To vote or not to vote: that is the (2023 proxy season) question

Springtime. It’s the season of growth and renewal here in Canada, where local wildlife (including some humans) emerge from their long hibernation, blinking into the warm sunlight. Plants burst into glorious colour, and there is a sense of renewed hope and optimism. Ahh, Vivaldi.

Springtime is also the proxy voting season, a three-month burst when publicly traded companies hold their AGMs, and their shareholders (or delegated proxies) get to vote?on major issues addressed on company ballots. The April-to-June period provokes intense scrutiny on companies, and this year will be no different.?

Looking at last year, according to ShareAction’s 2022 Voting Matters report , the four largest asset managers, Vanguard, Fidelity Investments, BlackRock and State Street Global Advisors, only supported 20% of ESG resolutions, down from their support of 32% of those resolutions in 2021. In terms of climate, Vanguard and Fidelity voted in favour of a mere 8% and 4% of climate resolutions, respectively, a massive change from the previous year's support of 39% and 22% of such resolutions at energy companies.?

Insightia’s Shareholder Activism Annual Review reported that activist investing is back on the rise. According to Insightia, activist investors targeted 967 companies around the world in 2022, a rise of 54 over the previous year. Partly due to the new universal proxy rules, 511 companies in the US faced activist demands, a 10.6% increase from 2021. However, in terms of ESG demands, only 11.5% were at least partially successful in 2022, a steep fall from 25.8% in 2021.

I fully expect there to be a raft of climate-related proposals again this year, but keep an eye out for environmental and social-related proposals. Biodiversity and water usage, and waste are hot topics around boardroom tables right now, as are plastic pollution, the cost of living and deforestation. Diversity, executive pay and workers’ rights will also be on the radar in 2023.

Here are my (magnificent) seven trends and talking points for the coming months (and yes, it might feel like the wild west out there with so many seeking righteousness):

BlackRock plays it safe

Larry Fink, Chairman and CEO of BlackRock, was late out of the gate this year with his eagerly anticipated Annual Chairman’s Letter to Investors . His giant asset management firm is a major bellwether for investors and shareholders alike, and this year it seems BlackRock is trying to distance itself somewhat from hot political topics such as ESG (not mentioned) and climate change. Although BlackRock sees climate change as a major financial risk, Fink said it is “not our place” to tell companies and society how they should deal with it. “As I have said consistently over many years now, it is for governments to make policy and enact legislation, and not for companies, including asset managers, to be the environmental police.”?

He continued: “It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy, and we don’t know the ultimate path and timing of the transition. Government policy, technological innovation, and consumer preferences will ultimately determine the pace and scale of decarbonization.”

ESG as a political hot potato

Florida Governor and possible presidential candidate Ron DeSantis fired the latest salvo in an increasingly bitter ESG political war in the United States last month. Florida has now formed an alliance with 18 other states “to push back” against the perceived ESG agenda of President Joe Biden. The alliance — which includes Alabama, Alaska, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming —believes that socially-conscious ESG investing is a clear and present danger to their current way of life:??

“The proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom, and our way of life, putting investment decisions in the hands of the woke mob to bypass the ballot box and inject political ideology into investment decisions, corporate governance, and the everyday economy,” the states wrote in a joint statement. There is no doubt that this highly charged political atmosphere will sway some shareholders’ decisions and that directors should be prepared for the ESG backlash discussion.

Ironically for the anti-ESG camp, the Inflation Reduction Act (IRA) passed last year in the US has triggered a huge wave of job creation via green investment in states across the country. Major firms in Europe are actively considering shifting production to the US to take advantage of benefits such as tax breaks on manufacturing wind turbines, solar panels, and electric vehicle batteries, as well as subsidies for green hydrogen, biofuels and carbon capture and storage facilities. For example, Danish green-hydrogen producer Topsoe A/S is considering adding a second plant in the US. Meanwhile, German chemicals giant BASF SE and steelmaker ArcelorMittal are also looking at shifting operations to the US.?

