What to Expect From This Year’s Proxy-Voting Season

Proxy season is the rich springtime ritual when shareholders get to vote on issues affecting the companies they own—management pay, directors, and the legions of environmental, social, and governance proposals (also called “resolutions”) submitted by fellow shareholders and by the company itself. This process is called “proxy voting,” and you can read a primer about it here. The proposals can be complicated, but they shed light on how a company addresses the world and its risks. We checked in with two Morningstar experts about what to expect this year: One is Jackie Cook, who oversees a stewardship advisory program at Morningstar Sustainalytics. The other is Lindsey Stewart, who heads up investment stewardship research at Morningstar. These are condensed, edited excerpts from our conversation.

Leslie Norton: Jackie, why is this proxy season so important?

Jackie Cook: This is the time of year when investors get to exercise an important right of share ownership, the right to shape corporate governance. In 2022, we saw a big jump in the number of shareholder resolutions that came to vote and an increase in the number of resolutions that earned majority support. We’ll see some of those trends continue and some new and interesting resolutions on corporate proxy ballots. This is an important time of year to see how investors integrate proxy voting into their year-round dialogues with companies.

Norton: The Apple AAPL annual meeting unofficially kicked off the proxy season. What did Apple’s proxy tell us?

Cook: Apple’s ballot had five resolutions on it this year, mostly S (social) and G (governance), no environmental resolutions. Two stood out. One asked Apple to report on the use of concealment clauses in employment agreements. [Concealment clauses require employees to keep silent about experiences in the workplace, such as discrimination.] It was filed by the same proponent last year and earned 50% support. This year, the same proponent has filed a resolution asking the board to adopt a policy of engaging with shareholder proponents of resolutions that earn majority support. I suspect they didn’t have much luck engaging on this issue over the past year. Then, there’s a resolution filed by Arjuna Capital that asks the company to disclose racial and gender pay gaps across the organization.

Norton: Lindsey, any new themes or issues?

Lindsey Stewart: I haven’t seen anything brand-new. I think we’ll see more proposals addressing the financing of fossil fuels by financial-services companies. Racial equity audits for sure. And proposals addressing topics on fairness in the workplace, like pay equity, or concealment clauses, will feature very heavily. And following the U.N. conference last year, investors are stepping up interest in topics related to natural capital and biodiversity. I expect calls for better information on how companies are dealing with those risks to increase.

Watch Exxon, Chevron Annual Meetings

Norton: Any particular votes you’re watching?

Stewart: On the environmental side, it’s worth looking at the resolutions from an organization called Follow This. They’ve filed proposals at four huge oil and gas companies—Exxon Mobil XOM and Chevron CVX in the United States and BP BP and Shell RYDAF in Europe. Specifically, it’s looking at so-called scope 3 emissions, which are emissions made through the use of a business’ products. That’s a particularly important point for oil and gas producers. The reporting of scope 3 emissions is a point of division among the investment community. Many asset managers think it’s necessary to report scope 3 emissions at some point. A lot of them, particularly in the U.S., don’t think that time is now. Some think the reporting processes aren’t robust; some are outright against it. It will be a key way to differentiate the approaches of various asset managers to environmental themes.

Norton: What about on the social and governance side?

Stewart: So, with a backdrop of a volatile economy, high inflation, large job cuts announced by several major employers, we’ll see a sharper focus on the experience of ordinary workers, or human capital issues. In particular, the proposal to review labor relations and unionization policies at Starbucks’ SBUX upcoming meeting looks like a bellwether of how institutional shareholders are considering those issues. On the governance side, there’s high interest among asset managers in the upcoming “say-on-pay” votes. Shareholders regularly get to vote on whether the chief executive’s or management’s pay is well aligned with their own interests. That’s not seen as just a fairness issue. As CEO pay in the U.S. has soared, there’s a lot more focus on assessing whether such high rewards are appropriately linked to the experience of shareholders investing in the company, and increasingly, we’re seeing more regulation from the SEC around that. That will be a huge point of interest for institutional shareholders going forward.

Expect Some Demands Around Plastics

Norton: How about you, Jackie?

Cook: The Racial Equity Audit, which is conducted by a third party in collaboration with key stakeholder groups, is in its third year. Shareholders have withdrawn resolutions because companies were willing to undertake a Racial Equity Audit as requested. Another social resolution in its second year that will get more attention asks for the disclosure of material diversity, equity, and inclusion data, workplace data. I think Big Tech will get a lot of social resolutions.

On the corporate governance side, I totally agree that say on pay will get a lot more interest. Investors will also pay increased attention to the governance of technology, social-media platforms, technologies of surveillance, artificial intelligence.

