10 minute read 7 Feb 2022
What investors expect from the 2022 proxy season

What investors expect 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.

10 minute read 7 Feb 2022

Investors want to see companies back up long-term commitments with shorter-term goals, clear reporting and direct board oversight.

In brief

  • Board ESG competence and oversight are under growing scrutiny. 
  • Investors want companies to walk the talk on climate and diversity.
  • On engagement, investors seek more candor and active listening.

The stakes for directors are going up in proxy season 2022 as investors seek to hold boards more directly accountable for business-relevant environmental and social matters, particularly climate risk and the energy transition. Investors and other stakeholders are also scrutinizing how companies take action across multiple dimensions – from their workplace policies and practices to the products and services they provide, their capital allocation decisions and whether political spending aligns with the company’s public commitments and values.

Investors want to see companies back up bold pronouncements and long-term commitments with shorter-term, interim goals, clear reporting on progress and direct board oversight. They also seek more candor and transparency around how companies are navigating challenges, and how they are innovating and investing in solutions as they work to address complex, systemic risks and position the company for the future. Underlying these expectations and areas of focus are investors’ conviction that more effective management of business-relevant environmental, social and governance (ESG) issues will lead to better financial performance.

The highlights in this report stem from conversations with governance specialists from more than 60 institutional investors representing over US$47 trillion in assets under management, including asset managers (44% of all participants), public funds (28%), socially responsible investment managers (14%), labor funds (8%) and faith-based investors (3%), as well as investor consultants and associations (3%).

Our preview of the 2022 proxy season is organized around these four key areas:

ESG topics impacting director elections
(Chapter breaker)
1

Chapter 1

ESG topics impacting director elections

ESG oversight will be a more important factor this proxy season, with climate risk emerging as the most acute area of focus.

Attention is turning to the board as investors plan to escalate their stewardship related to business-relevant environmental and social matters through votes against the reelection of directors. Nearly three-quarters of investors (73%) told us that ESG oversight will be a more important factor in how they evaluate and vote on directors this proxy season than it was in the 2021 season, with climate risk emerging as the most acute area of focus.

The new universal proxy rules make these developments more potent. Currently, shareholders generally have to choose between supporting the company’s or the activist’s slate; the new rules, which require that proxy cards include both sides’ nominees, will allow shareholders to vote for a mix of candidates from both slates. Investors are focused on increasing director accountability for ESG just as they are getting more flexibility to support the director candidates of their choice in a proxy contest and as ESG becomes a more important part of the activist playbook. 

  • Climate risk oversight

    A majority of investors (54% of the investors we spoke with) expect climate risk oversight to play a more important role in their director voting this year. For some, this reflects the impact of their own net-zero commitments. Globally more than 200 asset managers and 66 asset owners have committed to support investing aligned with net-zero emissions by 2050 and are intensifying their stewardship approaches in line with those commitments.

    Investors are developing their own independent approaches and are at different stages of integrating climate oversight into their director voting strategies. Most investors said they are not necessarily changing their proxy voting guidelines this year but, rather, expect to more proactively apply existing, flexible guidelines.

    While some external indicators and frameworks were commonly cited – specifically, the Climate Action 100+ Net-Zero Company Benchmark, Transition Pathway Initiative (TPI) assessments, the Task Force on Climate-related Financial Disclosures (TCFD) framework and the Sustainability Accounting Standards Board (SASB) standards – investors are also using their own internal frameworks and tools, peer analysis and engagement experiences. Several investors emphasized that they will be looking to director biographies and skills matrices in the proxy statement, as well as their engagement experiences with board members, for confirmation that the board has the expertise and independence to oversee strategy related to climate risk and the energy transition.

    The importance of ESG in 2022 proxy season

    Will ESG oversight be a more important factor in how you evaluate and vote on directors this proxy season than it was in the 2021 season?
    Chart description

    Two pie charts show that 73% of respondents answered yes to the question "Will ESG oversight be a more important factor in how you evaluate and vote on directors this proxy season than it was in the 2021 season?" Of overall respondents, 54% were focused on climate risk. This data comes from EY's conversations with governance specialists from more than 60 institutional investors.

