An increased focus on board governance and increasing pressure for companies to not consider ESG issues could be the main, albeit competing, themes of the coming U.S. proxy season, according to a report issued Feb. 29 by ISS-Corporate Solutions.
The provider of corporate governance programs tracked 350 shareholder proposals submitted as of mid-February and found 13% to be counter-ESG proposals. The report forecasts that support for them in 2024 will remain flat, after falling in 2023.
Both investors and portfolio companies will need to "carefully navigate these changing dynamics as the U.S. proxy season kicks off," said Jun Frank, managing director and global head of compensation and governance advisory at ISS-Corporate, in a release.
"While calls for more robust governance and board accountability are growing, pressure against environmental and social considerations is increasing," the report titled Governance Back on Agenda while Sustainability Recedes said.
Adding to the tension expected in the 2024 proxy season were two "explosive" court cases, the report noted: a landmark Delaware court ruling vacating Elon Musk's Tesla pay package and Exxon Mobil's court challenge to exclude a shareholder proposal on greenhouse gas emissions reduction. "These court cases highlight the emerging tensions between corporates and their shareholders," the report said.
Since 2020, the number of shareholder proposals aimed at enhancing board independence and accountability increased dramatically, and support for directors will continue to erode in 2024, the report said. Within the Russell 3000, median support levels for nonemployee board chairs, lead directors, and nominating and governance committee chairs declined to 94.9% in 2023 from 96.8% in 2018. Other topics investors are likely to focus on this season are say-on-pay and special equity grants.
Corporate governance also featured in an ISS ESG corporate rating survey released Feb. 28 that found most institutional investors consider ESG risk assessment relevant.
The inaugural ISS ESG Corporate Rating Survey was conducted between Sept. 25 and Oct. 20 and included 511 responses, 421 of which were from public companies or related respondents. Of the 90 institutional investors or their consultants, 71% were asset managers, 27% asset owners and 2% advisers. Anonymous or multiple responses were not accepted.
Among the investor group, 42% focused on Europe; among noninvestor respondents, 34% identified as global and 32% identified as North American.
The survey also found that when it comes to regulatory regimes, many companies and global investors consider the EU Taxonomy relevant, with 43% and 57% respectively, rating it with a very high degree of relevance.
On the subject of ESG risk assessment, 83% of the investor respondents considered it very relevant or of higher relevance, followed by reporting at 79% and sustainability impacts at 77%. Investors said that the most useful measurement of companies when it comes to ESG were analyst opinions, absolute letter grades, indicator-level assessment details and ESG performance scores, the survey found.
Both types of respondents identified climate change as the most relevant thematic topic in all sectors. Investors also emphasized audit and risk oversight, while corporate respondents cited worker health and safety.
