Proxy Season Observations to Sharpen Your ESG Strategies and Communications

These insights are part of an ongoing series of environmental, social, and governance (ESG) considerations for the office of the CFO and sustainability reporting professionals.

The 2024 proxy season was anything but boring, with record proposals and exclusions, new topics like green financing ratios, increasing politicization around ESG, and high-profile proxy battles. In this rapidly evolving ESG landscape where it’s easier and less costly for activists to wage a proxy battle, it’s increasingly important for companies to remain current on ESG trends–and to engage early and often with shareholders.

Amidst all this activity, here are several proxy season takeaways that can help companies shape their ESG strategies and policies to anticipate shareholder objections.

Make ESG transparency a priority

This year, companies received their fair share of climate-related proposals, including those focused on greenhouse gas (GHG) emissions, transition plans, and carbon financing, along with the expected political-themed proposals given the election year. Environmental and Social (E&S) shareholder proposal volumes were down slightly (approx. 5%), and shareholder support for these E&S resolutions also trended down, from 21% support in 2023 to 19% support in 2024.

While a couple of notable proposals regarding GHG emissions targets have received majority support, such as those at fast food chains like Jack in the Box, a closer look reveals lower support levels for resolutions calling for action on E&S issues and much more support for those resolutions asking companies to increase transparency and reporting on these issues. For example, a new proposal at financial institutions requesting the disclosure of a green financing ratio—the ratio of low-carbon to fossil fuel energy supply financing fared well. Similarly, on the social front, diversity, equity, and inclusion (DEI) proposals that seek workforce demographic reporting fared better than those requesting equity audits.

Align your ESG policies to your company’s values and strategy

Self-described conservative groups are submitting more proposals and new types of proposals aimed at reversing ESG policies. In 2023, the groups filed 13% of all proposals at S&P 500 companies, and that number rose to 16% year to date.⁽¹⁾

While these proposals generally receive single-digit support, new proponents, such as the American Family Association, have joined the movement. Generally, the proposals seek to reverse diversity initiatives and reduce climate mitigation spending, but new themes and angles on these issues are emerging. For example, one proposal this season at Johnson & Johnson aimed to limit medical benefits provided to employees who seek gender transitional surgeries.

While these types of proposals aren’t new, and the level of support may not be significant, their numbers are growing as ESG becomes more politicized. Companies should review and clearly articulate how their ESG initiatives align with corporate values and support business strategy.

1) Source: Proxy Preview REVIEW webinar on 07/11/24

Be ready to talk about AI

Corporate disclosures on artificial intelligence (AI) have surged over the past year, with Bloomberg reporting that nearly half of S&P 500 companies mentioned AI in their most recent annual reports. Those companies that haven’t been forthcoming on the issue may open the door to new shareholder proposals.

During the 2024 proxy season, several companies received requests for enhanced AI disclosures or reviews of governance structures related to AI. Such proposals target most industries and have gained the most support in the tech and entertainment industries due to AI’s potential to spread misinformation via social media, including election misinformation, or to be used in place of entertainment writers. Both Apple and Netflix received shareholder proposals on the uses of AI and ethical guidelines, and both proposals received around 40% support. Companies should take inventory of their AI practices if they haven’t already done so, a stance on AI use should be articulated, and policies should be developed to ensure the ethical use of AI. Doing so will reduce risks associated with the improper use of AI, such as reputational damage.

Push back to exclude proposals when and where it makes sense

The 2024 proxy season saw a record number of 998 shareholder proposal submissions, up 5% over the prior year, and a record number of companies requesting no-action relief from the US Securities and Exchange Commission (SEC) to block the inclusion of irrelevant, vague, or overly prescriptive shareholder proposals on the AGM ballot. The SEC saw 269 no-action requests, more than 50%  above the previous year, and showed a greater willingness to grant no-action relief, approving 145 or 53% compared to 46% or 81 of 177 requests in 2023.

One possible explanation for the SEC’s acquiescence– namely for climate-related proposals—is the imminent SEC climate rule. The SEC approved the rule in March 2024 after most of the proponents had filed their proposals, which would make many of the proposals irrelevant. Meanwhile, ongoing litigation jeopardizes the future of the SEC climate rule, so companies and shareholders alike will have to wait and see what happens next.

This year, ExxonMobil notably skipped the SEC no-action process entirely and moved straight to filing a lawsuit against climate activist groups Arjuna Capital and Follow This, the proponents of a proposal seeking the adoption of emission reduction targets at the company. Exxon viewed the SEC process as flawed and wanted a declaratory judgment to exclude the proposal from the 2024 ballot. Even after the activist groups retracted the resolution from the ballot, Exxon moved its lawsuit forward as a means of clarifying the limits of shareholder proposals. (In late June, the court called a halt, issuing an order that the company’s claim was moot due to the retraction of the resolution.) Ultimately, no shareholder proposal received majority support at Exxon’s 2024 AGM, and Exxon perhaps set a new precedent for limiting how far shareholders can go in their requests. The avenue taken by Exxon is not practical for any publicly traded company and remains an exception to the rule. Whatever the ultimate support level for a shareholder proposal ends up being, the visibility of the proposals itself can be a headache for companies and bad publicities.

Companies should be ready to engage with their shareholders on climate matters in order to prevent shareholder proposals from being filed with the SEC. Companies that have engaged with their shareholders will have a stronger basis for leveraging the SEC’s no-action process when these proposals are indeed overly prescriptive or irrelevant.

Be proactive and anticipate shareholder criticism in the era of universal proxy access

Recent SEC changes allow activist board nominees to be listed on the same materials as those listing management nominees and decrease the overall cost for activists to launch a proxy campaign. The most prominent proxy contest of the season pitched The Walt Disney Company against Trian Fund Management. Trian was vying for two board seats and a chance to influence the Board’s management of CEO succession in the wake of the controversial firing of Bob Chapek and reinstalment of Bob Iger, who came out of retirement to help Disney address short-term performance issues.

Disney invested heavily in shareholder engagement and proxy materials to counter the challenge and ultimately prevailed, although not unscathed. One challenged director, Maria Elena Lagomasino, won reelection with only 63% support from shareholders, a 30-percentage point change from the previous year. Universal proxy access is slowly bearing its fruit and demonstrating that capital previously allocated to the administrative aspects of proxy battles can now be spent on the efforts to publicize the perceived governance issues. Companies risk not only activist intrusion but also reputational damage, which is now more considerable than ever.

Get ahead of shareholder proposals with the right approach to corporate and ESG strategy

Whether your company faced its own shareholder proposal on the ballot this year or you’re learning from the proxy season experiences of your peers, the most important takeaways are to be proactive about seeking input from stakeholders, including investors, incorporating those inputs into corporate and sustainability strategy and plans, and clearly communicating how the company is addressing stakeholders’ wants and needs.