  • Board diversity and other ESG-related oversight

    Board diversity is another specific ESG matter where some (19%) investors expect to apply a more rigorous director voting approach in 2022, with some increasing their board gender diversity expectations (e.g., from at least one to at least two women on the board) and some implementing new expectations for racial and ethnic diversity disclosures and board representation (e.g., at least one person of color on the board).

    Beyond these thematic approaches, some investors spoke more generally about their intention to use director voting as a key lever of engagement and said they will be looking to see whether committee charters and other governing documents make clear how the board is overseeing material environmental and social factors and how the company’s disclosures compare with peers.

Key board takeaways on ESG topics

  • Recognize that investors plan to use more proactive director voting strategies to hold boards accountable on material ESG matters, especially climate risk, and are taking independent, investor-specific approaches
  • Consider how the company’s reporting about board skills, training and oversight responsibilities regarding ESG meet investor expectations, and how the company’s disclosures and practices compare with peers and external benchmarks and frameworks such as The Climate Action 100+ Benchmark, TPI assessments, TCFD and SASB
  • Refer to investors’ publicly disclosed policies and engagement meetings to better understand their views and how the board’s director votes are trending and why
Four ways boards can demonstrate oversight of ESG
(Chapter breaker)
2

Chapter 2

Four ways boards can demonstrate oversight of ESG

We asked investors: How can a board effectively show to investors that it is sufficiently engaged on ESG?

With directors under increasing scrutiny for their oversight of environmental and social matters, we asked investors how a board can convey to them that it is sufficiently engaged on ESG. Here are the answers most commonly cited. 

  • 1. Directly engage with shareholders, putting ESG in the context of strategy

    Forty-two percent of investors said their experiences directly engaging with board members are among the most telling regarding a board’s ESG engagement and knowledge. A point consistently highlighted was the ability of directors to talk authentically about how management has integrated the most relevant ESG matters into the strategy, including how those matters factor into capital allocation decisions and impact the company’s competitive positioning, as well as the targets and metrics used to drive and measure progress. Investors understand that the CEO is the spokesperson for the company’s strategy and performance but expect directors to be conversant on how material ESG issues are integrated into the company’s strategy, and speak with authority about how the board is executing its oversight. 

  • 2. Clarify the governance of ESG in committee charters, governing documents and proxies

    A third of investors said that committee charters or other governing documents should disclose how ESG matters are included in the work of the board, specific committees and subcommittees.

    Further, investors encouraged companies to bring those responsibilities to life in the proxy statement by providing more transparency around how oversight is executed, including more detail on management reporting to the board (e.g., which members of management, how often, what themes or topics are regularly discussed and which key metrics are reviewed) and how the board is hearing from external sources on relevant ESG trends and developments. 

  • 3. Enhance and communicate the board’s relevant ESG expertise and training

    A quarter of investors want boards to challenge whether they have the competency needed to oversee and help guide strategy relative to the business’ material environmental and social risks and opportunities. They also encouraged companies to be more thoughtful about what the director biographies and skills matrices in the proxy statement imply about the board’s expertise in this regard.

    For example, some said companies are ascribing sustainability expertise to directors in a skills matrix, but the connection between those directors’ experience, as described in the director bios, and the company’s material ESG factors is unclear. Many investors said that they appreciate seeing companies disclose that the board is receiving ongoing training and educational support around sustainability topics.

  • 4. Consider the role of ESG in executive pay

    Around 10% of investors said that seeing material ESG factors thoughtfully incorporated in executive compensation plans would be a strong indicator of board engagement on ESG matters. These investors said that the lack of ESG metrics in pay plans has led to an underappreciation of those issues and stressed that tying pay to ESG incentives is needed to drive change.

    Still, some other investors urged caution, raising concerns around the potential for ESG metrics to be misused as a way to pad executive pay and guarantee payouts in years of tough performance. Overall, investors made clear that this is an area under scrutiny and that they want to see key performance indicators that are objective, transparent and advance the strategy. 

