The 2022 AGM season has seen an increase in the number of shareholder proposals with a focus on environment, social and governance concerns, but support for them is falling. In-House Perspective examines these trends and the role for in-house counsel.

This year’s annual general meeting (AGM) season has seen a rise in shareholder proposals put forward across jurisdictions that focus on environment, social and governance (ESG) concerns. The scope of these proposals has widened both in terms of the issues covered and the jurisdictions affected. However, levels of support for them have fallen over the same period, perhaps indicating a change in tone as larger investors begin to take a more nuanced approach to ESG. The conflict in Ukraine has also altered the geopolitical context in which this year’s meetings are taking place.

Numbers are up

In the US there was a 50 per cent increase in environmental shareholder proposals this year, and a significantly higher number of both environmental and social proposals have made it to ballots. Social concerns were the focus of the largest proportion of shareholder proposals submitted in the US this season.  

The US Securities and Exchange Commission (SEC)’s guidance for the 2022 proxy season has made it more difficult for companies to exclude shareholder proposals, particularly those focusing on environmental or social concerns. In its announcement, ‘Shareholder Proposals: Staff Legal Bulletin No. 14L (CF)’, the SEC outlines how its staff will alter their approach to allowing companies to exclude shareholder proposals from their proxy statement. For example, it states that it’ll not allow the exclusion on micromanagement grounds of proposals that request companies to set targets or timeframes to address the climate crisis, ‘so long as the proposals afford discretion to management as to how to achieve such goals’. It also states that the economic relevance exception cannot be applied to ‘proposals that raise issues of broad social or ethical concern related to the company’s business’.

According to Amandeep Sandhu, Diversity and Inclusion Officer of the IBA Business Human Rights Committee and counsel at Zargar in Canada, this ‘rule change may be one factor supporting the record number of proposals filed in the United States in 2022’.

There are other factors driving the rise, both in the US and in other jurisdictions. The uptick in virtual meetings, for example, has made it easier to present proposals. Proponents may also have felt emboldened by the success of the 2021 season, with headline-grabbing experiences such as that of activist investor Engine No.1 at ExxonMobil perhaps symptomatic of a greater willingness from larger investors to back ‘E’ and ‘S’-related proposals in 2021 as a way of demonstrating their own commitment to these areas.

These actions on the part of investors over the 2021 season reflect the broader rise of ESG precipitated by the Covid-19 pandemic, when social issues such as employee wellbeing and community engagement were brought to the fore and have continued to dominate the agenda.

For Carol Nolan Drake, Global Governance and Stewardship Policy Manager at the International Corporate Governance Network (ICGN) in Ohio, some of the governance issues covered by shareholder proposals in the US this season, such as the right of shareholders to call a special meeting or to take action by written consent, can also be viewed as a product of the Covid-19 pandemic.

For her, these proposals reflect uncertainty over the options available to shareholders to make their voice heard during the pandemic and dissatisfaction with the levels of engagement they achieved. As companies return to holding in-person or hybrid AGMs, shareholders are reasserting their engagement rights.

There has also been a change in the types of activist investors who are seeking to address ESG issues. Tom Matthews, Head of EMEA Activism at White & Case in London, describes two types of activism that until relatively recently didn’t tend to overlap: ‘value’ and ‘values’ activism.

The former style of activism focuses on the sorts of issues that fall under the ‘E’ and ‘S’ elements of the ESG umbrella and is typically not financially motivated. The latter style focuses more on creating financial ‘value’ in the company and uses a wide range of activist strategies to achieve that goal.

More recently, there has been a convergence in some cases between what Matthews describes as ‘values-focused activists’ and ‘value-focused activists’ as the link between promoting ESG issues and achieving financial value has become more established.

Support is down

Perhaps one of the most notable trends of this season is that while the number of shareholder proposals put forward at AGMs has risen, the level of support for them has fallen. There are several possible reasons for this.

In the US there’s a feeling that the overall quality of proposals has dropped, with some proponents putting forward the same proposal at numerous companies without taking into account the specific circumstances of the target organisation. Others have been too prescriptive in their ask, making it difficult for larger investors to support them as the proposal could be viewed as encroaching on the board’s territory.  

Steve Cohen, Co-Chair of the IBA Corporate and M&A Law Committee and a partner at Wachtell, Lipton, Rosen & Katz in New York, says that ‘proponents will need to take a more thoughtful and tailored approach next year’.

