Climate, Diversity Resolutions Among Key Themes in This Year’s Proxy Season

At Morningstar, hotly debated questions about trends in proxy voting are submitted to Jackie Cook. A native of South Africa and onetime Rhodes scholar, Cook has spent two decades studying financial data related to corporate governance and investor advocacy about environmental, social, and governance issues. Today, she heads up a stewardship advisory program at Sustainalytics, Morningstar's sustainability research arm. We checked in with Cook in the thick of this year's proxy season, the springtime rite in which shareholders vote on resolutions affecting the companies they own.

Morningstar: How is this proxy season different from last year's?

Jackie Cook: It's very busy. Shareholders have filed many more ESG resolutions this year than in previous years. While many have been withdrawn following engagements with companies, we're also seeing more resolutions making it to proxy ballots compared with previous years. And, of those already voted, several have received very strong support. Two votes stand out in my mind. At Jack in the Box JACK, 95% of shareholders voted against the management recommendation on sustainable packaging. This result set a record early in the proxy season, with a record level of support for an ESG resolution opposed by management, and on the topic of plastic pollution.

I'd also point to the vote at Costco Wholesale COST asking the company to disclose its short-, medium- and long-term targets for reducing its full value chain emissions. That got 70% support. This result is important because it shows that investors aren't only concerned about oil and gas company emissions. Supply chains are also a source of emissions that investors expect companies to be measuring, disclosing, and managing.

We can think of 2021 as an inflection point in shareholder voting on ESG, and 2022 as really strengthening the gains we saw in 2021. One difference is the certainty that the SEC provided late in 2021 when it clarified that companies would not be allowed to use the so-called "ordinary business rule" to exclude proposals asking for climate targets. So, we're seeing more climate resolutions in general and more resolutions that specifically ask companies to set climate targets.

Morningstar: What are some other highlights?

Cook: Social issues on corporate proxy ballots are also attracting record levels of support. Obviously, there continues to be strong support for diversity, equity, and inclusion resolutions. Fifty-nine percent of Disney DIS shareholders supported a resolution asking for a report on racial and gender pay gaps, and a majority of Apple AAPL shareholders approved a resolution asking the company to commission a third-party audit of its civil rights impact. This year, Apple and IBM IBM shareholders also voted to ask the companies to explain the use of concealment clauses in employment contracts. Concealment clauses can limit an employee's ability to discuss grievances or concerns about employment practices. Nearly 80% of shareholders voted for a review of Microsoft's MSFT sexual harassment policies.

In summary, there's been strong support for climate, biodiversity, DEI, human capital management--a broad spectrum of ESG issues.

Morningstar: How do you expect the rest of the proxy season to unfold?

Cook: There are some big votes coming up at oil and gas companies asking for climate targets--at Occidental OXY on May 6, ConocoPhillips COP, Phillips 66 PSX, Chevron CVX, and Exxon Mobil XOM. Those are likely to be strongly supported by shareholders. We can also anticipate strong support for resolutions asking companies to conduct third-party racial equity and civil rights audits. There are also some high-profile meetings that everyone will be watching. At Meta Platforms' FB annual meeting on May 26, there are 13 shareholder resolutions addressing ESG themes. Amazon AMZN on May 25 faces 15 shareholder resolutions, and Alphabet GOOG faces 17--that is counting resolutions at Meta and Alphabet asking the companies to abandon their dual-class share structures, which prevent shareholder resolutions opposed by company founders from passing. These ballots raise a really wide set of ESG issues, from tax reporting to technology governance.

As far as support, I think we'll likely see another record year for shareholder resolutions. CEO pay attracted a lot of scrutiny in 2021 because shareholders were casting say-on-pay votes based on 2020 pay practices. ["Say on pay" refers to the law, adopted after the global financial crisis, that shareholders approve the compensation every year for a company's CEO, CFO, and top three most highly paid officers.] During 2020, it turns out that senior executives were paid very well, in part due to adjustments made at the start of pandemic lockdown measures. This wasn't great for workers. So, support for say on pay dropped a little in 2021. I hope we see more scrutiny in 2022.

Morningstar: Individual investors are notorious for not voting. Why should they start voting their ballots?

Cook: For an individual investor, it's less easy [than it is for an institutional investor] to knock on a company's door and say, "I'd like to have a conversation about your supply chain's human rights record." There are also difficulties for individual investors to vote their shares. Researching ballot measures to come up with informed positions is time-consuming. For an individual with limited voting power, that time and effort investment may not make sense. Most of the time, individuals are invested via pooled products like mutual funds and ETFs, so they don't have a vote anyway.

These factors limit the participation of individual retail investors in the proxy process. Historically, retail investor voting is extremely low. But new digital platforms are tackling the challenge of collectivizing individual investor voice and channeling it to companies and fund providers. A platform called Civex aims to allow small investors to start their own interest groups to share voting insights. Tumelo, a London-based startup, channels pension beneficiaries' voting preferences to fund managers. Another, Tulipshare, offers a platform from which shareholders can launch their own shareholder resolutions.

The SEC has long been interested in how to get retail investors more involved in proxy voting. One regulatory development that could really advance the participation of individuals in the proxy process is the SEC's proposal for enhancement of funds' proxy voting disclosures to make it easier for individuals to know how different asset managers are voting on their behalf.

Morningstar: You recently switched jobs at Morningstar.

Cook: I now head up Sustainalytics' ESG Voting Policy Overlay within Sustainalytics' stewardship services. This service offers ESG-focused proxy voting advice. We undertake to identify the ballot items with the most leverage with respect to ESG and develop well-researched vote recommendations on these items. Our vote recommendations are triggered by Sustainalytics' research, historical voting records, the stewardship team's ongoing and past engagements, and sustainability issues addressed directly by proxy ballot items.

One of our strategies is to offer voting advice on say-on-pay resolutions where there's a clear need for a company to link its pay practices with climate metrics. At the heaviest emitters, we examine compensation arrangements to evaluate whether senior executive pay incentivizes emissions reductions in line with the company's climate transition plan. This is in line with our view that governance, the "G" in ESG, is fundamental to the achievement of sustainable business and investing outcomes.

Correction: An earlier version of this article incorrected stated that a resolution at Amazon asking it to abandon its dual-class share structures made a total of 15 resolutions. The company is Alphabet and a total of 17, not Amazon.