As 2020 begins, companies are gearing up for proxy season and their next annual general meeting, where they engage with shareholders and discuss upcoming issues regarding their respective businesses. One frequent area of concern for shareholders is whether they will be voting on environmental, social and governance (ESG) proposals on the proxy card. These proposals ask shareholders to vote on matters that have some kind of relevance to social issues, from environmental impact studies to a measure of diversity in the workforce.
While these proposals only pass in certain rare instances, their increased visibility over the last five years suggests that ESG proposals will continue to feature prominently in the coming year. This article examines some statistics about social and environmental proposals within the Equilar 500—the 500 largest U.S. companies by revenue—in the past five years, and explores some specific proposals that have passed successfully and their potential impact on upcoming shareholder proposals.
As these proposals are discussed more and more in corporate governance spheres, how prevalent have they become within the Equilar 500? Figure 1 shows the total number of proposals voted on in the past five years, regardless of whether they passed. Companies can have multiple social- and environmental-related proposals, as in the case of Alphabet and Amazon, which had eight and nine of these proposals in the past year, respectively. However, most companies do not submit any social and environmental proposals, and those that do will typically only have a few. While the number of these proposals peaked in 2017 at 177, the overall number declined in five years, from 158 in 2015 to 142 in 2019. Does this mean that ESG is fading from the spotlight, or is there more to consider in trying to gauge its relevance in the upcoming year?
As ESG becomes a more prominent subject in media coverage of corporate governance issues, shareholders may find themselves under greater pressure to vote yes or no, instead of abstaining from the issue.
Figure 2 gives us a different perspective on the significance of ESG issues in the upcoming proxy season. While these proposals have not increased in terms of prevalence, the average percentage of total yes votes that they receive has increased in five years, from 18.4% in 2015 to 25.3% in 2019. These results show that social and environmental proposals are continuing to gain traction from shareholders, who are increasingly voting in favor of these resolutions. As this number continues to climb, companies will find themselves under increased pressure to implement the changes that their shareholders are voting on.
For the purpose of this study, the proposal must receive more yes votes than the combined total of all voting categories (including abstains) in order to be considered a pass. It is often the case that shareholders choose to abstain from voting, rather than voting no and displaying their direct opposition. By abstaining, they are signaling that the proposal is not compelling enough for them to take a definitive stance, or that they face a potential conflict of interest in voting and would prefer to avoid the liability of making a decision. As ESG becomes a more prominent subject in media coverage of corporate governance issues, shareholders may find themselves under greater pressure to vote yes or no, instead of abstaining from the issue.
While the percentage of yes votes for social and environmental proposals has climbed steadily among Equilar 500 companies in the past five years, Figure 3 shows the opposite trend for abstain votes. The percentage of abstain votes has dropped dramatically from 2015 to 2019, going from 10.6% to 1.8% of total votes (excluding broker non-votes). Whether they agree or disagree with the proposal, shareholders are increasingly hesitant to remain on the sidelines when it comes to social and environmental proposals. They recognize how these proposals support the brand reputation of companies that are under constant media scrutiny, and wish to take a definitive stance on the future of the companies in which they invest.
Although the voting results look grim for those who are passionate about ESG and corporate responsibility, there are some well-known activist investors who are making a lot of noise in this space and will possibly have a greater influence on the 2020 voting season.
In terms of social and environmental proposals that actually passed this year, there are a few examples that may indicate the kind of proposals that will be successful in 2020. Aon’s shareholders have voted in the past five years to authorize the company to make political donations, in order to fulfill a legal requirement in England and Wales. Cognizant Technology Solutions had a similar proposal, which would require the company to disclose both the company’s policy on political donations, as well as the actual donation amounts made by the company. Despite the board recommending a no vote, this vote passed by a narrow margin. Walgreens passed a resolution to provide a report on corporate governance changes that the company has made to address the opiate crisis. Finally, Newell Brands and Travelers Companies both passed resolutions related to reporting on diversity within the workforce. While these proposals related to political contributions, health and diversity have been the successful outliers, there is a distinct lack of successful environmental proposals, such as a requirement that companies disclose their carbon footprint or their net emissions. Even though a handful of these proposals have passed in previous years, it is unclear whether shareholders will make a more concerted effort to pass these resolutions in 2020.
Looking forward, it seems likely that ESG will continue to garner attention and media scrutiny. However, it appears that there will only be a handful of outliers that actually pass, and even then many of these proposals are non-binding. Although the voting results look grim for those who are passionate about ESG and corporate responsibility, there are some well-known activist investors who are making a lot of noise in this space and will possibly have a greater influence on the 2020 voting season. TCI has pledged to vote against directors of companies who don’t disclose formal carbon emissions reports and criticizes the large passive funds, like BlackRock and Vanguard, who take a hands-off approach to governing the companies they invest in when it comes to ESG. This dynamic will be interesting to observe in 2020, as activists attempt to push other investors to take action against uncooperative companies, while passive institutional investors argue that they should let the market dictate successful outcomes for corporate governance policies. Only time will tell who will have a greater influence over shareholder voting results.
Connor Doyle is Research Analyst at Equilar.