<!-- Swiftype Variables -->

ESG

Environmental, social issues big in proxy season

Engagement pays off; number of withdrawn proposals increases

Courteney Keatinge said many proposals were about calling for a special meeting.

Environmental and social concerns dominated shareholder proposal submissions in 2018, and there is strong evidence of investor engagement paying off.

According to Institutional Shareholder Services' Voting Analytics database, environmental and social concerns accounted for just more than half of shareholder proposals submitted at U.S. companies for the 2018 season, but with an increase in the number of withdrawn proposals and proposals receiving majority support.

Building off momentum from 2017, climate-risk proposals calling on companies to report on the resiliency of their portfolios under the 2-degrees scenario received majority support at two companies through June 30 — energy infrastructure company Kinder Morgan Inc. and Anadarko Petroleum Co. Similar proposals were withdrawn at several companies, including Chesapeake Energy Corp., Exxon Mobil Corp., Dominion Energy Corp. and DTE Energy Co., after the companies committed to enhancing their disclosures. Jamie Smith, Denver-based associate director at the Ernst & Young LLP's Center for Board Matters, said the results reinforce that "climate risk is a mainstream investor concern."

Last year, similar proposals were supported by a majority of investors at Exxon Mobil, Occidental Petroleum Corp. and PPL Corp., making it the first year that climate change-related proposals received majority support.

While climate change has been an area of focus for shareholders, investors are "not painting (companies) with a broad brush," said Courteney Keatinge, San Francisco-based director of environmental, social and governance research at proxy-voting advisory firm Glass, Lewis & Co.

Rather, investors are "looking really closely at these issues and taking into account what companies have disclosed and what they've done," Ms. Keatinge said, noting that 2-degree proposals at MGE Energy Inc. and PNM Resources were supported by only 11.1% and 14.5% of shareholder votes, respectively, this year.

Other environment-related proposals that received majority support this year included a methane emissions management proposal at natural gas company Range Resources Corp., and broad sustainability proposals at Kinder Morgan and food service equipment company Middleby Corp. The Kinder Morgan sustainability proposal has been filed every year since 2014, but this was the first year it received majority support, Ms. Keatinge said. So far this year, seven environmental proposals have received majority support, up from four in 2017, according to sustainability advocacy group Ceres.

According to the ISS Voting Analytics database, 63% of 27 sustainability proposals were withdrawn or not in proxy/ not presented this year, while that happened for 50% of 38 greenhouse gas emissions proposals. Last season, the figures were 50% of 24 sustainability proposals and 48% of 31 greenhouse gas proposals.

An 'interesting' year

A number of very targeted shareholder proposals made 2018 an "interesting" year on the social front, Ms. Keatinge said.

In May, 68% of Sturm Ruger & Co. shareholder votes supported a proposal calling on the gun manufacturer to report on its efforts to make guns safer and mitigate gun violence. Gun safety proposals filed at Sturm Ruger in 2001 and 2002 were supported by 5.43% and 4.26% of investors, respectively.

The same month, 61% of Depomed Inc. investors supported a shareholder proposal from the Investors for Opioid Accountability coalition calling on the pharmaceutical company to report on how it is responding to the opioid crisis.

While the Interfaith Center on Corporate Responsibility has filed proposals on drug pricing before, this was the first year it filed proposals requesting pharmaceutical companies report how rising public concern over drug pricing is integrated into their incentive compensation practices for senior executives. Support for the five proposals ranged from 21% to 28%.

A "whole slew of operational risks (came) to the forefront this year," said Patrick McGurn, special counsel and head of strategic research and analysis at proxy-voting advisory firm Institutional Shareholder Services Inc., Rockville, Md. Outside of gun safety and the opioid crisis, Mr. McGurn pointed to investors' data security concerns at Equifax Inc. and accounting concerns at General Electric Co. as other examples of operational risks raised this proxy season.

Tech companies such as Facebook Inc., Amazon.com Inc., Netflix Inc., Alphabet Inc., Tesla Inc. and Twitter Inc. that have a had a "long sort of bloom on the rose with investors," also received scrutiny this year, Mr. McGurn observed. Among investors' concerns: a lack of board diversity and independence, unequal voting structures and gender pay practices, and reactive rather than proactive content-management enforcement and data security policies. There were some tangible changes following the companies' May meetings — Amazon and Facebook adopted formal policies to consider diversity when filling vacant director positions and Facebook expanded the risk oversight duties of its audit committee. It remains to be seen, however, whether the companies adopt the other changes investors seek.

Call for special meetings

While environmental and social concerns were the focus of several shareholder proposals this year, the most popular proposal type this season was a governance one, specifically, shareholders' ability to call a special meeting, Glass Lewis' Ms. Keatinge said.

At least 62 of these proposals made it onto proxy ballots this year, compared to 23 last year, Ms. Keatinge said. Through May 31, average support for special meetings proposals at Russell 3000 companies was 42%, according to EY data.

Also on the governance front, there still appears to be strong support overall for director elections and executive compensation packages, EY's Ms. Smith said.

Through May 31, only 20 out of more than 13,000 directors at Russell 3000 companies failed to receive majority support, while 34 out of more than 1,600 say-on-pay proposals failed to do so.

Underlying this support, Ms. Smith believes, is engagement.

The "majority of large companies are having engagement with their key shareholders and disclosing some information about those engagements in the proxy statement," Ms. Smith said.

While executive pay is often a driver of those conversations, many conversations have also been focused on board composition and director diversity in terms of gender, race and tenure, she said.

Interestingly, say-on-pay opposition numbers were slightly up this year, while at the same time, investors backed a number of multimillion-dollar pay packages (e.g., Tesla), Mr. McGurn pointed out.

"That's something we really hadn't seen in the past, and it will be interesting to see whether this remains a trend going forward," he said.

According to ISS' Voting Analytics database, average support for say-on-pay proposals was 90.9% in 2018, down from 92.1% in 2016.

Overall, 433 shareholder proposals made it onto ballots for meetings between Jan. 1 and June 30, down from 453 in 2017 and 585 in 2015, Glass Lewis' Ms. Keatinge said.

One area that led the way in withdrawn proposals this year was human capital management, Mr. McGurn said.

According to ISS, 76% of 29 board diversity proposals were withdrawn or not in proxy/not presented this year, while that ws the case in 68% of 25 gender/race/ethnicity pay gap proposals. Last year, the figures were 70% of 34 board diversity proposals and 38% of 21 pay gap proposals.