14 minute read 27 Jul 2022
Man on bridge in jungle

Four key takeaways from the 2022 proxy season

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors
14 minute read 27 Jul 2022

Learn about changing stakeholder expectations, key takeaways from the 2022 season and what questions the board should be asking.

In brief

  • Support for environmental/social shareholder proposals narrowed amid a flood of more prescriptive proposals, corporate progress and pressure on the energy market.
  • Despite stricter voting approaches, average support for directors held strong, with companies and boards satisfying at least minimal investor expectations.
  • Proxies are evolving to address investor interest in how ESG is governed, including related committee responsibilities and director qualifications.

Environmental, social and governance (ESG) matters continued to take center stage this proxy season with investors and companies navigating an evolving and complex proxy landscape. This included an influx of environmental and social shareholder proposals, a changing regulatory environment and growing expectations about the role companies play in society – all against a backdrop of continued social upheaval and division, rising inflation and pressures on the energy market.

Considerations for boards coming out of this proxy season are more nuanced than in years past. Expectations for rising support of environmental and social shareholder proposals are being recalibrated as investors reject more prescriptive proposals; instead, they are evaluating proposals against the significant steps companies are already taking. The stakes for directors also continue to rise as investors adopt stricter director voting policies, but so far the impact of those changes on actual votes is relatively minimal, with companies taking steps to meet shareholder expectations around topics such as diversity, climate and ESG reporting and oversight.

To help directors understand the evolving proxy landscape and keep pace with changing stakeholder expectations, this report examines four key takeaways from the 2022 season and offers questions for boards to consider.¹

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¹ All vote results and shareholder proposal data for 2022 are based on a universe of S&P 1500 companies with meetings through June 24 where voting results were available. Proxy disclosure data is based on the 75 companies on the 2022 Fortune 100 list that filed proxies as of June 8.

Bridge in forest
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1

Chapter 1

Environmental and social shareholder proposal activity went up

While there were more proposals in these categories, support for them became more targeted.

Last year’s proxy season was marked by the momentum behind environmental and social shareholder proposals, which garnered record levels of support and signaled increased investor willingness to vote against management. This year, though there were more proposals in these categories, the support rates fell, dropping from an average of 32% in 2021 to 27% this year, as several developments impacted the shareholder proposal landscape.

Most notably, an influx of more prescriptive proposals reached the ballot this season under the SEC’s new approach to no-action requests, which made it more difficult for companies to exclude environmental and social shareholder proposals. In recent years, companies refused proposals if they could demonstrate that the matter raised was not significant to the company, even if it was significant to society more broadly, or sought to micromanage the company. Under the new guidance, which is actually a return to historical practice, SEC staff is no longer focused on determining the nexus between a policy issue and the company but is instead focused on the social significance of the issue. Further, SEC staff is taking a narrower approach to what constitutes micromanagement.

Many of these new proposals, which might have otherwise been omitted in recent years, failed to gain traction with investors broadly. For example, companies facing proposals calling for them to end their financing of new fossil fuel supplies were denied no-action relief, and the proposals averaged just 12% support, whereas majority support was secured on a less prescriptive proposal asking companies to report on how they will reduce the greenhouse gas emissions associated with their financing activities. Under the SEC’s new approach, the number of environmental and social proposals that went to a vote was up nearly 70% from last year, but just 12% of those proposals secured majority support, down from 20% in 2021.

Investors are also evaluating environmental and social shareholder proposals against the specific company’s progress in addressing and reporting on related matters, including learnings from direct dialogue with the company. Additionally, they are considering the impact of external developments such as new pressures on the energy transition in the wake of the war in Ukraine. As a result, some investors may have voted against specific shareholder proposals (e.g., because they thought the proposal was too prescriptive or that the company is making sufficient progress under the current circumstances) even if the broader underlying cause or concern (e.g., achieving net zero emissions globally by 2050) is generally aligned with the investors’ priorities.

These developments underscore the need for management to directly engage with the governance and stewardship teams of key shareholders to understand their views on the company, their expectations for progress on stewardship priorities, and the rationale behind their votes.

Key environmental and social shareholder proposal topics in 2022

  • Climate risk and the energy transition

    Most of the climate-related shareholder proposals submitted this year were withdrawn, reflecting companies’ ongoing engagement with shareholders on this issue. Still, the number of those proposals voted more than doubled from 2021, but they only averaged 35% support, down from 46% last year. This decrease in support likely reflects a combination of more prescriptive proposal requests further tempered by the activity companies are undertaking to address climate risk.

  • Diversity, equity and inclusion (DEI)

    The number of DEI-related proposals voted more than doubled this year, in part due to a jump in proposals calling for civil rights or racial equity audits. Twenty-one such proposals went to a vote this year, and they averaged 44% support, up from just nine averaging 34% in 2021. Other notable DEI themes this year were pay equity across race and gender (31% average support), risks stemming from the use of concealment clauses in the context of harassment or discrimination (48%) and risks and costs associated with state laws restricting women’s reproductive rights (25%).