On the environmental front, I’m looking at plastics, generally filed at consumer goods, beverage, and fast-food companies, asking them to reduce their amount of single-use plastics. Chemicals and oil and gas companies are also being asked to disclose the impact of reduction in demand for plastics on financial performance. Plastics resolutions at General Mills GIS and at Sysco SYY passed with the majority support of noninsider shareholders last fall.

Norton: Lindsey, the number of shareholder proposals jumped in 2022. Does that mean engagement isn’t working?

Stewart: It’s difficult to draw a clear signal because regulatory developments made it easier to get shareholder proposals onto the proxy statement. That tailwind is continuing this year. What we do know is that large asset managers have a preference for behind-the-scenes engagement and generally do not file shareholder proposals, even if they may decide to support them. Filers of shareholder proposals tend to have a more activist nature and much stronger social and environmental priorities compared with some of the larger asset managers. They’re aware that the resolutions are a good way to focus the attention of management and the public on a key environmental or social topic, even if shareholders don’t necessarily end up voting for it. It’s fair to say that the combination of engagement and shareholder resolutions is making companies more conscious of those issues in their decision-making and reporting.

Cook: The interest in shareholder resolutions has opened up this medium for dialogue also to a newer audience—resolutions filed by employee workers and platforms aggregating retail investor voice are really having an impact on the proxy season.

How Anti-ESG Affects the Proxy Season

Norton: There’s been a great deal of pushback against ESG in the U.S. How is that affecting companies and proxy voting?

Cook: It has affected the numbers [of so-called anti-ESG proposals]. In 2022, we saw 30-odd resolutions that fell into the category of the ESG pushback. They are filed by a small group of individuals and organizations that are linked to each other and generally get very low support. The overall impact has to do with maybe the confusion some caused in 2022. They looked very much like the traditional resolutions that ESG proponents would have filed. But when you read the supporting statement or listened to the proponents at the meetings, then you realized that the resolution was coming from a different angle. So, for investors deciding how to vote on these resolutions, it’s opened up questions of: “If I agree with the resolve clause, do I consider the arguments presented in the supporting statements? Do I support a resolution that asks for, say, disclosure of charitable contributions, if the supporting statement is making an argument against the support of LGBTQ+ causes?“ That’s what individual investors have to grapple with.

Norton: Jackie, we have some rule changes at the SEC. What are they, and how are they likely to influence the proxy season?

Cook: So, the pay-versus-performance disclosure requirement came into effect this year and requires companies to disclose in tabular format how company performance against standardized metrics squares up against CEO pay and senior management pay. It’s going to focus attention on the say-on-pay proposal. The universal proxy rule [which lists all director nominees from companies and dissidents] creates more choice around director elections. Then there’s the SEC’s proposed shareholder rule, which would narrow the basis on which companies can exclude shareholder resolutions. Companies have already been less inclined to petition the SEC for no-action relief. Then, there are the enhancements to Form N-PX, which details the proxy-voting record of mutual funds and institutional investment managers and extends disclosure requirements to those managing $100 million or more to disclose their say-on-pay votes.

Will BlackRock and Vanguard Hold Back From Voting?

Norton: Lindsey, BlackRock and Vanguard held back from voting in favor of ESG resolutions in 2022. What’s behind that? Do you expect that trend to continue?

Stewart: We looked at over 240 well-supported ESG resolutions and found that BlackRock and Vanguard supported considerably fewer of these ESG-focused resolutions in 2022 versus 2021, saying that they believe many such resolutions to be unduly specific or perhaps just not broadly in shareholders’ interests. Indeed, across the top 20 U.S. asset managers last year, most withdrew or reduced their support for such resolutions compared with the previous year.

It’s too early to say whether we’ll see a further decrease this year. Having read through their policies and spoken to a few stewardship leaders recently, there’s nothing to indicate a dramatic change of approach to proxy voting this year. However, the mix of ESG resolutions is always changing. We’re seeing more and more resolutions on those social topics where there is a wider range of opinions.

Cook: Lindsey, it seems like the decline in support by the largest institutional investors must be compensated for by an increase in support from elsewhere.

Stewart: Our report does actually show that. Generally, among the top five, and particularly the large index managers, there was a lower level of support compared with the others. And then, the next five, slightly higher and then the next 10 firms slightly higher again. It will be interesting to see if that continues.

What to Do if a Company Ignores You

Norton: What tools can shareholders use if companies ignore them, even if a resolution gains majority support, as in Apple’s case?

Stewart: I’ve spoken to a few asset managers about this recently. There’s an increasing focus on holding directors accountable by withdrawing support for director elections in those areas. So, that might be for members of the audit committee on the board for reporting matters, which includes environmental topics like climate, or the nominations and governance committee for board and leadership matters. If topics that come up frequently are repeatedly ignored, you’d expect to see increased votes against director elections.