Key board takeaways for demonstrating ESG oversight

  • Board members who participate in engagement discussions with shareholders should be prepared to discuss the role of material ESG risks and opportunities in the company’s strategy, and whether and how objective, transparent and challenging ESG metrics are used in the pay plan to advance that strategy. 
  • Consider whether there are opportunities to clarify in the board’s governing documents and committee charters how the board and its committees are overseeing material ESG matters. 
  • Assess how the board’s competence around material environmental and social matters clearly ties to director skills and ongoing training and is explicitly communicated in the proxy statement through the director biographies and qualifications disclosures, skills matrix and discussion around ongoing board training and education.
Top investor stewardship priorities for 2022
(Chapter breaker)
3

Chapter 3

Top investor stewardship priorities for 2022

Human rights and biodiversity stand out this year as topics gaining traction among a broader group of shareholders.

In 2022, investors continue to focus on climate risk, workforce and board diversity and broader human capital management issues. Human rights and biodiversity stand out this year as topics gaining traction among a broader group of shareholders.

While the top areas of investor focus remain the same since last year, the nuances of investor views continue to evolve. This year, investors expressed a growing skepticism of broad pronouncements (particularly related to climate and workforce diversity) that lack specific detail and a deeper focus on how company actions and practices across a multitude of dimensions align with the company’s public commitments and values. 

  • Climate risk and the energy transition

    Seventy-one percent of investors said they will prioritize the risks and opportunities associated with climate change. In the wake of more companies committing to net-zero greenhouse gas emissions by 2050, investors are focused on the credibility of those commitments and the quality of company transition plans.

    Investors want to see short-, medium- and long-term science-based emissions reduction targets that make decarbonization a priority for both current and succeeding management teams. Investors said that without detail around how interim goals and progress will be measured and reported, and without communication around what that commitment means for the company’s strategy, broad net-zero pronouncements lack value and may be perceived as “greenwashing.” Investors emphasized that decarbonization – not carbon offsets or selling off carbon-intensive assets – should be the cornerstone of company transition plans, and some are looking to see a corresponding shift to renewables.

    Investors also want to understand how companies are assessing potential impacts to the business under different climate risk scenarios (including both physical and transition risks), and how they are investing in solutions that can help the company meet growing market demand for sustainable products and services and competitively differentiate in a low-carbon economy. 

    Other key themes of our conversations included how company climate commitments are informing capital allocation, how corporate money is influencing climate policy (including through trade associations and other intermediaries) and how the company is considering workforce and community impacts as it transitions to a low-carbon economy (i.e., providing for a just transition). Regarding climate policy, some investors emphasized that when a company’s statements are in conflict with its public policy activities, it sends the message that either the public policy team is siloed and doesn’t realize its work is contradicting the company’s commitments or the company is intentionally misleading stakeholders. Investors are paying attention.

  • Workforce and board diversity

    Sixty percent of investors said they will prioritize board diversity and workforce diversity, equity and inclusion (DEI) in their 2022 company engagements. In terms of the workforce, investors want more transparency and accountability related to the role of DEI in the company’s strategy, related goals and key performance indicators. Many investors are continuing to ask for the disclosure of EEO-1 data as a baseline (and expect a significant increase in those disclosures this year), and some are measuring available EEO-1 data and using their analysis to benchmark and engage companies.

    Some investors (7%) are looking beyond employee diversity data and seek a more holistic understanding of how company policies and practices impact DEI and workplace culture and are filing related shareholder proposals. Some specific topics cited include mandatory arbitration and nondisclosure agreements, sexual harassment policies, pay equity, lawsuits filed against the company by people in protected classes and related settlement amounts, and how clawback policies address EEO-related provisions. Notably, a few shareholder proposals on mandatory arbitration and sexual harassment policies received majority support in 2021.

    Further, some investors (12%) also seek to understand how companies are considering the broader societal impacts of their business and operations on racial equity, including the impacts of a company’s business model, products, services, AI and marketing. In particular, five investors (up from just one of the investors we spoke with last year) indicated that they will submit shareholder proposals seeking racial equity audits that analyze a company’s adverse impacts on nonwhite stakeholders and communities of color. The EY Center for Board Matters tracked 16 such proposals in 2021 (predominantly at financial, health care and technology companies), which averaged 33% support where they went to a vote. 

