2020 Proxy Season: A Look Back, and A Look Forward

Jessica Strine is CEO, Robert Main is COO, and  Marc Lindsay is Director of Research at Sustainable Governance Partners LLC. This post is based on a SGP memorandum by Ms. Strine, Mr. Main, Mr. Lindsay, and Amy Hernandez.

For many, the 2020 proxy season required channeling of Winston Churchill for needed encouragement: “If you’re going through hell, keep going.” With companies, investors, and the public focused on the COVID-19 pandemic and racial equality movement, many spring discussions between companies and their shareholders had little to do with the ballot items at the upcoming shareholder meetings. Yet these meetings proceeded apace—albeit in a virtual format that presented its own challenges—and several noteworthy environmental, social, and governance issues (ESG) trends emerged from the final tallies.

Outside of the 2020 annual meetings, it was equally clear that investors’ attention to ESG is accelerating. While some wondered, early in the pandemic, whether ESG was a luxury good that would cease to matter in a market downturn, facts on the ground suggest the opposite: early studies found that ESG-oriented investment strategies have outperformed the market during recent months, [1] and calls for a stakeholder-centric “Great Reset” have become mainstream within the business world. Importantly, like the companies in which they invest, asset managers find themselves subject to increased scrutiny to ‘build back better’ by their clients, employees, investors, regulators and communities. With this backdrop, it is not surprising that ESG has become many top asset managers’ “new standard for investing.” [2]

Here, we discuss six themes –driven by events both in and outside of this year’s shareholder meetings—that should be front of mind as public companies prepare for fall engagements with their investors.

1. The “S”—human capital and diversity in particular—takes front and center.

The momentum behind human capital issues, including workforce diversity, was building before 2020 began. However, the speed with which these issues have risen to the top of investor agendas exceeds that of any other ESG issue in recent memory. We expect that workforce welfare and racial equality will be enduring investor focal areas.

The COVID-19 crisis quickly drove labor practices and employee health and safety to become the dominant sustainability topics in companies’ engagements with investors. Investors want to hear how companies are addressing layoffs, furloughs, pay and benefits, prioritizing employee health and safety, and balancing short-term actions with longer-term sustainability. [3] The investment rationale for these inquiries is rooted in the understanding that better corporate stewards of employee welfare will emerge from the pandemic with stronger workforces, higher employee engagement and productivity, and lower turnover. Investor focus on these issues will persist as the pandemic and market turmoil continues.

Similarly, companies are hearing from institutional investors and asset owners that they should be proactively addressing racial equality within their workforce. During the 2020 proxy season, 4 proposals seeking workforce diversity disclosure passed, including a proposal at Genuine Parts Company that received 75% support. [4] Shareholder demands outside of annual meetings have been equally loud, with calls for both enhanced disclosure—including to disclose companies’ Consolidated EEO-1 Reports, which includes the race, ethnicity and gender of employees [5]—and action to address inequalities in workforce composition, pay, and promotion velocity. Notably, these investor concerns do not stop at the level of rank- and-file workers: mainstream investors, such as Vanguard, have been calling for disclosure of directors’ ethnic diversity for some time. Most recently, the proxy advisor ISS sent letters to US companies requesting disclosure of the ethnicities of their directors and senior executives.

Action Items for Public Companies

  • As we noted in April, use earnings calls, direct engagement, and other channels to be transparent—and frank—about the company’s COVID-19 response, including efforts to protect the health and well-being of your workforce.
  • Review your non-public diversity data, including forward-looking diversity & inclusion targets, and consider what disclosure would best explain where the company is today … and where it is headed.
  • Investors expect boards to be closely involved in the oversight of many aspects of human capital Reevaluate your oversight protocols, including the role your board is playing in overseeing, supporting, and—at times—appropriately challenging the company’s human capital strategy.

2. The other half of the “S”—companies’ social capital and purpose—cannot be ignored.

Likewise, companies’ actions to address the societal impacts of many businesses—including upon customers and communities—have drawn both acclaim and derision during these uncertain times. In the wake of George Floyd’s killing, a broad set of businesses announced new measures and initiatives to promote racial justice. To name a few, tech companies refused to sell facial recognition technology to U.S. police forces, media companies sought to broaden representation in their programming, and companies from all sectors joined advertising boycotts in response to perceived failures to oversee content. Similarly, amidst the COVID-19 pandemic, companies have dedicated significant resources to issues such as access to health care and bridging the digital divide.

At the same time, investor scrutiny has never been higher when it comes to whether companies are truly ‘walking the talk.’ With myriad third-party data services and enhanced media attention, companies’ every move is under the investor microscope and carries reputation risk, as well as opportunity.

Moreover, investors are increasingly focused on companies’ political contributions and lobbying expenditures, and are scrutinizing the alignment between companies’ public statements and the political activity of both the company and the industry associations to which it belongs. At the 2020 shareholder meetings, 5 political activity proposals passed, and an additional 12 proposals received greater than 40% support (versus 3 and 13 in 2019).