  • Corporate political responsibility

    While the number of proposals voted on corporate political and lobbying expenditures stayed relatively flat, the focus of many shifted from transparency and board oversight to the alignment of political and lobbying spending with the company’s stated values and public policy positions. Nine political- or lobbying-focused proposals with this values and policy alignment lens went to a vote this year and averaged 41% support, up from five last year that averaged 38%. Additionally, a few proposals that focused specifically on climate lobbying averaged 31% support, down from 61% in 2021; however, more of these proposals were successfully withdrawn this year, often because the investors submitting the proposal and the company found common ground and reached agreement.

Key board takeaways on environmental and social shareholder proposals

  • Understand that investors are assessing shareholder proposals based on company-specific circumstances (including the investor’s engagement with the company), the proposal’s particular requests and external developments.
  • Do not assume that a vote against a shareholder proposal means the investor does not have concerns related to the proposal’s subject matter. For example, an investor with concerns about whether a company is sufficiently addressing risks related to the energy transition may still vote against a related proposal if they disagree with its specific, more prescriptive request.
  • Engage with key investors outside proxy season to understand their views on the company’s ESG strategy, performance and reporting, and the rationales behind their votes. 
Woman on bridge over marsh
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2

Chapter 2

Support for directors remained stable despite signals that opposition would increase

Despite several signals that director opposition would increase, overall director support remained relatively stable.

Heading into the proxy season, investors told EY researchers that ESG oversight – and particularly oversight of climate risk – would be a more important factor in how they evaluate and vote on directors this year, with some citing the director vote as their most powerful tool to drive change. Changes to investor proxy voting guidelines and proxy advisory firm policies also signaled a broadening of negative voting factors for directors, including expectations related to board and workforce diversity and related disclosures, climate risk, broader ESG oversight and overboarding policies.

However, despite these signals that votes against directors would increase, overall director support remained fairly stable, with average votes against S&P 500 directors inching up to 4.2% compared with 3.9% over the same time period in 2021. This relatively sustained support for directors may reflect the significant efforts companies made to address investor concerns and meet their expectations around key investor engagement priorities. It may also reflect an element of investor concern about losing access to directors and damaging the investor’s relationship with the board.

Opposition to directors has, however, crept up in recent years, particularly for certain board roles. This year average voting opposition for nominating and governance chairs at S&P 500 companies was 8.2%, up from 4.6% in 2017. Similarly, average voting opposition for compensation committee chairs at S&P 500 companies was 7.3%, up from 3.8% over the same period. In addition, opposition to independent board leaders (i.e., independent chair, lead or presiding director) rose to 7.0% from 4.3%. 

While director voting results indicate that this year most companies met at least the minimum thresholds for director support, overall trends (including changes in investor voting policies and in the shareholder proposal landscape) point to the director vote as a lever of change that investors may be more inclined to use going forward to accelerate their stewardship goals.

Key board takeaways on director voting

  • Monitor director voting-related changes to key investor proxy voting guidelines and stewardship goals and engage investors to better understand their expectations of the board. 
  • Prepare a holistic activist vulnerability analysis, and take action based on the findings.
  • Challenge whether company communications can more effectively address areas of investor focus and demonstrate the board’s competency, informed engagement and oversight. 
Sunset over hill
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Chapter 3

The governance of ESG stayed in the spotlight

In response to investor calls, companies enhanced disclosures on board oversight of ESG-related risks and opportunities.

In our conversations with investors, many made clear that they want companies to define how ESG matters are included in the work of the board and its committees. This year companies answered that call with enhanced and prominent disclosures on board oversight of ESG-related risks and opportunities.

  • More companies highlighted an integrated model for ESG oversight by committees

    Nominating and governance committees increased their oversight of ESG at the committee level. However, an emerging trend is companies highlighting a more integrated oversight model whereby the board’s various committees oversee different aspects of ESG related to that committee’s purview.

    Integrating relevant ESG matters into the charter of the board’s key committees aligns environmental and social oversight responsibilities with the core work of those committees. Such an approach may help integrate related topics into the work of the board and align to the strengths of the directors serving on those committees. For example, audit committees are well-positioned to oversee that ESG reporting has robust processes and controls with a supporting audit trail, like what exists for financial reporting. We found significantly more companies disclosing ESG-related oversight responsibilities for audit committees as ESG reporting expectations and requirements rapidly evolve.

    Still, tailoring the board’s ESG oversight approach to the company’s specific circumstances is important, and the most effective structure may change over time based on those circumstances and the advancement of the company’s sustainability journey. There is no one-size-fits-all best practice, and investors do not expect boards to implement a standard or template approach to oversight.

  • More companies cited ESG in director qualifications

    Nearly two-thirds of Fortune 100 companies cited ESG or sustainability as a director qualification this year, up from 51% in 2020. These qualifications were cited in director biographies or highlighted at the board level via a skills matrix and were more prevalent in certain sectors. For example, 86% of energy companies and 75% of consumer products and industrials companies cited ESG or sustainability as a director qualification vs. 43% of information technology and 27% of health care companies.