    In terms of board diversity, investors continue to seek disclosure of the board’s diversity across gender, race and ethnicity and expect those disclosures to be commonplace in 2022 and moving forward. 

    Investor expectations for demonstrable progress continue to rise. Some are adopting higher gender diversity thresholds or new racial/ethnic diversity thresholds in their proxy voting guidelines.

  • Strategic workforce issues beyond diversity

    Twenty percent of investors are prioritizing human capital management engagement more broadly. One of the key focus areas these investors cited was workforce development and training. Investors want to better understand how companies are upskilling and reskilling the workforce to align with the technologies and automation that are transforming the nature of work and meet the changing expectations of today’s talent.

    Some investors stressed that the employee voice is becoming more powerful, and how well a company can harness the value of its talent to create value for shareholders has become a key differentiator. These investors emphasized their view that employee flexibility, diversity of thought, a strong corporate culture and investments in employee development will be essential to enabling the innovation that has become table stakes for survival in the current business environment. Some investors also pointed to the labor challenges currently impacting the economic recovery and said that they view how well the company is managing the workforce as a success factor that speaks directly to the quality of the management team. 

  • Growing areas of focus – human rights and biodiversity

    Nineteen percent of investors said they will prioritize engagements on human rights in 2022, up from 8% in 2021. They noted heightened concern regarding human rights risks in global supply chains, particularly related to modern slavery and human trafficking, and want to better understand what human rights policies and risk assessment and mitigation practices companies have in place.

    Seventeen percent of investors said they will prioritize engagements on biodiversity and natural capital, up from 5% in 2021, and will tie these issues more closely together with their work on climate risk, noting the role that natural ecosystems have in climate solutions. This growing focus on biodiversity and natural capital aligns with the launch of the Taskforce on Nature-related Financial Disclosures, a new global initiative to develop a risk management and disclosure framework for organizations to report and act on nature-related risks, complementing the TCFD’s climate-related framework.

  • Chart description#Hide description

    A bar chart shows which drivers of strategic success are important for investors in 2021 vs 2022. Integration of material ESG opportunities into strategy accounted for 47% in 2021 and 69% in 2022. Quality of board and overall governance accounted for 38% in 2021 and 44% in 2022. Quality of strategy and ability to execute accounted for 47% in 2021 in 41% in 2022. Diversity of of board, management and workforce accounted for 42% in 2021 and 37% in 2022. Ability to transform business models and products through innovation and R&D accounted 33% in2021 and 36% in 2022. Quality of management team accounted for 32% in 2021 in 22% in 2022. Workforce development and training accounted for 23% in 2021 in 20% in 2022. Workforce transitions (e.g., remote working, automation) accounted for 28% in 2021 and 20% in 2022. Alignment of culture to drive strategy accounted for 23% in 2021 and 17% in 2022. This data comes from EY's conversations with governance specialists from more than 60 institutional investors representing over US$47 trillion in assets under management, including asset managers (44% of all participants), public funds (28%), socially responsible investment managers (14%), labor funds (8%) and faith-based investors (3%), as well as investor consultants and associations (3%). 
  • Chart description#Hide description

     A bar chart shows what investors determined to be their three biggest  threats to strategic success in the next three to five years in 2021 vs 2022. Climate risk and natural resource constraints accounted for 52% in 2021 and 58% in 2022. People issues, such as talent shortages or a failure to upskill accounted to 25% in 2021 and 47% in 2022. Business model disruption accounted for 48% in 2021 and 31% in 2022. Supply chain disruption accounted for 13% in 2021 and 27% in 2022. Changes in the regulatory environment accounted for 17% in 2021 and 24% in 2022. Cyberattack/data breach accounted for 18% in 2021 and 20% in 2022. Unfavorable economic conditions accounted for 15% in 2021 and 19% in 2022. Pace of technology change accounted for 17% in 2021 and 17% in 2022. Changing customer demands and expectations accounted for 30% in 2021 and 12% in 2022. Leadership and succession planning accounted for 8% in 2021 and 12% in 2022. Misaligned culture accounted for 22% in 2021 and 12% in 2022. Reputation and brand risk accounted for 18% in 2021 and 10% in 2022. Geopolitical turmoil (e.g., increasing nationalism) accounted for 18% min 2021 and 10% in 2022. Access to capital accounted for 8% in 2021 and 2% in 2022. This data comes from EY's conversations with governance specialists from more than 60 institutional investors representing over US$47 trillion in assets under management, including asset managers (44% of all participants), public funds (28%), socially responsible investment managers (14%), labor funds (8%) and faith-based investors (3%), as well as investor consultants and associations (3%).