Jamie Gamble, Managing Director at PwC in New York, argues ‘it’s important to recognise that part of the decline in support may be coming from the fact that companies are getting a little bit more mature on this issue’.

Gamble says that as companies start to act on issues such as the climate crisis, the conversation between them and their investors will be about the concrete steps being taken rather than the promises being made. In that context shareholder proposals will need to be more sophisticated to reflect this shift in tone.

Sara Feijao, a Senior ESG Knowledge Lawyer at Linklaters in London, suggests the decline in support for shareholder proposals in the UK might be symptomatic of disclosure fatigue on the part of larger investors. ‘Some of the large asset managers in some cases felt that sufficient information at the time had been [provided and] they didn’t feel they needed to support more prescriptive resolutions on extra disclosure,’ she says.

The larger institutional investors are certainly beginning to refine their positions on ESG. This season has seen them take a more nuanced approach to which shareholder proposals they support, weighing up the merits of each by assessing how the action requested would affect the business, its stakeholders and the returns they achieve for their clients.

For Zally Ahmadi, SVP Corporate Governance, ESG & Executive Remuneration at D.F. King, this change in approach from the bigger investors is the big issue for 2022. ‘We’re seeing larger investors gently take a step back from the blanket support that we have seen over the last couple of years,’ she says. ‘With that they’re acknowledging that the proposal requests are more nuanced, more prescriptive and the proponents themselves are more varied now. It’s become a more complicated space.’

In May, BlackRock Investment Stewardship articulated its position on voting on shareholder proposals. It stated that it ‘takes a case-by-case approach to shareholder proposals and, without exception, takes voting decisions on proposals as a fiduciary acting in clients’ long-term economic interests.’ In its view, many climate-related shareholder proposals coming to a vote in 2002 have been ‘more prescriptive or constraining on companies and may not promote long-term shareholder value’.

It’s likely these sentiments are behind some of the reduction in support for ‘E’ and ‘S’-focused shareholder proposals, particularly from the larger investors. They reinforce the need for proponents to take a more sophisticated approach to their proposals. Proponents will need to acknowledge which ESG issues are material to the company they’re targeting and use their proposals to make suggestions for how these issues can be addressed in a way that isn’t detrimental to any of the company’s major stakeholders.

Geopolitics and Ukraine

Russia’s invasion of Ukraine in February 2022 has altered the geopolitical landscape and places the 2022 AGM season in a different context.

The crisis has exposed how the ‘E’ and ‘S’ of ESG can sometimes be in conflict. Concern that inflation caused by the war will cause a cost of living crisis is threatening progress on decarbonising major economies. Leaders are falling back on traditional energy sources to shore up reserves ahead of what’s expected to be a difficult winter.

This trend could go some way to explaining why this season hasn’t been as successful as previous seasons, especially for climate-related activism. BlackRock, for example, has indicated that, ‘mindful of the current geo-political context, energy market pressures, and the implications of both for inflation,’ it’s less likely to support climate-related shareholder proposals this year that it deems to be too prescriptive.

For Matthews, ‘E and S have been brought directly into conflict by the war in Ukraine.’ He says the war has led some to re-examine the entire concept of ESG and to question whether it remains appropriate to group these three areas together.

‘Not every objective will be mutually beneficial to each other objective at all points in time,’ he says, arguing that governments, shareholders and activists will need to decide where their priorities lie when it comes to ESG.

Gabriella Covino, Chair of the IBA Corporate Governance Subcommittee and a partner at Gianni & Origoni in Rome, says events in Ukraine ‘are significantly changing the activism that is increasingly […] struggl[ing] to find a balance between the negative effects generated by the current geopolitical environment […] and attempts not to abandon the path of sustainability that has characterised the past few years’.

While the war in Ukraine has stalled progress on the ‘E’ of ESG, its economic impact will bring ‘S’ issues into even sharper relief. It’s likely there will be even more ‘S’-related proposals next year as the issues they address become increasingly urgent. Indeed, because the filing deadlines for shareholders' proposals in some jurisdictions came before Russia’s invasion of Ukraine, it’s likely it will have a greater impact still on the 2023 season.