No doubt many companies are in a ‘green hushing mode’, but at the same time, as much, if not more, ESG work is happening behind the scene. My best advice is to be pragmatic, look at the realities, the risks and opportunities, and report on what creates value now and in the future.

The importance of climate

ShareAction has published a list of resolutions for asset managers to watch this proxy season, aimed especially at progress on environmental and social issues. The list includes the May 12 Follow This’ shareholder resolution filed at BP, which wants to ensure the fossil-fuel giant’s Scope 3 emissions reduction targets are aligned with the Paris Agreement and on track to net zero by 2050, therefore mitigating systemic climate risks for investors. Amalgamated Bank has also proposed that Amazon measure and disclose all of its Scope 3 greenhouse gas emissions, including those related to its physical stores and e-commerce operations.?

There are mixed messages elsewhere. According to the latest research conducted by shareholder advisory firm Georgeson , investors would be happy to apply pressure by voting against the reappointment of directors if they do not think the company’s climate transition plans are good enough and not in line with restricting global warming to no more than 1.5C above pre-industrial levels. However, only just over a quarter of investors (26%) think that say-on-climate votes are important, with 37% reporting they are not important and the other 37% staying undecided.?

Universal proxies make their mark

The recent introduction of universal proxy cards will give investors much greater sway over the makeup of a board. These new rules, introduced by the SEC last year, will likely lead to a higher number of proxy voting contests and leave individual directors open to being targeted by activists and other shareholders. To counteract this, more boards are trying to add a human touch to their directors. Profiles are being buffed on company websites and in proxy statements, while some companies have used videos featuring board members to better engage with their stakeholders. Macy’s Inc. Insider special edition is a good example of this trend.?

Companies and boards should get ready to be possible targets of an activist campaign that could even involve dissident director nominees, and plan accordingly. One way to reduce the risk of activism impacting the board is to review and update articles of incorporation and bylaws, as well as improving how the board’s qualifications and effectiveness are being communicated. This includes assessing the current level of education that board members have on the risks and opportunities of today and tomorrow.

Glass Lewis in the spotlight

Earlier this year, Glass Lewis issued fresh voting recommendation policy guidelines that placed director accountability front and centre. The international corporate governance advisors have recommended votes against the nomination and governance chairs of Russell 1000 companies that do not “provide explicit disclosure concerning the board’s role in overseeing environmental and social issues”.?

That same voting recommendation also applies to Russell 3000 index boards that do not have at least 30% gender-diverse directors. Glass Lewis is also looking for comprehensive disclosures of oversight duties and climate risks from heavy carbon emitting companies: “Boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues.” However, these suggestions did not go down well with a group of Republican attorneys-general. In January, they sent a letter criticizing the advice , saying that it wasn’t material and threatened the economic value of their states’ investments, including pension funds. This battle is by no means over.

Digital takes off

Expect technology to make its mark this proxy season. Proximity, a high-tech investor communications platform, is rolling out its digital proxy voting service, Vote Connect Total , into new markets. Working with Citi Securities Services, South Africa is the latest on the list for April, following the path taken by Europe, Australia and New Zealand. The system allows for unique golden source announcements, real-time voting and vote confirmations across the entire proxy voting ecosystem.

Put your board directors to the test

Proxy experts Broadridge published five excellent questions for board directors in the Harvard Law School Forum for Corporate Governance that bear repeating here:

1. Are we prepared for the new rules and disclosures on pay versus performance and (in 2023) clawbacks?
2. How will we respond if investors use the universal proxy rules to put director candidates on the slate?
3. What additional information and metrics are our shareholders asking for regarding ESG reporting?
4. Are we prepared to effectively educate our newer retail shareholders as well as our base of long-term retail shareholders?
5. Are we effectively monitoring and using social media for investor relations’ purposes (beyond marketing and customer service)?

The stakes are high again this proxy season. Will shareholders vote for directors under certain circumstances? Do we even have directors now with the skills and knowledge to run a company under current circumstances? Will the voting ensure the best outcomes for shareholders and stakeholders, not just now but in the future? After all, Mother Earth seems to be using her proxy voting card more often, which is costing companies and societies money and livelihoods.

The next three months will be fascinating.