In this article, ISS provides a snapshot of shareholder proposals thus far in the 2018 proxy season. The most salient point is that over two-thirds of the proposals in the ISS database related to social or environmental issues, far outpacing the governance- and compensation-related proposals that historically have dominated the agenda. What’s going on?
For its analysis, ISS identified from its database 450 proposals made to Russell 3000 companies. The leading proposals on social issues related to lobbying and political contributions (74), other social issues (65) and board and workplace diversity and parity (62). Among environmental proposals, the leader was climate change with 70 proposals, followed by other environmental issues (22) and sustainability (20). The top governance proposals related to board matters (49), followed by shareholder rights (46) and other governance matters (11), and the top compensation-related proposals were compensation links to environmental and social matters (17) and other compensation matters (14). Even more surprising, all but one of the top ten shareholder proposals—proposing a lower threshold for the right of shareholders to call special meetings, a Chevedden group favorite this season—related to environmental and social issues.
What is driving this trend? ISS suggests that one reason may be the substantial growth in interest in environmental and social issues among the public and, particularly, among large asset managers and other institutional investors.
The EY Center for Board Matters offers some support for that view. EY identified investors’ top priorities for companies in 2018 based on interviews with over 60 institutional investors with an aggregate of $32 trillion under management. Of investors surveyed, 82% viewed board composition as a top priority, focusing in particular on board diversity. Addressing climate risk and environmental sustainability, including topics such as resource use, greenhouse gas emissions reduction, carbon footprint or preparation for a low-carbon economy, was a priority for 64% of respondents. (See this PubCo post.)
In part, this new interest in matters beyond just governance may result from the growth in index investing: as BlackRock CEO Laurence Fink has argued, asset managers’ responsibilities of engagement and advocacy have increased, given that asset managers cannot simply sell the shares of companies about which they have doubts if those companies are included in index funds. For example, BlackRock’s board engagement priorities for 2017-2018 highlighted topics such as board composition and diversity, corporate strategy for long-term value creation in light of shifting assumptions, executive pay linked to long-term strategy, climate risk disclosure and human capital management. (See this PubCo post and this PubCo post.) In addition, BlackRock has recently advocated that the boards of all of its investments should have at least two women directors. (See this PubCo post.)
In addition, the success of three proposals last year for enhanced disclosure regarding climate change may have created an inflection point on climate-change related proposals, and the difference was reportedly that some of the largest institutional holders— including mammoth institutional holders BlackRock and Vanguard—switched sides on some of these votes, after years of limiting their actions to just cajoling. (See this PubCo post.)
Interestingly, however, proposals relating to political spending and lobbying, the top items on the ISS list of proposals—do not figure prominently as key on priority lists from asset managers such as BlackRock. Indeed, in its 2018 proxy voting guidelines, BlackRock appears to impose a relatively high threshold to vote for a shareholder proposal on political activities or spending: it does not generally support any proposals requesting shareholder votes on political activities or expenditures or proposals related to corporate disclosure of political activity if they are overly prescriptive, but may support proposals requesting additional disclosure “where there seems to be either a significant potential threat or actual harm to shareholders’ interests and where [it believes] the company has not already provided shareholders with sufficient information to assess the company’s management of the risk.” (See this PubCo post.)
The second reason posited by ISS is that, in the “target universe” for shareholder proposals of mostly large-cap companies, “governance topics may be lower on the agenda.” That’s because many of the governance issues that typically make their way into shareholder proposals—such as annual director elections, majority voting standards and, to some extent, even proxy access (although, as discussed in this PubCo post, “fix-it” proposals continue to be submitted)—are now fairly standard at many large cap companies. According to ISS, “[w]hile, some proponents move on to the next tier of smaller-size companies to address governance concerns, those efforts are less likely to gain as much attention or make an impact [on] the broader market compared to proposals filed at large firms. Therefore, proponents may be forced to make a strategic [decision] to continue to focus on large companies, which often serve as models for the rest of the market.”
One new campaign that ISS highlights is from Investors for Opioid Accountability, a coalition with more than $1.3 trillion in assets. According to ISS, the coalition has submitted 10 proposals so far this season to various pharmaceutical and prescription drug distribution companies, some of which have requested relief from Corp Fin. The proposal typically urges the board to report to shareholders on the governance measures that the company has implemented to monitor and manage the financial and reputational risks associated with the opioid crisis, including whether the board or a board committee has responsibility for monitoring the risks, and whether the company has revised senior executive compensation metrics or policies, adopted or changed mechanisms for obtaining input from stakeholders, or altered policies or processes regarding company political activities.
ISS reports that companies sought relief from Corp Fin for over 40% of the shareholder proposals filed in the ISS database, compared to about 30% for all of 2017. According to ISS, to date, about 50 of the 450 proposals were omitted, while 43 were withdrawn. As usual, the most prolific proponents were John Chevedden and his associated group, who focus principally on governance issues, while the majority of proposals filed by another major proponent, the New York State Common Retirement Fund, were related to political contributions and lobbying disclosure. A number of other proponents have focused on diversity and climate change.