Are shareholder resolutions really getting better? The view from the proxy solicitor (Part 1)

We have seen a shift in support level from some of the largest asset managers which, at least in part, explains some of the recent growth in support for shareholder resolutions.
We have also seen a significant improvement in the drafting of shareholder resolutions by proponents, that has led proxy advisors to recommend voting for them more often. There also appears to have been a rise in shareholders undertaking proxy solicitation campaigns. But where does that leave the corporate side? Companies soliciting their own shareholders to vote in line with management is most certainly not a new thing, but are corporations feeling new pressure from this newfound shareholder success? Management continues to oppose shareholder resolutions, either through SEC No Action letters or through board statements in the proxy statement, but has the newfound success of the resolution process forced an increase in corporate proxy solicitation?
To find out, I spoke to Anne Meyer, Senior Managing Director, Corporate Governance, at proxy solicitation firm Georgeson.

“Climate change has been a prevalent topic for environmental proposals, accounting for about 50 in 2015 and 60 in 2016,” began Meyer, “but, as you said, a lot of these climate change proposals and other E and S proposals have historically received low levels of shareholder support. New in 2016, coming out of the Paris climate accord, were proposals asking companies to assess the impact of the Paris accord’s 2°C limit, which gained more support, averaging in the mid-30s. And I think if you look at the trends, especially now that proxy access is falling by the wayside, as many companies have come to terms with it, we can anticipate a lot more focus from investors on E and S issues. Because of this, we can expect a lot more engagement from a company perspective. Even if companies don’t like it, it’s a new world of shareholder engagement that we are living in, and many companies will feel pressure to respond to their shareholders on E and S issues with enhanced disclosure and/or engagement.”
I asked Meyer if she had already seen a corresponding shift in management behaviour in response to greater shareholder success. “I think on E and S matters, it varies company by company, certainly many companies within industries where environmental and social issues have been a focus have made changes. Others are more reticent; perhaps they feel the information requested by investors is not material, or is already provided or they have not completed an assessment internally. But there will be more pressure to engage, particularly for companies that may lag peers with respect to E and S matters or where there are other issues, such as performance, or a perceived lack of responsiveness to shareholder concerns.”
I wondered if there was any hard data on increases in proxy solicitation on shareholder proposals from the corporate side, but again Meyer said it varied from client to client. “When we work with clients on engagement and solicitation efforts, they range from off-season corporate governance road shows to one-on-one discussions with large institutional shareholders to the nitty gritty of an investor call campaign. Some companies have an internal team that will do much of the work themselves, others will rely on us to coordinate and participate in the meetings.”So there’s no hard and fast data, but what are your impressions, I asked? “Certainly, in the past, companies receiving E and S proposals would often expect them to garner such a low vote that there was no need to worry about them. Now, companies are realising that they are more likely to have a higher support level. So, even if they are not waging an active proxy solicitation campaign outside of their engagement with their larger shareholders, they will be keeping a close eye on the issues, because most management teams do not like to see close to 40% support levels for shareholder resolutions, that level of support really does start to raise a red flag about whether shareholders are out of line with the company.”

What can this solicitation process look like? “At this point, it is an established best practice for companies to engage with their largest shareholders in advance of the proxy season, particularly when potential issues have been identified. Effective year-round engagement can build trust and a deeper understanding of the strategic, financial, ESG and compensation matters that are important to both sides. It can also be hard to get your shareholders’ attention during proxy season because they are busy voting and talking to a lot of other companies,” said Meyer. “If a company receives a shareholder proposal, we often recommend that they reach out to the proponent in the first instance. Investors with strong governance teams will usually take a call, and they can be influenced by reasonable discussions and feedback from the company. I think a lot of the success of that approach is based on the company’s history of being willing to engage with investors.”

I asked if there was a split between companies that are dragging their feet and companies that are trying to engage with shareholders? “We do work with some companies, such as those that are controlled by a founding or other significant shareholder, that are less concerned about being responsive to shareholders on engagement issues. And sometimes when you get outside the Fortune 500, smaller companies just don’t have the bandwidth for staff to stay abreast of developments in shareholder engagement and issues. These are the companies that are most likely to be caught off-guard. But they are also often the companies that large investors have focused less on as they are a much smaller part of their portfolio.”
The extractives and utilities industries have been targets of climate change resolutions: has there been a shift in the way that these companies go about challenging shareholder resolutions? “I think the focus has been on really trying to dig down and figure out what the investors are asking for and how the companies can be responsive in a manner that is both meaningful to investors broadly and cost effective. Some of the shareholder proponents are smart, they tailor their proposals to the company and its circumstances. But others’ proposals are seemingly just lobbed in, for example where climate change disclosure is asked for from a company that puts out fairly responsive information, so there’s some frustration where companies perceive there is a lack of understanding of what’s already being put out there or what’s really important to the business. Sometimes the ask is a little bit uninformed: is the shareholder just trying to get their name in the paper, or is the proposal focused on material risks that are really related to climate change?”

I said that I had seen an increase in the amount of risk disclosures related to climate change as well as social issues in some companies’ annual reports and that that appeared to be changing. But it was interesting – given the improvements in drafting shareholder proposals – to hear from the corporate side that there was still a fair amount of frustration that resolutions are still being filed calling for disclosures that are already being made. Meyer replied: “Companies are certainly grappling with the amount of public disclosure they should be making with respect to climate change and other ESG issues.

From an SEC perspective, when considering risk factors, forward looking statements and other disclosure required in a Form 10-K or other filing, there is a fundamental duty to disclose material information.Companies also provide a great deal of disclosure on a supplemental basis, for example in ESG or CSR reports and on company websites. However, companies have real concerns about the volume and value of information that some investors request. We worked with a client this year which has a very diverse board, a diverse workforce, and they had fairly robust disclosure about that. But a shareholder proponent targeted a group of financial institutions with a general proposal requesting more information on workforce diversity, and they were lumped in that group. Those are the kinds of things that are frustrating.”