Action Items for Public Companies

  • Take a hard, honest look at how your company would fare—in the eyes of both the proxy advisors and your major shareholders—if you received the most prevalent “S” Use the fall engagement season to collect investor feedback on 2021 proposals—either those the company has already received, or those that it could receive.
  • As we noted in June, now is an opportunity to publicly articulate your company’s corporate purpose to key stakeholders in a substantive manner that addresses short- and long-term value creation.
  • During fall engagements, explain the stakeholder trade-offs that your strategy entails—both during the pandemic, and afterwards—and ask your long-term investors for their input.

3. Executive compensation faces enhanced scrutiny—and 2021 will be even more challenging.

Investors and other groups, including the proxy advisor Glass Lewis, have signaled that boards should proactively align executive compensation with employee and shareholder experiences stemming from the COVID-19 crisis. While 2020 Say-on-Pay votes were technically focused on 2019 pay, anecdotal evidence indicated that, in many instances, shareholders were unwilling to support large pay packages given the unfolding events of 2020. [6]

Simultaneously, some investors have pointed to the need to retain and motivate top management during this trying time [7], and compensation committees will be pulled between those dueling imperatives. Indeed, many companies will not hit performance-based compensation targets set before the pandemic. Boards will have to consider whether to use positive discretion to adjust underwater performance-based grants or make one- time retention grants. In normal times, neither approach is viewed favorably by investors or proxy advisors. To add to the uncertainty, calls for linking pay with ESG targets are becoming more mainstream; however, most investors’ (and proxy advisors’) primary focus remains quantitative alignment between pay and relative stock performance, leading to a Catch-22 if ESG targets and stock performance do not correlate over the relevant measurement period.

Action Items for Public Companies

  • Be judicious with goal modifications and one-time grants; investors will want detailed information on the retention and motivation needs that drive any such moves.
  • Also proceed cautiously with integrating ESG metrics into compensation design, and ensure that long-term oriented ESG goals are truly aligned with long-term measurement periods.
  • Use the fall engagements to socialize possible options with investors, including how investors balance retention concerns with ‘sharing the pain.’

4. Climate change remains a top ESG priority, and will only intensify in attention.

Climate issues continue to sit at the top of investors’ ESG priority list. In January, BlackRock joined Climate Action 100+, an initiative of more than 450 investors working to compel public companies to curb their emissions in line with the Paris Agreement. [8] More recently, for the first time, Vanguard publicly stated that it is encouraging certain companies to set targets aligned with the goals of the Paris Climate Agreement. [9] In the meantime, support for climate-related shareholder proposals has continued to grow; 6 proposals related to climate-related disclosure passed in 2020, while none garnered majority support in 2019. Scrutiny is no longer limited to carbon-intensive sectors: 2020 saw a climate proposal pass with 74% support at Dollar Tree, a chain of discount variety stores, and companies from a wide range of sectors are releasing detailed plans for how they will get to carbon-neutral (or even carbon-negative). Institutional shareholders are also withholding support from directors because of climate concerns; most notably, BlackRock took voting action against 53 companies in 2020 because of insufficient climate risk disclosure or management, and has placed an additional 191 companies ‘on watch’ for possible voting action in 2021.

To further complicate matters, the upcoming U.S. elections introduce significant regulatory uncertainty. The divide between the Trump administration’s current policies and recent policy proposals by Joe Biden and the Democratic caucus are notable, with significant ramifications for many sectors. Investors will want to understand the impact of the election outcome on companies’ climate strategies and, more importantly, how companies are preparing to thrive under either policy outcome (or the many permutations in between).

Action Items for Public Companies

  • Be prepared to explain to investors how your business strategy is resilient to a change in S. climate policy, including how your strategy would fare in a Paris-aligned world.
  • Ensure your board is ‘climate-competent’, and have directors prepared to talk to these issues in fall engagements; many will be asked.
  • To the extent you have not yet done so, begin preparing disclosures that address the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

5. Robust sustainability reporting becomes a “must have”—and momentum builds behind SASB.

Shareholder calls for better sustainability reporting are becoming more uniform, as investors—rapidly attempting to integrate ESG into their stock selection—are finding a dearth of comparable, decision-useful disclosure and data. This disconnect was highlighted by a recent report of the U.S. Government Accountability Office, which found a “variety of different metrics” used by companies on the same topic, and qualitative disclosure containing “generic language … not focused on material information”. Companies should expect this tension to drive increasing pressure by investors to enhance their ESG disclosure.

Among the various voluntary reporting frameworks, the disclosure standards by the Sustainability Accounting Standards Board (SASB) have accumulated the most momentum in recent years. Supported by an Investor Advisory Group representing approximately $40 trillion in assets under management, the SASB standards seem to represent investors’ collective ‘table stakes.’ Perhaps the largest and most vocal proponent, BlackRock’s Larry Fink wrote in January that BlackRock expects companies to publish disclosure in line with industry-specific SASB guidelines by year-end. Importantly, many investors characterize the SASB standards as a ‘floor’ for sustainability reporting; companies will need to consider what additional disclosure is needed by shareholders and other stakeholders, all the while balancing practical constraints (particularly in an economic downturn).

Action Items for Public Companies

  • To the extent you have not already, familiarize yourself with the SASB standards and look to integrate this disclosure into your sustainability reporting. Consider additional frameworks—such as TCFD or the Global Reporting Initiative (GRI)—that may be relevant to your sector and your investors.
  • In your fall engagements, communicate your intentions to investors, and gather feedback; they will be very focused on how you plan to make progress toward providing investor-relevant ESG disclosure.

6. Activists wait in the wings.

As the market pulled back in reaction to COVID and the future grew more uncertain, public activist activity slowed in the first half of the year. With M&A activity at multi-year lows, liquidity squeezed, and entire sectors pegged for failure, a common activist thesis became far less compelling. Many companies were quick to adopt shareholder rights plans, or poison pills, or to ensure that one was ‘on the shelf’, ready to be deployed in the face of an opportunistic activist. Activist firms themselves may have been unprepared to remain in a company’s stock through the full length of a possible campaign and were concerned that they would be seen as tone-deaf for attacking a company during a global pandemic. As a result, we saw the lowest number of U.S. proxy fights in decades.

As we look forward, however, companies should anticipate a higher number of private and public campaigns starting this fall and winter. There is typically a meaningful uptick in activist campaigns

following a market downturn, as activists search for undervalued targets. In addition, while there were relatively few proxy fights in the 2020 season, there were some significant activist wins, including two proxy fights (at GCP Applied Technologies and Mack-Cali) that resulted in a replacement of a majority of the board. Business plans have come under unprecedented short-term pressures, providing activists with a target-rich environment to argue that a company’s corporate governance failed to ensure a resilient strategy. Finally, the pre-crisis uptick in first-time activists, who often have a smaller capital base, leave small-cap companies particularly exposed.

These ESG trends have created a long list of action items for public companies as they approach the fall engagement season—on top of managing the everyday realities of the current pandemic and economic downturn. However, for the well-prepared company, this fall’s engagements with investors and next year’s AGM season can be opportunities for transparent two-way dialogue and powerful relationship-building for the long-term.

Action Items for Public Companies

  • Refresh your ‘activism vulnerability assessment’, including an honest assessment of vulnerabilities that may have been exposed during the pandemic, and assemble your response team—including outside advisors—proactively.
  • Likewise, actively engage your board in contingency planning for an activist outreach, and have a clear, well-understood roadmap for the response team.
  • Use the fall engagement season to build trust and rapport with your largest shareholders; the middle of a proxy fight is not the right time to first discuss your long-term strategy and the strength of your board.


1See, for example, reports by Morningstar, MSCI, and S&P Global.(go back)

2In addition to BlackRock’s well-publicized communications that “we are on the edge of a fundamental reshaping of finance”, similar public pronouncements from several of the world’s largest active managers—including T. Rowe Price, Allianz, Invesco, Wellington, and others—have served as clear notice that the “Age of ESG” has only just begun.(go back)

3See, for example, letters from State Street Global Advisors, manager of approximately $3 trillion in assets under management (AUM), and a separate coalition of 195 institutional investors, representing nearly $5 trillion in AUM.(go back)

4All shareholder meeting data used in this Insight has been sourced through ISS Corporate Solutions Voting Analytics.(go back)

5For example, the New York City Comptroller recently issued public letters to 67 companies asking them to publicly disclose their Consolidated EEO-1 Reports. Similarly, several investors, including Calvert and Trillium Asset Management, each well-known for submitting shareholder proposals to companies across all sectors, have signaled that racial equality will be a top priority for next year’s shareholder proposals.(go back)

6This trend did not necessarily translate at an aggregate level, as the number of companies that failed to receive majority support, and that dropped below the crucial 70% level at which ISS begins to scrutinize companies responsiveness, stayed relatively consistent at 45 and 104, versus 47 and 141, respectively, in 2019.(go back)

7We discussed this tension in April, quoting Sascha Sadan, director of investment stewardship at Legal & General Investment Management, who said, “We do need leadership at the moment. We need good people. The best leaders could end up saving their companies a lot more.”(go back)

8Climate Action 100+ has now grown to more than 450 investors with over $40 trillion in assets under management. In addition to its focus on Paris-aligned emissions, this group advocates for TCFD reporting and disclosure of whether a company’s lobbying efforts, including its trade association memberships, support Paris-aligned policy.(go back)

9Both of these investors, which have hesitated to ‘name and shame’ companies in the past, have published public bulletins naming companies they have voted against and providing specific details and rationale for their climate-related votes.(go back)

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