Proxy season is just around the corner, and it’s certain to be an active one. The tumultuous events of the past year have only underscored the inextricable and undeniable link between corporate behaviors and various adverse events: from deforestation to democracy, and from racial justice to worker treatment. As such, we’ve seen numerous companies responding to the headlines—and to stakeholder activism— with pledges to review and overhaul their practices.
The pressure on companies to do right by their various stakeholders is unlikely to abate; in fact, research firm CoreData recently found that the overwhelming majority of institutional investors are expecting a surge in shareholder activism over the next three years. This year’s shareholder proxy votes in particular are likely to reflect a growing cognizance of the ways in which companies may be widening inequality, accelerating climate change, perpetuating racial injustice and failing to ensure adequate worker protections. Investors are becoming acutely aware not just of corporations’ role in creating these issues, but also of their resilience in the face of social and economic externalities.
With that in mind, here are some of the issues we can expect to see at the forefront this proxy season:
In 2020, the mounting hazards associated with climate change became more obvious than ever. We saw devastating wildfires unleash destruction in various corners of the globe, experienced a ferocious and record-breaking Atlantic hurricane season, and recently learned that the past seven years have been the hottest on record. As the visible evidence of climate change ramps up, so too does pressure on corporations to do something about it.
The Interfaith Center on Corporate Responsibility, a shareholder advocacy group, has launched a campaign urging companies to align their lobbying activities with the goals of the Paris Climate Accord. Meanwhile, proxy advisory firm Institutional Shareholder Services (ISS) has made it known that, when assessing companies’ material failures of governance, stewardship, risk oversight, or fiduciary responsibilities, it will recommend a vote against those with “demonstrably poor risk oversight of environmental and social issues, including climate change.” Indeed, climate change is a material financial risk for companies across just about every industry—per the Fourth National Climate Assessment, unless decisive action is taken to reduce global greenhouse gas emissions, “annual losses in some economic sectors are projected to reach hundreds of billions of dollars by the end of the century.”
Last summer, a racial reckoning was ignited as troubling details emerged concerning the untimely deaths of George Floyd, Breonna Taylor, and Ahmaud Arbery at the hands of police officers. While protests across the nation called for police reform, many investors also turned their attention to their portfolios and how their holdings may be perpetuating or compounding systemic biases. As such, the resolutions filed for 2021 reflect a range of concerns—from predatory banking practices that disproportionately impact communities of color, to lobbying activities that may be deepening racial inequity.
Corporate diversity and inclusion efforts appear to be a hot topic for 2021, with shareholder resolutions calling on companies to assess the effectiveness of such programs and be more transparent about the demographic composition of their workforce and leadership. Some asset managers, for example, have made clear that they will vote against companies that do not disclose the racial and ethnic makeup of their boards or that do not have adequate minority representation on their boards.
In the wake of the Capitol insurrection, many major corporations moved to distance themselves from politicians that had knowingly spread misinformation about the validity of the election process, while others simply halted all political donations for the time being. At the same time, pressure is mounting on various companies to address the propagation of hate speech and sale of harmful products via their platforms, both of which can exacerbate existing divides in society and erode trust in democratic institutions (more on that here).
This year will see various companies come under pressure to provide expanded disclosures regarding lobbying activities, the fruits of which can often undermine leadership’s public stances on issues such as climate change, worker treatment, racial justice, and LGBTQ+ rights. As a result of the harrowing events that unfolded at the Capitol, some companies may be forced to take stock of how their political spending undermines democracy as we know it—more here on why that matters.
This year, the COVID-19 pandemic brought the social (‘S’) component of ESG into plain view, with corporate responses to the crisis underlining the various material risks associated with worker treatment. At the apex of the crisis, a consortium of 105 international investors, collectively representing US$5 trillion in assets under management, publicly called on governments to introduce regulation that requires companies to assess and address the ways in which their business activities may expose employees and suppliers to potential harms. After all, they argued, “where there are the most severe risks to human rights, there are material risks to business, including reputational harm, financial loss, and legal liabilities.”
This proxy season, we can expect to see more companies pushed to expand disclosures regarding their worker safety protections, compensation and benefits packages, and efforts to support employees’ wellbeing. Recently, shareholder proposals submitted to seven major companies requested a report on the feasibility of extending paid sick leave as a standard employee benefit once the threat of COVID-19 had subsided. Finally, executive remuneration will be in the spotlight as shareholders assess whether upper management has, at the very least, made symbolic efforts to absorb some of the economic challenges suffered by staff at the lower end of the pay scale.
Direct indexing for shareholder activism
As we’ve written before, direct indexing with separately managed accounts offer an array of benefits, including the opportunity for socially and environmentally conscious investors to align their portfolios with their ethical convictions. While various index funds may claim to be green or say, LGBTQ-friendly, they offer a rigid and somewhat opaque approach to something that’s deeply personal and subjective: values. With SMAs, on the other hand, investors enjoy direct ownership of the equities within a given index, meaning that it’s relatively easy to exclude those that the individual deems problematic. With its unprecedented customization and tax-optimization capabilities, this approach has been hailed by some as the “next $100 billion advisor opportunity.”
Because SMA investors directly own the underlying equities in their portfolio, they are able to further elevate their impact by exercising their proxy voting rights. However, many individual investors are unclear as to the effect that their lone vote can have; that’s where you, as a trusted advisor, can step in and provide valuable guidance.
The easiest way for individual investors or family offices to make an impact with their proxy vote is by bolstering proposals already put forward by other investors. The time you spend getting to know your clients, and the issues they care about deeply, will help you to identify and bring to their attention the proposals most likely to resonate. Is your client an avid scuba diver? She might be interested in various resolutions that urge companies to reduce the use of plastic packaging that has a profound impact on marine ecosystems. Has another client lost a family member to lung cancer? He might wish to back proposals that call on retailers to reconsider their sales of tobacco products.
As fiduciaries, advisors have an impetus to act in their clients’ best interests at all times. By helping your clients to have their say, you are doing just that—for one, you are priming them to shield their assets from the financial risks associated with environmental, social and governance issues. Furthermore, and perhaps more importantly, you are empowering them to secure the kind of future they want to see for themselves and their families.
Alex Laipple is the head of business development at Ethic, a tech-driven asset manager focused on sustainable investing.