ESG Issues Earned Shareholder Support in 2022; What's Ahead for Boards in 2023?

The 2022 U.S. proxy season has ended for most public companies, and corporate boards and management should take time to analyze shareholder voting outcomes and proposals focused mainly on environmental, social and governance (ESG) topics, including executive compensation, director support, human capital management and climate.

The proxy season is an annual opportunity for every company and its board to learn more about its shareholders’ priorities and interests.

Going into this year’s U.S. proxy season, there was a level of uncertainty about how much support ESG-related proposals would receive given higher shareholder support for some of these issues during the 2021 proxy season, in addition to current unease about the economy and the stock market downturn during the first half of 2022.

In this article, we clarify the outcome and impact of key votes on four important topics: executive compensation, director support, human capital management and climate. We also explore how companies can start preparing for the 2023 U.S. proxy season.

1. True or False: Say-on-pay (SoP) vote results returned to pre-pandemic “norms”?

False! In fact, several well-known companies saw markedly-low support or failed the vote entirely.

• Support drops: Vote support is lower across the market. The average SoP vote result among all Russell 3000 companies was 89.4 percent, compared to 91.7 percent in 2018. Approximately one-third of S&P 500 companies received less than 70 percent, and 4.3 percent (18 companies) lost their SoP vote. Vote results at large companies were more negative. For the S&P 500, average support was 87.6 percent compared to 91.4 percent five years ago.
• Greater shareholder scrutiny: Shareholders increasingly scrutinize insufficient disclosure on how goals are set or how payout decisions are made. They have also expressed concern that performance targets, both annual and long term, are not sufficiently rigorous. It’s usually too late to mitigate shareholder concerns about these issues once proxy season has begun.

2. True or False: Boards received strong support in director elections?

True! Although, trends show investor patience is growing increasingly thin.

• Director opposition grows: Directors saw overall support levels decline even though the total number of directors receiving less than majority support stayed essentially flat. In 2022, 30.2 percent of S&P 500 directors received less than 90 percent support and 9.3 percent received less than 70 percent. In 2018, those values were 17.9 percent and 6.5 percent, respectively.
• Greater compensation accountability: Rather than voting solely against SoP when a controversial compensation decision is disclosed, shareholders are holding directors who sit on the compensation committee responsible.
• New voting policies: Updated voting policies from institutional shareholders and proxy advisory firms related to board diversity, human capital metrics such as EEO-1 data, and director time commitments began to take effect and added to existing scrutiny of governance provisions such as classified boards.

3. True or False: There were more human capital management and diversity-related shareholder proposals than in 2021?

False! However, human capital management-related proposals saw greater success when they went to vote.

• Fewer proposals submitted: While the number of submitted human capital management proposals decreased 25 percent year over year, more of these proposals went to vote (54 in 2022 versus 39 in 2021).
• The reason: Companies took initiative following the windfall of social proposals in 2021 to get in front of anticipated issues like civil rights audits and pay equity, and effectively engaged with shareholders. Shareholders at a handful of companies that didn’t take proactive action in this area approved such proposals in 2022.
• More proposals passed: Thirty-one percent of human capital management proposals passed in 2022 (29) compared to 11 percent (18) in 2021.
• Proposal focus: Shareholder proposals that passed covered civil rights or racial equity audits, research and/or disclosure of pay data and research on concealment clauses. This is an indication that social and racial justice issues are still at the top of shareholders’ ESG agendas.

4. True or False: There was greater pressure to address climate strategy this year than in 2021?

True (to a certain degree)!

• More proposals: Climate change shareholder proposals represented 16 percent of submissions in 2022 (compared to 10 percent in 2021) and 9 percent of voted proposals (compared to 6 percent in 2021).
• Shareholder support drops: The percentage that passed dropped from 50 percent in 2021 to 30 percent in 2022, resulting in nearly flat proposals year-over-year (14 in 2022 versus 13 in 2021).
  • Blackrock Investment Stewardship indicated that 2022 climate proposals were more prescriptive and constraining than those presented in 2021.
• Support extends to other industries: Most of the successful 2021 climate proposals targeted the energy, transportation and logistics industries, but in 2022, a more diverse slate of companies saw successful climate proposals, spanning manufacturing, retail and insurance industries.

Planning for the 2023 Proxy Season

It’s early to start making predictions about the 2023 U.S. proxy season, but we are certain that the action we’ve seen in the current political and economic environment will impact what we see next year, including:

• Investors likely to expand policies against directors: Several large institutional investors implemented policies voting against directors the first year in which a pay-for-performance disconnect or problematic practice is identified. It is reasonable to assume those policies will be applied more broadly in 2023 and potentially implemented by more investors.
  • Companies might want to consider engaging with shareholders prior to making supplemental equity grants or if they intend to make significant changes to the compensation program.
• Pressure on companies to disclose on climate plans grows: The Supreme Court’s West Virginia v. EPA ruling will almost certainly create a legal challenge for the SEC’s proposed climate-related disclosure rule. On the other hand, major legal hurdles might influence some shareholders to ramp up the pressure for companies to disclose more about their climate transition plans.
  • Given the expanding impacts of climate change, including drought impacts on water resources and shipping routes, investors are increasingly requesting enhanced disclosures for how companies intend to address physical and transition risks, including taking a science-based approach to reducing emissions.
• Social proposal numbers might see increase: The devastating conflict in Ukraine will continue to have an overall dampening effect on the market that’s exacerbated by supply chain issues and a global energy crisis. Given these pressures, we might see more social proposals on issues like supply chain transparency and human rights issues (of which there were 15 and 35 proposals this year, respectively).
  • Affected companies should be specific in disclosures about the magnitude of operational disruptions and what steps the company has taken to ensure business continuity going forward. Companies should monitor regulation around supply chain due diligence, such as the Uyghur Forced Labor Prevention Act.
• Proxy advisory firms increase pressure for ESG disclosure: In 2022, Glass Lewis began voting against directors for large and mid-cap companies where the company hasn’t disclosed board oversight of environmental and social risks. While we saw some against votes this year, we can expect more in 2023 along with expanded coverage of Glass Lewis’ ESG Profile, which includes data on board oversight of ESG.
  • Companies should be explicit about what board committees are overseeing ESG risks and disclose how and at what frequency environmental and social risks are monitored at the board level. Additionally, shareholders want to see director expertise in specific ESG topics such as DEI, climate risk and cybersecurity, among others, when they are material to the company.

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