The past 12 months have seen a surge in proposals and voting trends related to environmental, social and governance (ESG) matters. Here, experts from Bass, Berry & Sims discuss activity from the Big Three asset managers (BlackRock, Vanguard and State Street) and offer takeaways for public companies in the year ahead.
2020 was marked by a yearlong pandemic, social activism and a tumultuous presidential election. Likewise, the landmark 2021 proxy season (i.e., the proxy season beginning in July 2020 and ending in June 2021) was reflective of a significant shift in attitudes toward shareholder activism with respect to environmental, social and governance (ESG), including diversity, equity and inclusion (DEI) matters. Shareholders made their voices heard by proposing an all-time high number of ESG proposals, of which a record number received majority support or otherwise garnered significant support.
In particular, proposals focusing on diversity-related matters received significant support during the 2021 proxy season (e.g., board and executive diversity; disclosure of EEO-1 reports, which provide a standardized breakdown of workforce demographics; and calls for DEI reporting and racial equity audits). The level of support shown for proposals seeking racial equity audits during the season was somewhat surprising, given that it was generally those proposals’ first appearance on the ballot.
ESG proposal mainstays such as requests for board diversity at companies with no apparent racial or ethnic diversity, EEO-1 disclosure and DEI reports saw an exceedingly positive reception, with proposals that did not succeed primarily occurring at companies with large insider or parent company ownership. Although not surprising in light of events following the last proxy cycle, the level of shareholder support shown for these proposals reflected a significant shift in contrast to prior years. For example, requests for board diversity saw a 100 percent increase in average support as compared to the 2020 proxy season (i.e., the proxy season beginning in July 2019 and ending in June 2020). Requests for racial equity audits at companies that made public statements in support of racial justice last year similarly received strong, although less than majority, support.
Institutional Investor Support from the Big Three
At the forefront of this wave of support for E&S proposals were the “Big Three” asset managers, BlackRock, Vanguard and State Street. Comprising the most influential group of institutional investors, the Big Three is estimated to constitute the largest shareholder in approximately 88 percent of S&P 500 companies, with an estimated ownership position of 22 percent, on average, of each S&P 500 firm included in the Big Three’s portfolio.
The Big Three has been desirous of enhanced gender and racial/ethnic diversity within the governing bodies of companies in their portfolios. State Street’s Fearless Girl campaign, which began in 2017, promised to take voting action against directors on boards that did not meet minimum expectations with respect to diversity. BlackRock and Vanguard initiated substantially similar campaigns, albeit ones with less memorable names. Proponents of these campaigns reasoned that “cognitive diversity” plays a pivotal role in corporate governance, with research finding that companies with greater levels of diversity on their boards have stronger performance and fewer governance-related issues. Lack of board diversity ranked second to lack of independence in reasons BlackRock Investment Stewardship (BIS) voted against directors during the 2021 proxy season worldwide (and it was the top reason for BIS’s Americas region). By the numbers, BIS voted against 1,862 directors at 975 unique companies (out of over 64,000 director elections) for lack of board diversity during the 2021 proxy season, an increase of approximately 19 percent from the prior proxy season.
At the outset of the 2021 proxy season, each of the Big Three firms provided updates to their guidance and expectations with respect to diversity and inclusion for companies within their portfolios, beyond simply their expectations regarding board diversity. BlackRock, for instance, indicated that it may express concern over a company’s commitment to advancing DEI through “voting for shareholder proposals that address business-relevant human capital risks.”
Vanguard, like State Street and BlackRock, placed an emphasis on board diversity during 2021, as in prior years, but updated its guidance on ESG proposals. Per Vanguard’s updated policy, Vanguard funds would continue to vote on ESG shareholder proposals on a case-by-case basis but would likely support shareholder proposals that request “reasonable” disclosure on workforce demographics, including gender and racial/ethnic categories. The determination of “reasonableness” may include analysis of widely accepted industry standards, current company practices and applicable laws and regulations.
As somewhat of an outlier among the Big Three, State Street adopted a detailed framework that outlines five specific expectations that State Street holds of all companies in its portfolio. Specifically, these five expectations require enhanced disclosure regarding the role of diversity in human capital management practices, diversity-related goals, measures of diversity (including EEO-1 report data), board-level diversity and board oversight over diversity and inclusion.
State Street’s stated policy is to vote against a diversity-related proposal if the company is aligned with four or five of the expectations but for the proposal if the company is aligned with three or fewer of its five expectations.
