Miles Rogerson is a Financial Journalist at Diligent Market Intelligence. This post is based on his Diligent memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; and Big Three Power, and Why it Matters (discussed on the Forum here) by Lucian A. Bebchuk and Scott Hirst.
A select group of ESG proposals have led the way in terms of shareholder support during the 2023 proxy season. Freedom of association, alongside broader human rights reporting proposals, won occasional majority support from investors in the 2023 proxy season, as shareholders identified employee retention and recruitment as a potential risk resulting from current market volatility.
In a market plagued by rising inflation and cost-of-living concerns, a number of shareholder proposals on pay equity and severance package approval were also forthcoming.
Human capital becomes a priority
Freedom of association proposals, which seek to guarantee employees’ right to form trade unions, rank among the best performing ESG proposals of the 2023 season. Nine proposals of this kind won 35.5% average support, up from one proposal winning 38.9% support a season prior, while none made the ballot in the 2021 season.
“Proposals on freedom of association and diversity, equity and inclusion (DEI) reporting that went to a vote continued to gain traction with investors, despite the broader decline in support for environmental and social proposals, an indicator that investors felt the social risks they addressed were tied to financial value,” PJT Camberview Director Sheena VanLeuven told Diligent Market Intelligence (DMI).
One proposal filed by the New York City Comptroller, asking Starbucks to commission an assessment of its workers’ rights and freedom of association policy, won 52% support at the U.S. coffee company’s March 23 annual meeting.
Vanguard elected not to support the proposal, explaining that while matters relating to workers’ rights are a “material risk” at Starbucks, the coffee giant’s board “appeared to be taking appropriate steps to remediate and address the risks.” Seven other proposals of this kind won above 30% support in 2023 at companies such as Netflix and Activision Blizzard.
Beyond unionization, other human rights concerns received elevated levels of support, albeit rarely winning majority support. Two proposals asking Smith & Wesson Brands and Axon Enterprises to adopt/amend their human rights policies won 41.8% and 13.7% support, respectively.
In comparison, during the 2022 season, proposals asking Smith & Wesson and Microsoft to adopt/amend their human rights policies received 43.9% and 4.1%, respectively. In 2021, support for human rights proposals was markedly lower, with reporting requests at Twitter and Alphabet receiving 14.3% and 10.3% support, respectively.
“A lot of companies have ramped up their governance of human rights issues, DEI and freedom of association over the last few years,” Marc Lindsay, managing partner, director of research at Sustainable Governance Partners, told DMI. “Investors are giving companies credit for enhancing their disclosure or governance practices.”
Many U.S. companies with operations in Europe will also be required to enhance their human rights reporting in the near future, thanks to the EU’s Corporate Sustainability Reporting Directive (CSRD).
Under the new rules, made effective January 5, 2023, U.S. companies with European subsidiaries will be required to report on due diligence processes related to their corporate value and supply chains, which must also be subject to a thirdparty audit.
Diversity disclosure
Broader focus on employee welfare also meant that support for proposals seeking the approval of, or amendments to U.S. diversity and equal employment opportunity (EEO) policies remained relatively consistent in the 2023 season, with eight proposals winning 28.4% average support, compared to 11 winning 32.7% support in the 2022 season.
As with freedom of association proposals, only one of the 2023 EEO-1 proposals received majority support in the season. That was at Expeditors International of Washington’s May 2 annual meeting, where the proposal won 57.3% support. Legal & General Investment Management (LGIM) was one of many investors to support the proposal, noting in its rationale that “disclosing the level of information contained in the EEO report may lead to reduced inequality,” and thus reducing business risk.
“Freedom of association proposals, which seek to guarantee employees’ right to form trade unions, rank among the best performing ESG proposals of the 2023 season.”
“The proposals that got higher support this year were carefully crafted by the proponent to be focused solely on disclosure and not on being prescriptive around company strategy,” Lindsay told DMI. “Proponents know that the passives are going to be hesitant to support proposals that are more prescriptive.
“While divergent voices have started to take aim at companies for advancing social initiatives, all indications point to these topics continuing to be priorities for investors and companies alike in the year ahead,” said VanLeuven.
“I think the anti-ESG sentiment has had a chilling effect at some of the larger asset managers, in terms of whether they support these diversity resolutions,” said Edgar Hernández, assistant director, department of strategic initiatives at the Service Employees International Union (SEIU). “My hunch is that the biggest asset owners probably did not, and that’s a big obstacle to overcome when pushing issues like gender, racial and ethnic diversity on boards.”
Pay disparity
Investor concerns also extended beyond employee welfare and human rights, with many proposals seeking to enhance scrutiny of executive pay. Proposals pushing U.S. companies to create pay disparity reports have seen support hold steady at 33.8% compared to 35.5% in 2022, while the number of proposals being filed has increased to 11 this season, up from eight in 2022.
While no director remuneration proposals managed to win majority support this season, James McRitchie’s proposal urging Boeing to establish an annual report on unadjusted median and adjusted pay gaps across race and gender globally came the closest, winning 47.4% support at the airline’s April 18 annual meeting.
20 proposals pushing U.S. companies to submit executive severance packages to a shareholder vote were put before investors at annual meetings this season, winning 31.4% average support. Three of these proposals, targeting Delta Air Lines, Becton, Dickinson and Co. and Expeditors International of Washington, were backed by a majority of votes cast. Proposals seeking clawback policy amendments at Marathon Petroleum and Verizon Communications won 45.2% and 37.9% support, respectively.
“While divergent voices have started to take aim at companies for advancing social initiatives, all indications point to these topics continuing to be priorities for investors and companies alike in the year ahead.”
Average support for proposals asking U.S.-listed companies to approve clawback provisions also increased to 41.5%, compared to 27.5% a season prior.
“In some cases, the U.S. is somewhat of a laggard on these issues, and I think we really need to push more to ensure that there is gender and racial pay equity. There’s definitely been a lot of great progress made so far, but there’s still some ways to go,” Hernández said.