What directors need to know about the 2023 proxy season

Proposals have become narrower (e.g., greenhouse gas emissions reduction proposals focused exclusively on Scope 3 emissions; or calling for absolute targets as opposed to emission intensity targets) and more prescriptive in nature, in some cases seeking strategic and operational changes that large asset managers believe should be left to management’s decisions (e.g., calling for a time-bound phaseout of financing new fossil fuel projects).

Companies are also disclosing more information about their environmental and social initiatives, related progress and board oversight, which investors appreciate. In their proxy statements, 84% of Fortune 100 companies this year voluntarily included a section on corporate sustainability initiatives, and 95% disclosed which committees are tasked with ESG oversight responsibilities (most often the nominating/governance committee or a stand-alone sustainability committee having primary oversight, with other committees overseeing areas related to their purview). These numbers are even more significant considering that sustainability reports, not proxy statements, are the primary vehicle companies use for external communication about environmental and social matters.

Additionally, companies and investors alike are balancing opposing pressures and increased scrutiny from different stakeholders related to their approach to business-relevant environmental and social matters, including investors’ proxy voting. This may be contributing to a more cautious approach from investors on which proposals to support. 

In particular, in some states, certain asset managers are facing political pushback (and in some cases are barred from managing state funds) for being perceived as furthering an ideological agenda through the integration of ESG into their investment and stewardship approaches. However, against this backdrop of anti-ESG legislative activity and related media attention, so-called anti-ESG shareholder proposals, which push against company efforts related to environmental and social matters, have been among the least supported in 2023, averaging just 2% of investor votes in favor.

These developments may make navigating the evolving shareholder proposal landscape more challenging and complex for companies and investors alike as business-relevant environmental and social risks – including political polarization, state legislative activities and campaigns against individual companies – potentially escalate. For companies, transparency and constructive engagement with stakeholders (including employees, customers and investors) will remain paramount to understanding expectations, building trust and securing proxy voting support.

Key environmental and social shareholder proposal topics

1. Diversity, equity and inclusion – DEI represented the largest category of proposals submitted this year. Fifty-two percent were withdrawn before going to a vote, reflecting successful company-shareholder engagements. Taking a closer look at the subcategories of DEI proposals, the most prominent DEI proposals called for racial equity or civil rights audits. These proposals gained significant attention in 2022 when they doubled in number and their support jumped to an average of 44%. This year, however, these proposals lost steam, with support falling to 22% on average. Women’s reproductive rights is another high-profile DEI proposal topic that lost traction this year, with related proposals averaging 12% support, down from 25% in 2022. Other top DEI-themed proposals topics include pay equity across gender and race (which averaged 32% support, in line with the 31% in 2022) and reporting on the effectiveness of corporate DEI efforts (most of which were withdrawn as companies and investors reached agreements).

2. Climate risk and the energy transition – Climate-related proposals, such as those addressing greenhouse gas emissions and climate transition plans, were the second-most-submitted category this year. Around 100 such proposals were submitted to companies across a range of sectors, but predominantly focused on the financial, energy and industrials sectors. Thirty-eight percent were withdrawn, reflecting successful company-investor engagement, and those that went to a vote averaged 22% support, down from 34% last year. The most successful proposals sought reporting on company plans to reduce emissions across the supply chain (or, in some cases, financing activities). The least successful – and more prescriptive – proposals called for a time-bound phaseout of financing activities related to fossil fuel projects.

3. Corporate political responsibility – The third-largest category of proposals relates to corporate political and lobbying expenditures. This year a growing subset of these proposals focused on the alignment of political and lobbying spending with the company’s stated values and public policy positions, but they lost voting momentum, averaging 24% support, down from 40% in 2022. However, proposals focused solely on how corporate lobbying aligns with climate commitments fared better this year, with 10 voted proposals averaging 35% support, compared with four averaging 32% in 2022.

While this year’s voting results changed the vote trajectory for key board positions, they nonetheless reflect a continued shift in investor voting to bring a more nuanced assessment to the director vote, including holding relevant board members more directly accountable for oversight concerns related to board diversity, climate reporting, executive compensation practices and more. Notably, among directors who received more than 15% or more opposition votes this year, 34% are nominating and governance committee chairs and 20% are independent board leaders.

For boards, interpreting these director voting results can be challenging. This is especially true when directors hold multiple committee roles. As an example, a director serving as both chair of the nominating/governance committee and member of the compensation committee may not know whether opposition votes regarding his/her re-election were driven by investor concerns about board diversity progress, responsiveness to investor engagement requests, board tenure, problematic executive pay practices, or all of the above. The nuances and multilayer considerations underlying investors’ voting approaches make engagement critical to understanding investor views of the company’s governance and strategy.

For companies facing challenges related to say-on-pay, constructive engagement discussions with investors focused on company-specific decisions (not proxy advisory firm views) and including compensation committee members or the chair in shareholder discussions where appropriate can provide both the company and investors with valuable insight. Clear disclosures that illuminate the reasoning behind pay decisions and discuss how the committee is responding to shareholder feedback may also help secure support.

More Fortune 100 companies are incorporating ESG into long-term pay plans

This year 12% of Fortune 100 companies, up from 10% last year, incorporated ESG factors into their long-term incentive plan, either as a specific percentage of the target bonus opportunity or as a pay modifier that adjusts pay upward or downward from the objective financial performance metrics. In such cases, pay is often tied to progress toward diversity goals or greenhouse gas emissions reduction targets. This slight change is notable because most companies (73% of the Fortune 100) integrate ESG into their annual incentive plan. The most common annual incentive approach is to fold ESG considerations into individual or company strategic goals as part of a qualitative assessment (36% of the Fortune 100), or to include a weighted ESG metric (25%), with 10% being the most common weighting used. Twelve percent of companies use an ESG pay modifier to adjust annual incentive pay based on ESG performance.

Boards should be aware that the inclusion of ESG measures in executive pay is an area of investor scrutiny. Some investors have raised concerns around the potential for ESG metrics to be misused to increase executive pay, or to create unintended consequences. They want to see key ESG performance indicators that are objective, quantifiable, transparent and advance the strategy.

Going forward

The proxy voting landscape continues to grow in complexity. While macroeconomic conditions kept activism levels lower than last year, the new universal proxy rules have made directors more accountable – and vulnerable – than ever before. While this year there may have been an element of retrenchment at play given the volatile economic environment (i.e., investors wanting to see a focus on the bottom line and not looking for radical changes on the board right now), the impacts of universal proxy are only beginning to play out. Additionally, corporate environmental and social efforts have become politicized at a time when business risks and opportunities related to sustainability are accelerating. In these volatile times, directors’ long-term vision, integrity and guidance will be critical to understand and balance stakeholder demands, build long-term value, and secure support on the proxy ballot.