Alert
Alert
By Stacie D. Yee, Jean F. Kuei, Paula M. Weber, Jordan Rhodes
07.14.22
Companies increasingly consider Environmental, Social, and Governance (ESG) factors when identifying both material risks and growth opportunities. Perhaps more importantly for some, investors and shareholders have placed new and more exacting demands on companies to publicly share their ESG progress and are eager to understand the degree to which various ESG factors play into companies’ strategic decision-making.
The 2022 Proxy Season
Information on the 2022 Proxy Season comes from “An Early Look at the 2022 Proxy Season,” which is current up to May 16, 2022 (also published in Harvard Law School’s Forum on Corporate Governance on June 7, 2022), and from the “Proxy Preview 2022” report, current up to February 24, 2022.
As of May 16, 2022, the 2022 Proxy Season was reported to have seen 924 shareholder proposals. More than 520 of those proposals involve ESG topics, up 20% from last year. (As of May 20, 2021, there were 435 proposals on ESG topics for the 2021 Proxy Season.)
Beyond an increase in the sheer quantity of ESG shareholder proposals, the significance of the ESG demands made during the 2022 proxy season rose, revealing more targeted and action-oriented proposals. For example, in 2022 shareholder proposals on diversity in the workplace newly go beyond asking for EEO-1 data disclosure, instead asking for information on companies’ diversity programs and outcomes.
Still, passage rates as of May 16, 2022, seem to indicate hesitance by institutional investors to support such proposals, as indicated by the following statistics broken down by ESG topic:
Common Questions and Potential Benefits of Retaining Outside Counsel to Assist
Q: I am facing a shareholder proposal like one discussed above. What are my options?
There are several potential options, the best of which may depend on a number of factors, including a particular organization’s goals, values, sensitivities and stakeholders. Options may include:
Option 1: Challenge.
Though outside the scope of this article, companies have many tools to challenge shareholder activism which are often deployed in tandem. These include organizing campaigns to engage shareholders and lobby large investors against shareholder proposals or seeking exclusion of a shareholder proposal through a Rule 14a-8 no-action request. Targeted audits can help inform the company’s overall response strategy.
Option 2: Compromise.
In exchange for withdrawal of the shareholder proposal, companies may try to reach a middle ground with the investor(s). This will confirm an organization’s commitment to working collaboratively with key stakeholders, while also typically giving the organization greater control over the conduct of an audit, the final report and any other resulting work product. It is important for both sides to be open-minded and reasonable when negotiating an agreement resulting in withdrawal. Remember that, even if an agreement is reached resulting in withdrawal, an unsatisfactory report may cause the proposal to show up again in some form during the 2023 Proxy Season.
Option 3: Wait and see.
Some companies may choose to take a “wait and see” approach, perhaps waiting for the results of a shareholder vote before undertaking the significant labor and expense associated with an audit or other remedial action. While this is understandable, waiting for vote results before proactively taking action can have some clear downsides. A vote typically means increased publicity surrounding the issue. In addition, a company may lose its ability to have a say over the scope and intrusiveness of an audit. Willingness to collaborate and possibly compromise will go a long way towards ensuring an outcome that all parties can live with.
Q: How is an ESG-focused audit helpful? When should I consider an audit?
There is no need to wait for an agreement or a vote before deciding your organization would benefit from proactively moving forward with an audit. An audit can be done pre-agreement, pre-challenge, pre-vote or even as soon as the potential for a proposal arises. There are a handful of shareholder proposal situations to which auditing can be tailored:
Situation 1: You suspect or know you may be the target of a particular trending shareholder proposal.
Conduct a privileged audit to get ahead of the curve. The results will help guide you in setting policies that may avoid a proposal entirely. Or else it may help identify parameters for reaching potential agreements with shareholders. The results will also help you decide whether a certain proposal should be challenged. For example, if the results reveal there are no issues causing concern, then an organization could decide there is little downside to allowing the proposal to go to a vote.
Actively monitor your situation and whether there could be an “S”-related shareholder proposal in 2023. Consider proactively conducting an audit now.
Situation 2: An investor initiated a proposal, and you have reached an agreement.
Retain outside counsel to perform a third-party vendor analysis consistent with the parameters reached pursuant to your agreement. Keep in mind that at this stage some results will likely be shared in a final report issued by your organization; however, some or all of the underlying work of a third-party law firm may be privileged.
Situation 3: You have sought withdrawal of or otherwise challenged a proposal.
Conduct a privileged audit, particularly if you are unsure whether the challenge will be successful. That way, you will be informed of specific issues which may arise should the proposal go to a vote, and pass.
Situation 4: There has already been a vote in favor of the proposal.
Hire an independent, third party to assist in performing an audit and preparing a report. Consider whether the third party has industry expertise relevant to your business, as an “S” audit will touch on all aspects of your business, and industry knowledge could be critical in achieving a report and resulting strategy that is thoughtful, meaningful and tailored to your business. Ensure the auditor is independent to avoid criticism of the report.
Q: How does an audit work? What is the process?
Allowing outside counsel to conduct an audit can provide you with a tailored, independent third-party review of your company. Outside counsel will work closely and collaboratively with you to assess and then address any potential ESG issues that may arise, such as on the “S” side in relation to potential bias, inequity or discrimination issues. An effective audit should be personalized for your business, and thought should be given regarding the extent to which the audit makes internal inquiries, external inquiries or both.
Pillsbury is well-equipped to handle these audits given that it regularly conducts employment practices audits for its clients, and our subject matter experts assist in developing and implementing policies and practices intended to produce more equitable results.
Possible areas of assessment include:
Looking to the Future
The already escalating investor-driven focus on ESG issues is expected to only intensify in upcoming years. Many popular issues in the 2022 Proxy Season are expected to pop up again next year, with equity and DEI issues perhaps seen through a slightly different lens, including, for example, based on recent court decisions such as the U.S. Supreme Court’s Dobbs decision impacting equal access to reproductive healthcare. It is not too early to start considering how current events will impact the 2023 Proxy Season and take steps to avoid “S”-focused shareholder proposals.
Conclusion
The ESG landscape is constantly evolving. Companies should think not only about responding to current expectations but should also anticipate how expectations will change in the future and develop strategies focused on addressing those expectations. Pillsbury is prepared to engage in this forward-thinking exercise with you.