There could also be some pushback on prioritising ESG issues as the economic climate becomes more difficult. However, Gamble argues that doing well on ESG will be an important competitive advantage for companies facing more difficult economic times. For him, ESG is ‘not something you have to balance against economic pressure, it’s something you should look to as a way of addressing more difficult economic times by differentiating yourself from your competitors’.

The role of in-house legal

It’s important for business leaders to understand the markets they operate in so they can anticipate the issues an activist might target them on. In-house lawyers can help the board prepare for changes in the markets by keeping up to date with topical issues that could affect the business and the voting strategies of its investors.

Certain sectors are more at risk of being targeted by activist shareholders with an ESG agenda. For example, traditional energy companies and the banks that finance them, as well as certain consumer goods that can be targeted in relation to ‘S’ issues like obesity, or ‘E’ issues like single-use plastics. Wilma Rix, a senior corporate knowledge lawyer at Linklaters in London, says in-house counsel should be asking, ‘what type of business am I in? What is it about this type of business or product which could be controversial?’

One of the most important ways to understand the risks from shareholder activism is to engage with your investors. Being proactive is the best approach, engaging with investors throughout the year to develop a good understanding of what their concerns are, which shareholder proposals they’re inclined to vote in favour of, or whether any of them are building a position around a certain issue. It’s also helpful to benchmark your business against your peers to make sure yours is not a laggard or is not perceived to be by your shareholders.

‘If you know where you stand amongst the pack and you know what investors want and you are constantly in discussions with them in the off-season, then when you do receive a request, it doesn’t always come as a surprise,’ Ahmadi says.

Feijao suggests that where there has been a noteworthy vote in favour of an activist resolution, but it hasn’t been enough to pass it, it’s worth engaging with those investors who voted in favour to understand their motivation. She argues that ‘being on the front foot in terms of engagement sends a really good message to those asset managers that you’re taking this seriously’.

Engagement could also form part of the company’s response if it’s targeted by an activist. According to Sandhu, ‘meaningful engagement with shareholders may provide the proponent with the basis to withdraw a proposal’.

Reporting offers a means by which companies can communicate the action they’re taking to address ESG issues to both their shareholders and their wider stakeholder base. According to Matthews, in-house lawyers ‘can make sure they’re complying with their statutory and regulatory disclosure requirements in their annual report’. There are also investor guidelines on ESG issues that the company could comply with to demonstrate its commitment.

Sandhu says that in-house lawyers might need to become more closely involved in investor relations activities. This is particularly pertinent as companies find themselves increasingly being urged by their stakeholders to engage with the issues of the day. Consistency is critical: shareholders of all sizes will notice if a company contradicts itself in the messaging it puts out and will be quick to question it.  

Nolan Drake argues that in-house lawyers ‘really should have a role in making sure there is that consistency’ in what the company is saying on ESG issues. They can do this by ensuring they’ve oversight of material produced on ESG, for example, meeting notes or annual reports.

Equally, Drake argues that general counsel and their teams should be aware of all the information that’s coming into the organisation relating to ESG issues. That could be survey responses, requests for information from investors or procurement responses. Doing so will give a sense of what the company knows about its stakeholders’ views on ESG and its responses, again to ensure consistent messaging.

Gamble agrees, suggesting general counsel should keep an inventory of all the promises and statements the company has made on ESG and be the keeper of that inventory. ‘Know how you get from promise to execution and then back again,’ he says, ‘so that when somebody calls you on it and says, “have you done this?” you can answer, “yes.”’

Gamble argues there’s currently an opportunity for in-house lawyers to become more integrated with their company’s general strategy process, and says they are a natural place to look for help with managing ESG issues. He suggests general counsel should write the ideal ESG narrative they’d like to include in their annual report. From there they can take concrete steps to make it a reality.

It's important to plan for if your company does become the target of an activist investor. It’s certainly not safe to assume that because you haven’t been contacted on ESG issues so far you won’t be a target in future.

Matthews says that ‘knowing who your advisers are and knowing what your 24–48-hour action plan would be if an activist did get in touch with you is important’.

The business will have various options available to it, such as accepting or rejecting a proposal or engaging in dialogue with a view to the proponent withdrawing.

‘It’s all about mindset,’ says Matthews, ‘at least initially, it should be “engage” not “defend”. The activist is a shareholder and has a right to be heard. They may have some good ideas.’