    The backgrounds and related experience of these directors varies widely, which is indicative of the vastly different dimensions of experience that can be relevant for a skills category as broad as ESG. For example, directors’ ESG qualifications were attributed to experience that included overseeing sustainability initiatives as a CEO, addressing ESG issues on a policy level through a background in government or law, work related to sustainability reporting frameworks, leadership roles with an environmental advocacy organization, service on another company’s board committee that oversees sustainability, climate science expertise or experience in leading business transformation more broadly.

    These observations are based on companies’ disclosures that explicitly linked the director’s background or experiences to the assertion that she or he has ESG or sustainability qualifications. Not all companies connected the dots in this way. In fact, in many cases directors were marked in a skills matrix or as part of their biography as bringing ESG or sustainability expertise without a clear explanation for what constitutes that assertion. Investors raised this lack of clarity with us as a pain point during our conversations and urged companies to be more thoughtful about what director biographies and skills matrices imply about the board’s expertise.

    Notably, proposed SEC rulemakings on climate and cybersecurity may require companies to revisit their disclosures on related director qualifications. The rules would require companies to disclose whether any member of the board has expertise in climate-related or cybersecurity risks, respectively, with disclosure in such detail as necessary to fully describe the nature of the expertise.

    More companies highlighted ESG initiatives and goals, plus incorporated ESG into executive pay. Download the full PDF to find out how.

Key board takeaways on governance of ESG

  • Assess whether the proxy statement and the board’s governing documents make clear how the board is overseeing ESG matters and consider the effectiveness of that oversight model.
  • Challenge whether director qualifications disclosures clearly connect the dots on how director experience and related ongoing training aligns with material ESG oversight responsibilities.   
  • Consider gaps between current director qualifications disclosures and board expertise disclosures under proposed SEC rulemakings on climate and cybersecurity. 
Path through tress
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4

Chapter 4

Board diversity disclosures continued to evolve

Nearly all Fortune 100 companies (97%) voluntarily disclosed the board’s racial/ethnic diversity, up from 82% last year.

More companies provided racial/ethnic diversity characteristics at the individual director level with 40% of companies doing so, up from 27% last year. Still, the most common approach (57% of companies) was to disclose the percentage of the board that is racially/ethnically diverse on an aggregated level without assigning diversity characteristics to individual directors.

While many companies continued to provide these disclosures using pie charts or similar graphics, 44% included a matrix such as that required under Nasdaq’s board diversity rule, which allows for a board-level or director-specific disclosure approach. A third of companies included diversity characteristics in a director-specific matrix (often adjoined to a broader skills matrix) that assigned diversity characteristics to individual directors, and 11% used an anonymized board-level matrix.

Some companies also disclosed additional categories of diversity. The most common of these were LGBTQ+ status (17% of Fortune 100 companies disclosed this), director nationality (12%) or military service (5%).

More standardization in how companies make these disclosures may be on the horizon. The SEC’s current regulatory agenda includes rulemaking related to board diversity disclosures.

Key board takeaways on board diversity disclosures

  • Consider whether there are opportunities to enhance the board’s diversity disclosures to meet investor demand for this information.  
  • Realize that not disclosing board diversity data may put certain directors at risk of opposition votes. 
  • Communicate the board’s strategy for advancing diversity in the boardroom 

Going forward

A key theme running through this year’s proxy season takeaways is the importance of engagement with key constituencies of the firm’s investors, including those firms’ governance and stewardship teams in addition to analysts and portfolio managers. As the proxy voting landscape becomes more complex and nuanced, particularly with respect to votes on directors and shareholder proposals, investors’ perspectives and the degree of their support for management may not always be clear from proxy voting results. With activism trends further raising the stakes, investor engagement is a vital tool for understanding key shareholders’ perspectives on the company’s governance and strategy, enhancing the company’s communications and deepening relationships. 

Questions for the board to consider

  • How is the board overseeing the company’s investor engagement program and hearing feedback from those discussions? Under what circumstances do individual directors participate in investor engagement? 
  • How is the board kept informed of the views and stewardship priorities of key shareholders’ governance teams, and significant changes to their proxy voting policies? 
  • How does the board learn about shareholder proposal trends relevant for the company’s industry? Does the board engage in discussions and role play how it would respond to some of the shareholder proposals currently securing majority support?
  • How is the board regularly challenging and refreshing its composition in light of strategic and risk oversight needs? Does the proxy statement clearly communicate the rational for each director’s role on the board and substantiate any claims about director qualifications?
  • Has the company conducted a holistic activist vulnerability analysis and taken action based on the findings?
  • How do the board’s governing documents and committee charters clarify the ways in which the board and its committees are overseeing material ESG matters? Are there opportunities for the proxy statement to better communicate how that oversight is executed?
  • What steps is the board taking to advance its diversity across multiple dimensions? How is it communicating those efforts and the board’s current diversity to investors? 

Summary

In 2022 the proxy voting landscape continues to grow more complex, with investors and companies both navigating evolving stakeholder expectations, especially around ESG oversight; changing regulatory and activism environments; and various other market and geopolitical forces impacting the business context. With these developments, engagement with key shareholders is ever-more vital to understanding and addressing investor perspectives.

About this article

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors