Four key takeaways from the 2022 proxy season

Last year’s proxy season was marked by the momentum behind environmental and social shareholder proposals, which garnered record levels of support and signaled increased investor willingness to vote against management. This year, though there were more proposals in these categories, the support rates fell, dropping from an average of 32% in 2021 to 27% this year, as several developments impacted the shareholder proposal landscape.

Most notably, an influx of more prescriptive proposals reached the ballot this season under the SEC’s new approach to no-action requests, which made it more difficult for companies to exclude environmental and social shareholder proposals. In recent years, companies refused proposals if they could demonstrate that the matter raised was not significant to the company, even if it was significant to society more broadly, or sought to micromanage the company. Under the new guidance, which is actually a return to historical practice, SEC staff is no longer focused on determining the nexus between a policy issue and the company but is instead focused on the social significance of the issue. Further, SEC staff is taking a narrower approach to what constitutes micromanagement.

Many of these new proposals, which might have otherwise been omitted in recent years, failed to gain traction with investors broadly. For example, companies facing proposals calling for them to end their financing of new fossil fuel supplies were denied no-action relief, and the proposals averaged just 12% support, whereas majority support was secured on a less prescriptive proposal asking companies to report on how they will reduce the greenhouse gas emissions associated with their financing activities. Under the SEC’s new approach, the number of environmental and social proposals that went to a vote was up nearly 70% from last year, but just 12% of those proposals secured majority support, down from 20% in 2021.

Investors are also evaluating environmental and social shareholder proposals against the specific company’s progress in addressing and reporting on related matters, including learnings from direct dialogue with the company. Additionally, they are considering the impact of external developments such as new pressures on the energy transition in the wake of the war in Ukraine. As a result, some investors may have voted against specific shareholder proposals (e.g., because they thought the proposal was too prescriptive or that the company is making sufficient progress under the current circumstances) even if the broader underlying cause or concern (e.g., achieving net zero emissions globally by 2050) is generally aligned with the investors’ priorities.

These developments underscore the need for management to directly engage with the governance and stewardship teams of key shareholders to understand their views on the company, their expectations for progress on stewardship priorities, and the rationale behind their votes.

Key environmental and social shareholder proposal topics in 2022

Heading into the proxy season, investors told EY researchers that ESG oversight – and particularly oversight of climate risk – would be a more important factor in how they evaluate and vote on directors this year, with some citing the director vote as their most powerful tool to drive change. Changes to investor proxy voting guidelines and proxy advisory firm policies also signaled a broadening of negative voting factors for directors, including expectations related to board and workforce diversity and related disclosures, climate risk, broader ESG oversight and overboarding policies.

However, despite these signals that votes against directors would increase, overall director support remained fairly stable, with average votes against S&P 500 directors inching up to 4.2% compared with 3.9% over the same time period in 2021. This relatively sustained support for directors may reflect the significant efforts companies made to address investor concerns and meet their expectations around key investor engagement priorities. It may also reflect an element of investor concern about losing access to directors and damaging the investor’s relationship with the board.

Opposition to directors has, however, crept up in recent years, particularly for certain board roles. This year average voting opposition for nominating and governance chairs at S&P 500 companies was 8.2%, up from 4.6% in 2017. Similarly, average voting opposition for compensation committee chairs at S&P 500 companies was 7.3%, up from 3.8% over the same period. In addition, opposition to independent board leaders (i.e., independent chair, lead or presiding director) rose to 7.0% from 4.3%. 

While director voting results indicate that this year most companies met at least the minimum thresholds for director support, overall trends (including changes in investor voting policies and in the shareholder proposal landscape) point to the director vote as a lever of change that investors may be more inclined to use going forward to accelerate their stewardship goals.

In our conversations with investors, many made clear that they want companies to define how ESG matters are included in the work of the board and its committees. This year companies answered that call with enhanced and prominent disclosures on board oversight of ESG-related risks and opportunities.

More companies provided racial/ethnic diversity characteristics at the individual director level with 40% of companies doing so, up from 27% last year. Still, the most common approach (57% of companies) was to disclose the percentage of the board that is racially/ethnically diverse on an aggregated level without assigning diversity characteristics to individual directors.

While many companies continued to provide these disclosures using pie charts or similar graphics, 44% included a matrix such as that required under Nasdaq’s board diversity rule, which allows for a board-level or director-specific disclosure approach. A third of companies included diversity characteristics in a director-specific matrix (often adjoined to a broader skills matrix) that assigned diversity characteristics to individual directors, and 11% used an anonymized board-level matrix.

Some companies also disclosed additional categories of diversity. The most common of these were LGBTQ+ status (17% of Fortune 100 companies disclosed this), director nationality (12%) or military service (5%).

More standardization in how companies make these disclosures may be on the horizon. The SEC’s current regulatory agenda includes rulemaking related to board diversity disclosures.