As the role of the proxy statement evolves, so does the content
As the board’s main communication tool to investors before the annual meeting, proxy statements have been filled with pertinent governance information for a long time. In recent years the look, feel and substance of proxy statements has changed dramatically, as the legal teams that compile them have searched for ways to enhance readability and bring the story to life. With color photographs of directors, skills matrixes, enhanced CD&A tables around pay for performance and a push for brevity, today’s proxy statements might look more like glossy magazines to the legal professionals who compiled them 10 or 20 years ago.
In the last couple of years, investors have turned up the heat on issuers about their performance on material environmental and social issues. The speed of change has been startling. In 2018 ExxonMobil, Occidental Petroleum and PPL Corporation became the first three companies to face majority shareholder opposition at their proxy meetings on proposals asking for a 2°C climate risk disclosure. Two years later, and more than 1,000 companies globally support the Task Force on Climate-related Financial Disclosures (TCFD) and more than 100 US companies are using the Sustainability Accounting Standards Board (SASB) framework in some form of investor-facing communication.
Kellie Huennekens, head of ESG research at Nasdaq, says: ‘Given that proxy statements represent the board and company’s positioning on governance, the increased focus on ESG in the proxy statement – by boards, institutional investors and other key governance stakeholders – is naturally an expected development. Where we see continued questions is how best to connect the dots between traditional and non-traditional reporting and to what extent that can and should be in the 10K or annual report. In the meantime, companies are continuing to invest more in monitoring and tracking a wide range of E&S or ESG data – and disclosing this information in sustainability reports, on dedicated pages on the company website and, increasingly, in the proxy statement.’
There is some discussion about whether the proxy statement is the right place to include an update on material environmental and social issues, and it largely comes down to the audience. For equity ESG analysts, there is a preference for E&S information to make it into the 10K, whereas investor stewardship teams at large institutional investors are increasingly looking to draw a correlation between a company’s performance on material E&S metrics and the board’s oversight of this performance. For this constituency, the proxy statement is a good place for E&S information.
There are also advisory groups, such as Focusing Capital on the Long Term (FCLT), which suggest that executive compensation should be tied to E&S performance, as FCLT advised at its forum in March. This would require companies to include a meaningful update on E&S performance in the CD&A, in order for investors to sign off on executive compensation and the quality of oversight from the compensation committee.
Many issuers are taking this into account. Just under a third (29 percent) of nominations submitted for the proxy statement categories at the 2019 Corporate Governance Awards prominently discuss their company’s efforts to include E&S information in the proxy statement. This represents a significant increase compared with the year before. Some issuers included pages from their corporate sustainability report, others created bespoke E&S information for inclusion in the proxy statement.
‘The language [in the proxy statement] needs to show how the board is applying a considered, future-oriented, long-term approach to its business policies and practices,’ Huennekens says. ‘Companies are increasingly creating a separate E&S or ESG section in the proxy statement – and concurrently leveraging existing, more established sections to show how ESG is intertwined in their approach to director qualifications, risk oversight, board committee responsibilities, executive compensation, as well as their strategy section or a governance highlights section, if they already have these.’
In this guide, we will look at examples from three companies that have added E&S information to their proxy statements in the last year. We hope you enjoy it.