Mid-Season Review of 2024 Proxy Season

The 2024 proxy season is just past its peak, with over 57% of the Russell 3000 with December 31 fiscal year-ends having held their annual meetings and reported their voting results. We summarize below some of the key trends in shareholder proposals for this season.  A more comprehensive review of the 2024 proxy season will need to wait until all of the voting results are in.  However, the trends so far may be instructive to boards as they consider engagement strategies for the coming year.

Key Points:

• The 2024 proxy season saw an increase in the number of no-action requests lodged with the Securities and Exchange Commission (the “SEC”) for the exclusion of shareholder proposals compared to the 2023 proxy season, as well as an uptick in the willingness by the SEC staff to grant no-action requests for exclusion, particularly where companies argue that a shareholder proposal relates to ordinary business matters, would result in micromanagement, or suffers from a procedural defect.
• Shareholder proposals on “traditional” governance topics, including reducing supermajority voting requirements and requiring an independent board chair are receiving strong support this proxy season, with several majority vote proposals being approved by a wide margin.
• There is continued investor interest in environmental, social, and political topics, with the most frequent shareholder proposal topics related to climate change and greenhouse gas emissions and political contributions and lobbying disclosure. Shareholder support for environmental proposals remains lower than the 2022 peak, with very few thus far garnering sufficient votes for approval. In addition, while the number of “anti-ESG” proposals is increasing, they are not seeing significant support from shareholders.
• Shareholders are showing some interest in proposals relating to emerging issues, such as calls for disclosure about use and oversight of artificial intelligence.

SEC Shareholder Proposal No-Action Requests in the 2024 Proxy Season

Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, a company must include a shareholder proposal in its proxy materials unless the proposal falls under any one of thirteen substantive bases for exclusion or the proponent or proposal fails to satisfy the eligibility or procedural requirements of the rule or the company’s constituent documents. Typically, when a company intends to exclude a shareholder proposal from its proxy materials, it will request no-action relief from the SEC staff.

The SEC staff’s approach to no-action requests regarding shareholder proposals is subject to change and shifting priorities, which may lead to some uncertainty for companies as they consider whether to challenge proposals they receive.  Most recently, in November 2021, the SEC staff in the Division of Corporation Finance issued Staff Legal Bulletin No. 14L (“SLB 14L”), which announced that certain analytical approaches, particularly the approaches to the “ordinary business” and “relevance” exclusions for shareholder proposals, that were adopted under the prior SEC leadership would be abandoned or modified.  For additional information regarding SLB 14L, see Mayer Brown’s Legal Update, “SEC Staff Issues Legal Bulletin Announcing Shift in Shareholder Proposal Review Process Ahead of 2022 Proxy Season,” dated November 8, 2021.[1]

The number of no-action requests submitted to the SEC staff decreased significantly in the 2023 proxy season, likely as a result of the staff’s more restrictive stance with respect to the exclusion of shareholder proposals under the new guidance in the 2022 proxy season.  However, this proxy season again saw an increase in no-action submissions, with 269 submissions compared to 177 in the prior season.

During the 2024 proxy season thus far, the SEC staff concurred with companies’ determination to exclude a shareholder proposal in approximately 53% of the cases, as compared with 46% in the 2023 proxy season.

Many of the companies successfully argued this year that the proposal was excludable under Rule 14a-8(i)(7), the ordinary business exclusion. The rationale behind this subsection recognizes that it is the purview of management to run the day-today operations of a company, not the shareholders and that shareholders should not micromanage a company on matters where shareholders would not be in a position to make informed decisions. A common example of the “ordinary business” grounds for exclusion involves a proposal relating to employee matters such as workforce turnover, employee safety, or the written content of employee training materials. The SEC has, however, carved out an exclusion from this where proposals focus on social policy issues that are sufficiently significant so as to transcend ordinary business.

Consistent with prior seasons, the ordinary business exclusion was the basis most frequently argued by companies in no-action requests, and the staff concurred with over half of these requests. Among the proposals permitted to be excluded under the application of Rule 14a-8(i)(7) were proposals that would seek a breakdown by major retailers of greenhouse gas emissions by product category or would seek disclosure by financial institutions of the proportion of sector emissions attributable to clients not aligned with a credible net zero pathway. This appears to be consistent with the framework of SLB 14L, under which the staff is focused on the level of granularity sought in the proposal, and whether and to what extent it inappropriately limits discretion of the board or management.

However, there were also several requests in which the company argued for the application of the ordinary business exclusion and the staff did not agree, because they did not constitute micromanagement or raised significant policy issues. These proposals covered a variety of topics, including proposals related to companies’ use of artificial intelligence (“AI”), the Board’s role in overseeing AI usage, and the ethical guidelines the company has adopting with respect to the use of AI, as well as gender-based compensation gaps and associated risks, environmental and safety risks, living wage policies, and deep sea mining.

Trends in Shareholder Proposals in 2024

This proxy season has seen a large number of proposals on “traditional” governance topics, including proposals to implement simple majority vote requirements, to provide shareholders with the right to act by written consent, and to require an independent board chair. Compensation-related shareholder proposals were also significant this proxy season, particularly proposals that would require a shareholder vote on severance or change-in-control provisions for executives.

While support for governance- and compensation-related proposals overall is generally consistent with prior years, proposals regarding majority voting have been particularly popular this season, with more than 75% of the proposals that have been voted at this point achieving majority support from shareholders. According to data from Broadridge as of June 12, 2024, median support for these simple majority voting proposals was approximately 72%.

Consistent with recent years, environmental and social topics still make up a significant portion of the proposals put forth for shareholder vote. Relying on data from Broadridge, more than 300 such proposals have already been considered by shareholders. Within this broader category, climate change and greenhouse gas emissions and political spending and lobbying appear to be the dominant topics of shareholder proposals in the 2024 proxy season. Support for these proposals appears to be generally consistent with the 2023 season, but noticeably lower than the levels of support for environmental and social proposals in 2022.

According to the Broadridge data, median support for environmental proposals at this point in the season is approximately 19%, compared to approximately 21% in 2023, and approximately 30% in 2022. With respect to political spending and lobbying proposals, median support is approximately 23% at this point of the proxy season, a slight increase from the approximately 21% median support in 2023. One environmental proposal and one proposal related to transparency in lobbying have received majority support of shareholders thus far.

Also noteworthy is the number of proposals in the so-called “anti-ESG” category – this includes those proposals that are critical of, or question the value of, company policies or initiatives related to topics such as climate risk or corporate social responsibility.  These proposals continue to increase in number, but support is low among shareholders, with a median support level of approximately 1.5% at this time.

Finally, a topic to watch for upcoming proxy seasons is proposals relating to the use of AI and companies’ governance structures and processes relating to AI.  The 2024 proxy season saw 13 proposals on this topic, mainly to technology and entertainment companies, in light of rapid technological developments in this space. Although the number of proposals was small, and none of these proposals achieved majority support, there appears to be increasing interest in this topic.