Ben Maiden investigates how corporate values on issues such as reproductive rights and executive compensation are set to feature prominently in 2023
Large US companies continue to face pressure to take public positions on a range of political and social issues such as reproductive rights and racial equity. Some of those that have done so may think twice about doing so again after feeling the hot breath of pushback from lawmakers or the internet.
But investors and shareholder advocacy groups won’t face such impediments in the coming proxy season and are expected to push companies on their values.
In the wake of the US Supreme Court overturning Roe vs Wade, some companies made declarations of support for employees’ reproductive rights, saying they would cover the costs of seeking healthcare outside of their home states, if necessary.
These announcements received both acclaim and criticism in the political arena. Some companies have also felt the weight of investor expectations in the governance arena – and more are predicted to do so.
For example, a month after a leak of the court’s draft ruling that suggested it would strike down Roe, almost a third – a level of support widely regarded as significant – of votes cast at The TJX Companies’ AGM were in favor of a proposal requesting that TJ Maxx’s parent company release a report ‘detailing any known and any potential risks and costs to the company caused by enacted or proposed state policies severely restricting reproductive rights, and detailing any strategies beyond litigation and legal compliance that the company may deploy to minimize or mitigate these risks.’
Trillium Asset Management, which filed the proposal in late 2021, wrote in its supporting statement: ‘Should [Roe] be weakened or overturned, as is widely anticipated, TJX employees will face challenges accessing abortion care… Employers as well as employees bear the cost of restricted access to reproductive healthcare.’
Following the vote, Trillium chief advocacy officer Jonas Kron said in a statement: ‘This significantly high vote is evidence that many investors are concerned about the impact the Supreme Court’s decision will have on businesses and the people who work at these businesses.’ TJX’s board had urged shareholders to vote against the proposal. The company did not respond to a request for comment at the time.
Governance professionals expect shareholder proposals to be filed this coming proxy season on both sides of the abortion rights debate. Edward Greene, managing director at Georgeson, predicts there will be a lot of post-Roe proposals relating to human capital management and employee benefits.
June Hu, an attorney with Sullivan & Cromwell, notes that some shareholder groups based on religious organizations that support action on issues such as climate change may not align with pro-ESG groups in this area.
Anti-ESG signsAnother reason companies may find themselves in the crosshairs on this and other values-based issues is the recent spike in anti-ESG shareholder proposals in the social and environmental spaces. Research from Georgeson finds twice as many proposal submissions that were critical of the ESG landscape in 2022 (52) as in 2021 (26). In many cases, these anti-ESG proposals appear at face value to be similar to pro-ESG resolutions, but their supporting statements reveal very different intents.
Those conservative proposals didn’t gain much traction – according to Georgeson they secured an average support of 9.5 percent – but observers, including Greene, expect them to continue to appear in 2023. As a result, governance professionals say it is time for companies to identify more proponents in their proxy statements so investors can better understand their perspectives.
Companies need to educate themselves and shareholders about people submitting proposals, Hu says, noting that more proposals are being filed by individuals on behalf of groups. She says that faced with proposals on a sensitive topic such as reproductive rights, companies should consider what’s right for their constituents, not just shareholders.
She also notes that companies have for some time been willing to negotiate with proponents to potentially withdraw their resolutions, particularly on sensitive social matters, but proponents are less willing to settle following a change at the SEC. The agency’s division of corporation finance in fall 2021 updated guidance on its process for deciding whether to give no-action relief under Rule 14a-8 for companies that wish to exclude a proposal from their proxy statements.
This was seen as making it less likely that the SEC would grant such relief and as a result mean that a larger number and array of ESG proposals would get onto proxy statements – something that is generally accepted as having come true. The shift is also generally seen as allowing proponents to get more granular and more prescriptive resolutions to votes at AGMs that in turn can face more opposition from investors.
Changing climesThat move toward tougher resolutions is perhaps most obvious in terms of the climate crisis. Proposals on climate change and companies’ net-zero commitments made a big splash in the 2022 proxy season among record numbers of ESG resolutions.
Danielle Fugere, president and chief counsel of As You Sow, says that going into 2023 her group will, among other things, be asking companies for details of how they plan to reach their climate targets and will file some proposals related to forestry matters.