Key board takeaways on investor priorities

  • Recognize that business-relevant environmental and social topics continue to dominate investor engagement priorities, which is underpinned by their views that these are among the most pressing risks and opportunities in today’s business environment
  • Assess whether the company has a resilient climate transition plan, including short, medium and long-term science-based emissions reduction targets; prepare for questions on how the company is directly and indirectly impacting climate policy, and how capital allocation and incentive structures align to climate goals
  • Consider how the company is embedding diversity, equity and inclusion in the company’s human capital management programs and policies, as well as the company’s products, services and business model
  • Understand trends in environmental and social shareholder proposals and consider what your company is doing to be ready to respond to requests put forward in majority-supported proposals; consider those proposal trends with the mindset that the company could likely receive a similar proposal in the future
Five tips from investors for improving shareholder engagement
(Chapter breaker)
4

Chapter 4

Five tips from investors for improving shareholder engagement

We asked investors: how can company-shareholder engagement be improved in the current environment?

As company-shareholder engagement continues to evolve, we asked investors how engagement can be improved in the current environment. Many said that engagement is working well as-is and remarked on improvements they’ve seen over the years, including companies becoming more open and responsive and increased director involvement. Following are the most cited tips investors provided about how engagement can be different and better. 

  • 1. Seize the strategic opportunity to listen, learn and avoid surprises at the annual general meeting

    Investors said one of the biggest differentiators of effective engagement is when companies are actively listening and using engagement conversations to fully understand shareholders’ perspectives.

    Investors also highlighted that they have developed extensive research and market insights through their assessment and engagement of companies. They encourage companies to take advantage of those investments and approach engagement as a strategic resource they seek to access – and approach investors as a partner with shared interests. 

  • 2. Consider more director involvement

    Seventeen percent of investors said having board members directly involved in engagement conversations would be beneficial. Perspectives on this issue varied. Some of these investors want to speak with directors on a regular basis to better understand how the board is assessing relevant risks and opportunities. Others said director involvement should be limited, generally to instances when the topics under discussion are directly under the board’s purview (e.g., how the compensation committee is overseeing human capital management) or when investors have specifically requested to speak to the board (which can be an escalation tactic investors use when they feel their concerns are not being heard).

    A few investors urged that companies should be cautious about involving directors in engagement without adequate preparation. Finally, when directors are not part of the engagement, some investors said there can be a level of skepticism that the conversation is filtered and misrepresented to the board. Management making clear to the investors during engagement conversations how they are communicating shareholder feedback up to the board can provide some reassurance.

  • 3. Optimize the opportunity through planning, preparation and maximizing time for open discussion

    On a practical note, investors encouraged companies to prioritize efficiency and productivity by having mutually agreed agendas and the right subject matter experts online, sharing pre-read materials and prioritizing open discussion within the boundaries of Reg FD, reviewing investors’ publicly disclosed views in advance and treating engagement as an ongoing conversation that builds on (rather than rehashes) prior discussions.

    Investors also encouraged companies to maintain the convenience and connection offered by video conferencing as the pandemic subsides, and consider the overall tone and leadership style of the individual leading the engagement. 

  • 4. Consider opportunities for collaborative engagement and new engagement avenues

    Some investors encouraged companies to consider opportunities for more collaborative engagement and new engagement avenues to help them connect with key investors beyond their top holders (e.g., periodic deep dives by topic via a virtual format, using virtual meeting breakout rooms to directly interact with a small group of investors).

    Some investors pointed to stakeholder working groups on specific ESG or sustainability reporting topics, recognizing these collaborations as having investor engagement benefits as well. Some also encouraged companies to optimize the annual shareholders meeting (particularly the question and answer portion) as an opportunity to hear feedback and talk through how the company is progressing on various topics of interest.

