By Anne Sherry, J.D.
Majority-supported environmental, social, and governance shareholder proposals are still rare, representing less than a tenth of overall ESG proposals, but their prevalence is growing. However, proponents responding to a survey by the Principles for Responsible Investment (PRI) believe that only 23 percent of these proposals are being fully implemented, and another 14 percent partly implemented. Corporate inattention to proposals that receive majority support can create compliance, legal, or operational risks, PRI posits.
Chart. The report includes a comprehensive chart showing the status of majority-supported proposals since 2022, including the company, resolution name, percentage of shareholder support, and whether both the proponent and the company believe the company is taking action on the proposal. Where applicable, PRI links to publicly available information showing the company’s response. For example, the chart shows that a proposal that Canadian retailer Loblaw Companies disclose supply chain audits received 72 percent support. While the proponent does not believe the company adequately responded, the company asserts a partial response as seen on its human rights policy webpage.
Why it matters. PRI says that paying attention to proposals that receive majority support is a sign of good shareholder relations and governance. Conversely, ignoring shareholders’ preferences can damage investor engagement. If corporate boards are unresponsive, it is unlikely that shareholders can achieve meaningful progress on systemic sustainability issues through the proposal process.
While majority support on a proposal is not legally binding, inaction is a red flag for investors. As PRI notes, “many institutional investors recognize proxy voting as a part of their fiduciary duty” because the corporate response can affect shareholder returns. This isn’t even limited to majority-supported proposals: Glass Lewis, the UK Investment Association, and the International Corporate Governance Network all expect boards to engage with shareholders when just 20 percent of shareholders vote against board recommendations.
Inaction can also be seen as a governance failure in jurisdictions where directors owe fiduciary duties to shareholders. PRI says that inaction can be a sign of a captured board that is beholden to the CEO or management. Companies with captured boards, especially those that do not have ESG expertise, may fail to mitigate the risks that arise from environmental or sustainability factors.
Recommendations. Looking ahead to the 2023 proxy season, PRI recommends that investors define what constitutes issuer inaction. Companies should show some meaningful progress on majority-supported proposals within the first year. Investors should be wary of disclosures that make it sound like the company is acting, but that lack any solid commitment or change. PRI cites ISS’s voting guidelines, which warn that companies may disclose that they have discussed a majority-supported resolution with shareholders. “Investors should think critically about whether such efforts, when used to delay action or commitment, are justified when over half of the company’s voting shares have already weighed in favour of a proposal,” PRI suggests.
To spur action on majority-supported proposals, investors should communicate directly with companies to clarify what actions they expect by the next annual meeting. If the company’s actions are inadequate, an investor can employ the “escalation strategy” of holding the board accountable by voting against all directors or targeting the board chair or key members of governance and oversight committees. Investors may also consider nominating alternative directors or engaging companies on improving shareholder access.