddenly there's a rush of recruitment.
So I think succession planning is in a lot of people's minds. It's been a high-profile topic at a couple of companies this year. And having an independent chairman may be a way to better prepare the board to recruit, in the event the CEO moves on.
What would you say are some of the most misunderstood things about the shareholder process?
I think one common misconception is that investors have stopped caring about ESG. Certainly the words are used less frequently now. It isn't quite the marketing tool that it once was. But you still have growing stewardship teams at institutional investors combing their portfolios for risks and trying to understand what companies are doing, how much they match up with their peers and where threats to the stability of their portfolio might emerge.
Just because your company is producing record profits and [total shareholder returns] are great, that doesn't mean that stewardship teams are going to be uninterested in your externalities. Because they own a lot of other companies in their portfolio, and if those are affected then that impacts the value that they provide to their investors.
And I'm not sure if this is a misunderstanding, but it's not commonly known or talked about. But investors retain the same kind of interest in human capital, talent and workforce — you can call it welfare, safety, availability — that they had during the height of the talent war. Those issues are still pertinent, and companies are advised to think strategically about what they're doing to make sure that their workforce, as a valuable asset, is protected.
What are the global factors that are pushing U.S. companies to do more on ESG issues?
Companies — certainly multinational companies — are increasingly required to report on their emissions, including scope 3, as long as they're doing a relatively small amount of business in the [European Union].That is driving a lot of the ESG work that companies are doing.
You also have some of that in the U.S. with California. It's very easy for California to set the tone for the U.S. ESG space, with its [since overturned] board diversity rules and ESG climate emissions reporting rules.
Elsewhere, Asia is also leaning into the ESG stewardship and governance conversation.You still see the kind of focus on board independence and board composition that was part of the conversation in the U.S. and Europe a little bit further ago. But certainly climate disclosure is kind of a worldwide phenomenon. And now you have the roll up of the different standard setters into the [International Sustainability Standards Board]. So that is more centralized, and it's probably easier, in some respects, for companies to identify one set of standards that their investors might be looking for globally.
Is there anything else you’d like to highlight?
We're not seeing as many female board appointments as we did a couple of years ago. That's trending down and might be something to watch.
A lot of boards had to address changing shareholder demands quite quickly. [In addition to] the California board diversity rules, proxy advisors and institutional investors set principles for board diversity.
Companies may have met those initial goals; there's probably some that still haven't. But I would expect board diversity to continue to be a topic of conversation, and companies still need to cast a wide net. In fact, AllianceBernstein just put out a position paper on age diversity on boards, saying that boards with at least one person under 50 tend to perform better. So there will be different iterations of what board diversity means, but it's something for companies to continue to consider.