  • 5. Be forthcoming about challenges and how the company is investing in solutions

    A key theme of our conversations this year has been investors wanting companies to be more forthcoming about the challenges they are facing. Several investors cited the extraordinary challenges ahead to reach net-zero climate goals, which the investors are also facing. They said they understand that no one knows how to get there yet but want to see that companies are moving in the right direction, noting that the investors themselves are on this journey and learning alongside them.

    Some investors said they especially want to understand how companies are pushing themselves to think creatively and innovate. For example, if a company doesn’t think it is economically feasible or practically viable to reach the sustainability goals investors are pushing for, investors want to understand what is needed to make that goal practical and viable and what management is doing to help make that happen, including considering collaborations, investments and the impact of the companies’ policy activities. 

Key board takeaways for investor engagement

  • Approach engagement as a key information resource for understanding investor perspectives on the company’s strategy, risk management and governance; consider how the tone and substance of engagement conversations are meeting investor expectations for more candor, responsiveness and solution-focused discussion
  • Make clear that there is an open line of communication from investors to the board, both through involving board members in engagement conversations as appropriate and also by providing more transparency around how investor feedback to management is reaching the board level
  • Encourage management to approach engagement meetings with a stronger view toward efficiency and productivity
Aerial view of an orchard of peach trees

Looking ahead

Investors are embracing votes against directors to escalate their stewardship on climate risk and other ESG priorities, while the SEC’s new universal proxy rules will give investors more flexibility in choosing the directors they want to support. These developments should drive increased board attention to director skills and competencies around the material ESG risks and opportunities facing the business. With investor skepticism high, companies have an opportunity to advance beyond broad statements and commitments by disclosing meaningful ESG targets and metrics. These disclosures and strategic investor engagement can help demonstrate authenticity and build trust.

Questions for the board to consider

  • How is the board proactively challenging and refreshing its composition, oversight structures and practices to adapt to new and evolving risks and opportunities related to material environmental and social matters? Is the board staying nimble and adaptative as the business environment continues to transform?
  • How is the company helping to provide solutions that meet changing market needs and stakeholder expectations in the current and future business environment? 
  • Do the company’s public statements, commitments and values align with its workplace and supply chain policies and practices, capital allocation, political and lobbying spending, and public policy activities? How is the board overseeing, and the company communicating, this alignment? 
  • Does the current board have the skills and ongoing training needed to position it for oversight of strategy and risk management related to business-relevant ESG risks and opportunities? How do the board’s succession planning and evaluation practices support ESG oversight needs, and do the company’s disclosures effectively communicate the board’s strengths and goals in this area?
  • Do the company’s governing documents and disclosures make clear where ESG oversight responsibilities lie at the board and senior management levels and give color to how the board and its committees execute that oversight?
  • Are the company’s disclosures fit for purpose given current stewardship priorities, investing trends and related investor data needs? What disclosure controls and procedures underpin nonfinancial disclosures, and how are they assured?
  • Is the company approaching investor engagement as a compliance exercise or as a strategic opportunity to understand shareholders’ views of the company and learn about potential emerging risks and opportunities from an external stakeholders’ perspective? How is it enhancing engagement practices to optimize the efficiency and productivity of those interactions?
  • How could the board’s role in overseeing and directly participating in investor engagement be enhanced? Are directors able to have substantive discussions about the company’s strategy relative to material ESG factors and how the board’s oversight is conducted? If not, why?
  • How is the board learning about shareholder proposals trends and proactively considering how the company is addressing the concerns and requests raised by proposals that are gaining traction in the market?
  • How will the company’s next annual general meeting demonstrate management and the board’s receptivity and engagement with investors?

Receive updates from the EY Center for Board Matters

Connect

Summary

Director accountability on ESG is increasing. Investors plan to use their votes on director elections to hold boards responsible for oversight of climate risk and other material ESG matters. Investors want to better understand how boards are building the competence needed to oversee ESG, especially in the context of strategy, and how they are executing that oversight. Climate risk and workforce and board diversity remain in the spotlight, with concerns about greenwashing driving further scrutiny of company plans, actions and progress. Investors say their focus on ESG is rooted in their conviction that ESG can materially impact financial performance.

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.