Why Minority Support for Precatory Shareholder Proposals Promotes Transparency and Accountability

Sanford Lewis, Director of the Shareholder Rights Group.

While shareholder proposals on governance are perennial favorites that win majority support from shareholders, advisory proposals that continue to receive significant support from a bloc of investors highlight areas in which enhanced corporate disclosure could be material to a significant portion of a firm’s investors. Shareholder proposals that allow investors to aggregate collective support for improved disclosure by companies are an important part of the functioning of heterogeneous capital markets.

A July 3 post on the Blue Sky Blog asserted that the low voting outcomes for anti-ESG proposals reflect a general sentiment of shareholders in opposition to precatory proposals on ESG. But the voting outcomes this year do not bear out this conclusion. The article mistakenly concluded that this year’s 2 percent average voting for the anti-ESG proposals is not far from the supporting votes on ESG proposals overall this season.

A credible source of analysis, Morningstar, reports that the overall support for pro-ESG proposals averaged 20 percent this year. There is a large difference between 2 percent and 20 percent support. In fact, 20 percent support is recognized by many as the level that often compels boards and management to take note and consider responsive action.

Take proposals related to diversity, equity, and inclusion (DEI). There was a huge gap in voting outcomes this year between proposals that  focused on eliminating corporate diversity programs, which averaged support of 2 percent or less, and voting outcomes on proposals that sought better disclosure on diversity. Many investors continue to view board and employee diversity as a material issue relevant to a company’s capacity to function in a diverse society. Most tellingly, Georgeson reports that this year, proposals asking companies to disclose EEO data that the companies previously filed with the government received an average of 33 percent support. Instead of blanket opposition to precatory proposals, this outcome exemplifies the discernment of investors in supporting proposals that promise materially useful disclosure at low cost. Making those EEO reports public improves information to the market at essentially zero cost to the companies – this is a bargain for investors. In contrast, even a more expensive approach to assessing corporate diversity programs, asking companies to conduct racial equity audits, received 18 percent support, on average.

The suppressed top voting outcomes this year for environmental and social proposals reflect an ongoing political and legal campaign that pressures the largest asset managers, suppressing their significant volume of votes for many environmental and social proposals. Nevertheless, voting shareholders still demonstrate discernment and support for many shareholder proposals that sought improved corporate environmental and social disclosure.

Voting evidence from this season shows that shareholder proposals allow blocs of investors to express their collective voice regarding opportunities for improving corporate disclosure that would aid their investment strategies and decisions. A majority vote is not required for shareholder proposals to persuade the board and management regarding market demand for better disclosure on an issue viewed by their investors as significant to their company.

The shareholder proposal rule is structured to ultimately screen out repetitive proposals that are truly viewed as low quality by voting investors. In a 2020 rulemaking, the SEC  concluded that if a proposal receives less than 5 percent support the first time it is submitted, a proposal on substantially the same subject should not be allowed to be resubmitted for three years. The commission viewed this increase over the prior 3 percent threshold as better calibrated to ensure that the proposal that is resubmitted could have a realistic prospect of eventually obtaining broader support.  Notably, the number of pro-ESG proposals that are receiving support below that commission-determined threshold has essentially held steady, not risen. Instead, this year, a surge in anti-ESG proposals filed by new proponents drove up the total number of proposals receiving less than 5 percent support. They have a right to file those proposals, and shareholders have a right to reject them. That’s the marketplace of ideas working, not failing.

The shareholder proposal process allows shareholders, rather than the SEC, to make the first call as to whether a proposal is strong enough to merit ongoing consideration and whether the issue reflects a material concern for a significant portion of investors. While governance proposals may win the most votes in the current climate, other precatory proposals allow investors of nuanced strategies to exercise their voting rights and encourage better disclosure of emerging material interests to the market.  Precatory proposals continue to provide a dynamic opportunity for engagement and deliberation between and among investors and their companies.