Coronavirus creates a whole host of unknowns

A lot of attention has been paid to Securities and Exchange Commission rule proposals that would change the way proxy advisory firms make recommendations and raise the thresholds for submitting shareholder proposals.

And while those rules, if finalized, would greatly affect future proxy seasons, the 2020 season has interesting wrinkles of its own, sources said.

At publication time, the full impact of the coronavirus and the stock market slide remains to be seen.

Courteney Keatinge, New York-based senior director of environmental, social and governance research at proxy-voting advisory firm Glass, Lewis & Co., said it's possible that some public companies could see proxy vote outcomes affected because of business disruptions caused by the virus.

"We always find, particularly when it comes to compensation, when companies are not doing very well financially, (shareholders) don't want to see executives doing very well either," she said referring to executive compensation shareholder resolutions.

On March 4, the SEC issued "conditional" regulatory relief, providing companies impacted by COVID-19 up to 45 additional days to file disclosures due between March 1 and April 30, including quarterly reports. Issuers who delay their disclosures must provide "a summary of why the relief is needed in their particular circumstances," the SEC order stated.

SEC Chairman Jay Clayton said in a news release that while timely public filings are crucial, the virus upheaval may prevent certain issuers from compiling these reports within required time frames. "We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments," Mr. Clayton added.

On March 13, the SEC published guidance for companies, setting out the process companies should follow if they decide to change the date, time or location of an annual meeting. That includes issuing a news release, filing the announcement on EDGAR, and taking "all reasonable steps necessary" to inform other intermediaries in the proxy process and other relevant market participants of the changes.

Two weeks before its March 18 annual meeting, Starbucks Corp. scrapped its in-person meeting in favor of a "virtual-only" meeting. Ms. Keatinge said more companies may go the virtual-only route this proxy season.

The SEC also published guidance for companies looking to hold virtual shareholder meetings. If an issuer plans to conduct a virtual meeting, it must notify its stockholders, intermediaries in the proxy process and other market participants of such plans in a timely manner and disclose clear directions on the logistical details of the meeting, including how stockholders can remotely access, participate in and vote, the SEC said.

Patrick McGurn, special counsel and head of strategic research and analysis at Institutional Shareholder Services Inc., Rockville, Md., said presidential election politics could also come into play at some annual meetings. Last year, Sen. Bernie Sanders, I-Vt., a presidential candidate, attended Walmart Inc.'s annual meeting in Bentonville, Ark., pushing a proposal to allow hourly employees to join the company board. The proposal garnered 0.1% support, but similar attempts could be made this year.

"A lot of momentum could develop on some of these topics simply because they're in the news and when people are stepping into the voting booths in some of these states, they're going to be getting proxies at the same time," Mr. McGurn said, citing issue like climate change, board diversity and human capital management.

Politics always plays a part in proxy season but it "wouldn't surprise me if there's an increased emphasis on proposals about political spending and lobbying, given the political environment," Ms. Keatinge added.

As of March 16, 476 shareholder proposals have been filed, compared with 808 total proposals last year, according to ISS Analytics, the data intelligence arm of ISS. Most companies hold annual meetings from April through June.

Issues like climate change, political spending, board diversity/oversight and human rights have been a focus for shareholders this season, according to a report from Proxy Preview, a collaboration between non-profit shareholder advocacy group As You Sow, Proxy Impact, a sustainability focused proxy service firm, and Sustainable Investments Institute, which provides proxy information services to institutional investors. Of note, proponents remain keenly focused on diversifying boards and have filed 49 resolutions, the most ever and up from 44 last year, according to the proxy preview report.

Patti Brammer, corporate governance officer of the $100.2 billion Ohio Public Employees Retirement System, said board diversity is top of mind this season. "We ultimately want them to get the best candidate, we just want them to understand that there's a pipeline of women out there that will bring diversity'' of thought, opinion, race and ethnicity to help their business, she said.

Mr. McGurn said that proponents filing shareholder resolutions have scaled back their requests on many issues from last year. In 2019, he said the SEC's division of corporation finance, the unit that determines whether a given proposal can be omitted following a company objection, was quick to grant companies no-action relief in certain instances.

"If anything looked even close to the line of prescription and micromanagement, the SEC staff OK'd the exclusion of those proposals," Mr. McGurn said. "I think the proponents in 2020 took that into consideration and backed off their asks. We're seeing more proposals on recommendations that boards report various (environmental plus social) risks and fewer that call for specific action by those companies."