Banks continue to be an area of focus and Fugere says that now many lenders have set net-zero goals, As You Sow is looking for them to create transition plans. At time of writing in mid-October, talks with banks were still under way and As You Sow had not decided whether it would file proposals to pursue this issue. Among other things, the group wants to see that banks have plans to drive change at their clients.
Bill Ultan, managing director for corporate governance at shareholder services company Morrow Sodali, says anti-ESG pressure is more credible in terms of major institutional investors than conservative proponents.
Big global investors have in recent years supported ESG resolutions in part to demonstrate their support for certain issues and to project aligned images of themselves but now they need to be more pragmatic, he says.
As a result, companies need to show the strategic objectives of their ESG efforts and the returns on those investments, Ultan notes. The difficulty for many is that they are early in the ESG process.
What’s the C-suite worth?Companies will also face scrutiny in the 2023 proxy season of how they value their C-suite through executive compensation, amid regulatory changes and upheaval in the economy due to inflation, supply-chain worries and the war in Ukraine. Growing numbers of investors are skeptical regarding companies’ say-on-pay policies. According to Farient Advisors, the percentage of large US companies receiving less than 90 percent support for say on pay rose from 17.9 percent in 2018 to 30.2 percent in 2022.
Brian Bueno, ESG leader at Farient, says say-on-pay developments will be particularly interesting given falling markets. Investors will be looking to compare the value of target pay at the start of the year and performance pay at the end of the year. Widespread disconnects could lead to a spike in the number of companies not achieving good say-on-pay results, he says.
Poor say-on-pay results in turn put pressure on companies to engage with investors and respond to their demands. This includes exposing them to pressure to link executive compensation to ESG metrics – particularly at high-emission companies – Bueno notes.
Linking executive compensation to ESG has become increasingly widespread in recent years. Research from IR Magazine online sister publication Corporate Secretary suggests boards in Europe are more likely than those in North America to link executive compensation to ESG metrics. Despite that, recent Farient research indicates that 58 percent of firms in the S&P 500 include ESG in their incentive packages.
But Bueno says simply including ESG elements may not be sufficient. He points to growing pressure for companies to make sure the ESG metrics they use are relevant to the business, material to its long-term value and tied to rigorous targets.
Board attitudes to aligning compensation with ESG vary widely, Bueno says. Some boards at companies that are taking a great deal of action on ESG issues are still cautious about using that for compensation, particularly at larger firms that may be more careful about change, he notes.
Boards that are quick to act are often those that face investor pressure during engagement, he adds, saying he’s heard of companies being told by investors that the ESG metrics they are using for compensation are not ‘mature’ enough, such as when targets are based on disclosures rather than concrete actions.
Despite this, Bueno says it remains too early for investor concerns along these lines to impact say-on-pay results significantly due to the often relatively low weighting given to ESG factors in compensation plans.
‘Actually paid’Companies also face regulatory pressure around compensation. The SEC in August adopted rule changes under which companies must disclose information on the relationship between executive compensation ‘actually paid’ and the registrant’s financial performance. The changes, which went into effect in October, require issuers to create a table to report specified executive compensation and financial performance measures for their five most recently completed fiscal years.
‘It’s a lot of work [to comply with], particularly given the need to revalue [named executive officer] equity awards for the purposes of calculating ‘actually paid’ compensation,’ says Richard Gluckselig, associate general counsel and assistant secretary with Regeneron Pharmaceuticals.
Despite the work that must be done, the impact of the rule changes is unclear. ‘I’m not sure it will add too much interesting information for investors, as the new disclosure essentially represents just a different cut of already available data,’ says Gluckselig. ‘But investors are not focused on this yet, so it remains to be seen. Will it be like the CEO pay ratio, which people worried about but which ended up not meaningfully changing the conversation? Or will it change the way investors and proxy advisers look at executive compensation?’
Bueno notes that there has been a scramble at companies to get the disclosures ready. He says there is a requirement to include important compensation measures, adding that it will be interesting to see whether and how companies include ESG metrics. In the meantime, US boards and governance teams should prepare for their companies’ values – and how they value executives – to come under scrutiny in new ways.
Ben Maiden is editor-at-large of IR Magazine online sister publication Corporate Secretary
