The US 2020 proxy season looks set to feature investor pressure on board diversity and political spending amid a variety of ESG topics – and uncertainty over how the SEC will play umpire on some proposals
Industry professionals in the US foresee no turning around from the direction companies and investors have been headed in recent years, with a growing number of shareholder proposals in 2020 on issues under the ESG umbrella. In terms of which proposals end up in votes at AGMs, there is an expectation that the trend toward negotiating the withdrawal of many environmental and other disclosure-based proposals will continue, but also concern about a new SEC approach to deciding which proposals can be excluded.
Brigid Cremin Rosati, a director of business development at Georgeson, is among those anticipating more political spending/lobbying disclosure proposals ahead of the 2020 US presidential election. No such proposals received majority support in 2017 or 2018, but three did so at S&P 1500 companies in 2019, she notes. A variety of sponsors are bringing political spending/lobbying proposals, including unions and public pension funds but also a growing number of conservative groups, according to Rosati.
Board diversity has been a focus of recent proxy seasons and industry professionals anticipate a continued increase in proposals and engagement in 2020. The drive for greater gender diversity has been fueled in part by several large institutional investors. For example, State Street Global Advisors (SSGA) reports that as of June 30, 2019, 43 percent of the 1,350 companies targeted by SSGA’s Fearless Girl campaign had either added a female director to their board or committed to doing so.
SSGA now plans to take a tougher approach to companies that haven’t responded. The firm has said that in 2020 it will vote against the entire nominating and governance committee ‘if we have concerns about the lack of gender diversity for four consecutive years and are unable to engage in productive dialogue.’
PJT Camberview partner Krystal Gaboury Berrini says a confluence of factors is bringing the E and S of ESG issues to the fore in terms of shareholder proposals. These include the Task Force on Climate-related Financial Disclosures (TCFD) gaining momentum, she says, adding that this will gain an additional boost when TCFD-based reporting becomes mandatory in 2020 for the more than 2,300 signatories to the UN-supported Principles for Responsible Investment.
The focus on human capital management will also continue in 2020, Rosati says. Other issues potentially featuring in proposals include gun control and linking executive compensation to ESG-based metrics, she adds.
Getting onto the ballot A notable feature of the 2019 proxy season has been the extent to which companies were willing and able to negotiate over shareholder proposals such that they were withdrawn. According to Georgeson, 386 E and S proposals were submitted in 2019 but only 160 – 41 percent – were ultimately voted on at AGMs. Meanwhile, 332 governance-related proposals were filed and 236 (71 percent) of them reached a vote.
Peter Kimball, head of advisory and client services for North America at ISS Corporate Solutions, says governance proposals are less likely to be withdrawn than environmental ones because proponents of the latter – and firms – tend to have room to negotiate the level of disclosure. More firms are focused on making disclosures about sustainability, human trafficking and other E and S issues for their own interests, regardless of investor pressure, he adds, noting that this, combined with a growing number of E and S shareholder proposals, will lead to even more companies willingly negotiating as they’re already making disclosures.
According to Berrini, the high rate of withdrawals among E proposals reflects that companies are already taking action on sustainability metrics they haven’t previously disclosed. The increase in off-season engagement also helps promote negotiations, she adds.
These high rates of successful negotiation are expected to continue. But getting shareholder proposals onto the ballot faces a new wrinkle going into 2020 following the announcement in September by the SEC’s division of corporation finance of a revised approach to handling companies’ requests to exclude shareholder proposals. The announcement has prompted confusion and concern among corporate attorneys, in-house teams and investors, all of whom are unsure how the agency will act in practice. They fear a wave of niche shareholder proposals, a lack of clear guidance and being forced into litigation to settle disputes.
The key aspects of the statement are the emphasis the division puts on its option not to make a decision on excluding a proposal, and its intention to respond orally in some cases. Division staff will continue to monitor correspondence and provide informal guidance to firms and proponents as appropriate. If a company wants to exclude a proposal, the division will let the proponent and the company know whether it concurs, disagrees or declines to state a view.
But from the 2019-2020 proxy season, the division may respond orally instead of in writing to some no-action requests. ‘The [division] intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8,’ officials write.
If a company wants to exclude a proposal and the division doesn’t state a view, the only option for a determined shareholder proponent is to go to court, said Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management, shortly after the statement was released. But he added that the effect of the division’s statement will depend on how often it declines to take a view.
‘In the current climate, where there are a growing number of shareholder proposals, companies need a referee more than ever,’ said Betty Moy Huber, counsel with Davis Polk & Wardwell, at the time. The SEC did not respond to a request for comment.