Overall, the SEC allowed a similar number of proposals to be omitted last year — 120 in 2019 compared with 131 in 2018, according to ISS. As of March 6, it has granted 84, according to data on the SEC website.

Proponents have withdrawn 101 proposals as of March 13, compared with 207 in all of 2019, 210 in 2018 and 173 in 2017, according to Heidi Welsh, founding executive director of the Washington-based Sustainable Investments Institute. Withdrawals typically signal that a company and shareholders have struck a compromise.

Ms. Welsh said there have been more withdrawals in recent years because there has been more support from shareholders in general for environmental and social issues. She pointed to 2017 proxy votes at Occidental Petroleum Corp. and Exxon Mobil Corp. where a majority of shareholders approved climate change disclosure proposals.

"That illustrated that the market really wants information about how companies are going to deal with climate change and companies have responded; they're giving more information about how they plan to deal with this," Ms. Welsh said.

Last year, the five pension funds in the $215.5 billion New York City Retirement Systems took an unorthodox approach to see that their shareholder proposal on climate change made it on TransDigm Group Inc.'s proxy ballot.

The funds sued the Cleveland-based aerospace company in December 2018, alleging that it intended to exclude the shareholder proposal from the proxy for its 2019 annual meeting. In January 2019, litigation was dropped after the company agreed to withdraw a complaint filed with the SEC opposing inclusion of the pension funds' proposal in the 2019 proxy materials.

Ms. Welsh said more institutional investors may file lawsuits to establish a legal precedent in the courts on major issues. "It seems clear that there are other major institutional investors who are willing to make a point on this like New York City was last year," she said. "Those big institutional investors have in-house legal departments and substantial resources that could mount such a challenge."

One of the major things Ms. Welsh will be watching this proxy season is how large asset managers vote their shares. Support for ESG-related shareholder resolutions has climbed steadily in recent years among asset managers, but several of the biggest managers vote against ESG resolutions more often than not, a recent report from Morningstar Inc. found.

Over the past five years, average support for ESG-related resolutions across 50 large fund families rose to 46% in 2019 from 27% in 2015, Morningstar said in its report. The report, which tracks asset manager disclosures, found that the ESG issues garnering the most support in 2019 included diversity and gender pay equity, with an average of 57% support, and political spending resolutions, which garnered 53% average support.

Of note, five of the 10 largest asset managers — Vanguard Group, BlackRock, Inc. Capital Group Cos. Inc.'s American Funds, T. Rowe Price Group Inc., and DFA Funds offered by Dimensional Fund Advisors LP — voted against more than 88% of ESG-related shareholder resolutions, Morningstar found. Representatives from Vanguard, T. Rowe Price, American Funds and Dimensional said after the report was released that one-on-one engagement with companies typically produces better outcomes than shareholder resolutions, since the latter are non-binding.

In January, BlackRock Chairman and CEO Laurence D. Fink said in his annual letter to corporate CEOs that sustainability now is the New York-based firm's standard for investing, given the risk that global climate change poses to "economic growth and prosperity."

And on March 18, BlackRock released its engagement priorities for 2020 and said its five priorities were board quality, environmental risks and opportunities, corporate strategy and capital allocation, compensation to promote long-termism and human capital management.

"In intensifying our stewardship efforts, BlackRock expects companies to improve how they disclose sustainability-related risks and to demonstrate a plan for and progress on managing material risks and opportunities," Michelle Edkins, global head of BlackRock Investment Stewardship, said in a news release. "Where companies are making progress on these critical issues, we expect to support management and the board. However, given the groundwork laid over the past several years, we will hold directors accountable where we have concerns about lack of progress on managing material sustainability factors or inadequate disclosure on business relevant risks and opportunities."

Jackie Cook, Vancouver, British Columbia-based director of sustainable stewardship research at Morningstar, said that BlackRock's message is an important signal. She added that there's a "herd mentality" around proxy-voting issues.

"They're reluctant to break with the pack on particular issues, but we've seen more and more of them do that now that proxy voting is a branding opportunity as well," Ms. Cook said of asset managers. "I think if BlackRock signals that they're going to be voting against management on some of these major issues, it only emboldens other asset managers and potentially other passive investors as well."

Morningstar's report found that 19 of the 23 ESG-related resolutions earning more than 40% support in 2019 would have passed if supported by either BlackRock or Vanguard.

Vanguard spokeswoman Alyssa Thornton said in an email after the report was released that while proxy voting is an important component of Vanguard's stewardship program, it's only one part. "We do not believe in telling company leaders how to run their businesses, but rather focus on ensuring they take into account, and disclose, the risks associated with their businesses," Ms. Thornton said.