Notable E&S Votes and Trends in 2021
Unsurprisingly, the Big Three’s unequivocal and vocal views on diversity in corporate governance translated into unprecedented shareholder support for diversity-related proposals in 2021 and contributed to an uptick of about 5 percent from the previous high in average support for shareholder proposals generally.
Diversity-related shareholder proposals saw a number of notable wins at high-profile companies during the past proxy cycle. For example, a pay equity proposal at Oracle received approximately 88 percent of the unaffiliated shareholder vote in support and was supported by each of BlackRock, Vanguard and State Street.
Similarly, while each of the following failed to receive majority support of the overall vote – shareholder proposals for diversity and inclusion reporting and disclosure of EEO-1 data at Charter Communications and a shareholder proposal requesting a diversity and equity audit at Amazon – each received majority support after adjusting for insider and parent company ownership.
At Berkshire Hathaway, BlackRock voted contrary to management’s recommendation on a proposal requesting annual DEI reporting, reasoning that Berkshire Hathaway had not disclosed any information to help its investors assess the board’s performance on its exercise of oversight over DEI policies, despite Berkshire Hathaway’s holding companies employing over 360,000 people.
Overall, in its 2021 proxy season summary, BIS reported its support for 27 out of 75 shareholder proposals addressing social issues filed at U.S. companies and 35 out of 100 proposals at all companies — compared to eight of 114 of such proposals supported in the 2020 proxy season (i.e., the proxy season beginning in July 2019 and ending in June 2020). Although Vanguard and State Street have not published their full summaries of the 2021 proxy season, a corresponding increase in the number of social/diversity proposals supported is likely, which is reflected in the support given these proposals in the final vote counts.
Furthermore, although impossible to determine with any measure of certainty, it is likely that the Big Three’s increasing public support of ESG shareholder proposals and engagement with companies on such matters resulted in some companies reaching agreements with shareholder proponents in lieu of putting such E&S proposals to a shareholder vote.
Takeaways and Looking Ahead to the 2022 Proxy Season
During the upcoming proxy season, we anticipate shareholder requests for increased or enhanced diversity-related board disclosure to continue, although the introduction of Nasdaq’s board diversity rule may somewhat arrest this trend for Nasdaq-listed companies. Nasdaq’s board diversity rule, which was approved by the Securities and Exchange Commission (SEC) in early August of this year, generally requires that Nasdaq-listed companies provide transparency on board-level diversity data in a standardized format beginning in 2022 and have, or explain why they do not have, at least two diverse directors, including at least one director who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Nasdaq companies must have (or explain why they do not have) one diverse director by August 7, 2023 and two diverse directors by August 6, 2025, subject to an extended phase-in period for Nasdaq Capital Market companies and an exemption from the two-director requirement for companies with five or fewer directors.
For non-Nasdaq companies, to the extent proposals for increased or enhanced diversity-related board disclosure make it into the proxy statement, levels of shareholder support for such proposals will likely remain consistent with 2021’s heightened levels.
As was seen during 2021, we expect the Big Three and other asset managers to continue to play a pivotal role in the support of diversity and inclusion proposals, particularly at companies with poor track records of board diversity or at companies that made public commitments to increasing diversity and inclusion efforts during the prior cycle but failed to provide investors with sufficient disclosure in order to assess progress.
Given the increasing support for these types of proposals in the prior proxy cycle, companies should carefully consider whether to reach an agreement with the shareholder proponent in lieu of including the proposal in the company’s proxy, whether to not oppose or even whether to support the proposal. This is particularly applicable in cases where the proposal is not overly prescriptive or unduly constraining for management or where the company in question is lagging behind its peers with respect to DEI matters.
Requests for board diversity will likewise receive substantial support in the upcoming cycle, particularly at companies with few or no diverse board nominees. Boards that fail to take proactive steps toward increasing gender and racial/ethnic diversity are expected to receive proposals for board diversity and even votes against nominating and corporate governance committees, particularly in light of the heightened transparency required of Nasdaq companies in 2022.
Whether shareholder requests for strengthened diversity among management teams increase as compared to 2021 remains to be seen. One such proposal at Paycom that went unopposed by the board received strong support during the prior proxy season. Given the success of requests for diversity on public company boards, a push for stronger diversity among management teams is a logical next step for upcoming proxy seasons.
Shareholder support for DEI proposals continues to be a changing landscape, and the upcoming proxy season will bring to bear the ongoing evolution of these types of proposals, as well as what is expected to be continued support from the Big Three.