While early reports indicate that shareholder activism will significantly decrease in 2020, investor interest in environmental, social, and governance (ESG) processes and oversight has not diminished.
Investors continue to emphasize the importance of ESG reporting to convey how the company plans to mitigate unexpected risk and strategically prepare for external shocks.
From common environmental and social proposal types to market cap and industry breakdowns, the following sections review shareholder resolutions in recent years.
Here is a summary of our findings:
- While the total number of shareholder resolutions has significantly declined in 2020, the number of environmental and social (E&S) shareholder resolutions remains steady.
- The most common shareholder resolution filed with U.S. corporate issuers targets political contributions and calls for increased transparency on political contribution policies, total amounts ($), and recipients. We expect this trend to continue with the 2020 presidential election and growing interest in corporate expenditures toward lobbying and election campaigns.
- Unlike the U.S., global (non-U.S.) E&S shareholder proposals this year are overwhelmingly focused on environmental activities. This trend should continue to be watched closely as shareholder interest in environmental activities will likely increase in the U.S.
- When looking at industry trends in 2020, consumer non-durables (including food and beverage, footwear and apparel, and tobacco industries) have received the largest percentage of shareholder proposals. This varies from 2019, when the sector receiving the largest number of shareholder proposals was retail trade.
- The majority of companies that have received shareholder proposals thus far in 2020 fall within the large-cap range, such as McDonald’s, Eli Lilly, Abbott Laboratories, and Chevron—all of which received shareholder proposals relating to political activities.
Shareholder proposals shift focus in the past 5 years
In the past five years, the number of environmental, social, and governance (ESG) shareholder proposals hit an all-time high in 2019 relative to other proposal types. This trend was expected to continue in 2020. Interesting to note, however, that while the number of overall shareholder resolutions have significantly decreased in 2020, the number of environmental and social (E&S) shareholder resolutions has remained relatively steady. As of June 4, 2020, there have been 143 E&S shareholder resolutions filed and voted upon, compared to 147 from the same time in 2019. While this trend is subject to change as the year develops, current numbers signal a consistent interest in enhanced corporate reporting.
Which E&S topics are investors targeting?
In reviewing common themes in the U.S. market, three categories of proposal types have remained consistent over the past three years—political, environmental, and social requests. The most common requests in these categories include the request for: the creation of a political and lobbying contributions report (47 proposals), the adoption or amendment of an environmental policy (18 proposals), the creation of a climate change report (15 proposals), and the creation of a social report (15 proposals).
The fourth most common E&S shareholder resolution relates to human rights issues. Interestingly, the fourth common proposal type in 2020 (human rights) doubled in 2019 and remains a consistent area of interest for investors in 2020. With this proposal type, investors are most frequently requesting the creation of a human rights report and the adoption or amendment of a human rights policy.
Political contributions proposals in the U.S.
Since 2010, shareholder proposals requesting increased disclosure of company policies and procedures for the use of corporate funds for direct or indirect contributions to a public office, candidate, or advocacy organization have sharply increased. Investors are generally requesting that companies provide either detailed disclosure of political contribution policies – or – the amount and recipients of payments made by the company for direct or indirect lobbying or grassroots lobbying. In some cases, investors are requesting both.
Some may attribute this consistent focus on political contribution disclosure to the U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission. Investors are increasingly looking for clear visibility into the amount and recipient of corporate funds contributing to political campaigns or allocated to public policy or advocacy organizations.
Given the 2020 presidential election, and the growing interest in corporate expenditures toward lobbying and election campaigns, one can anticipate that shareholder interest in political activities spending will remain steady.
Global vs. U.S. Perspective
From a global perspective, E&S shareholder proposals are targeting companies for different reasons.
Global (non-U.S.) E&S shareholder proposals this year are overwhelmingly focused on environmental activities, as seen below. Approximately 77% of non-U.S. shareholder proposals relate to environmental activities, calling for companies to adopt or amend an environmental policy, assess the impact of a 2 degree scenario, create a climate change report, create an environmental report, or create an industrial waste/pollution/GHG emissions report.
U.S. shareholder proposals, on the other hand, are a bit more dispersed. As discussed above, U.S. corporate issuers are most frequently targeted for political activities disclosure. Approximately 43% of E&S shareholder proposals in the U.S. requested the creation of a political or lobbying contributions report.
Are some industries more vulnerable?
As seen in the pie chart below, there is a relatively broad spread across industries signaling that ESG integration is critical irrespective of industry. While data reports a small uptick in certain industries in recent years tied to issue-specific themes like data privacy, the opioid crisis, and diversity—there remains broad industry dispersion overall.
So far in 2020, consumer non-durables (including food and beverage, footwear and apparel, and tobacco industries) have received the largest percentage of shareholder proposals (14%), followed closely by transportation (inclusive of airlines, trucking, railroads, and air freight / couriers) and finance (inclusive of rental and leasing, property and casualty insurance, investment banks and brokers, real estate investment trusts, and financial conglomerates).
This varies from 2019, when the sector receiving the largest number of shareholder proposals was retail trade, followed by finance and utilities. In 2018, companies within the finance sector received the largest number of shareholder proposals, followed by utilities and consumer services.
Of note, companies within the finance sector have been targeted by shareholders for the past three years. In 2020, companies including GEO Group, Western Union, Charles Schwab, Citigroup, American Tower Corporation, and JP Morgan have received E&S shareholder proposals thus far. These proposals largely surround political activities, calling for companies to report on lobbying payments and policy or disclosure around political contributions and expenditures. Thus, we can anticipate the finance sector will see additional E&S shareholder proposals as proxy season continues.
Does company size matter?
When looking at the breakdown of shareholder proposals by market cap in 2020, most companies that have received shareholder proposals thus far fall within the large-cap range. Companies include McDonald’s, Eli Lilly, Abbott Laboratories, and Chevron, the large majority of which have received shareholder proposals relating to political activities. This is consistent with 2018 and 2019, where companies within the $10-$50 billion market cap range received the largest number of shareholder proposals. Mega-cap companies also received a significant number of shareholder proposals this year, including Amazon, Alphabet, and Facebook, which have all received various E&S proposals related to human rights, political activities, and environmental and social matters.
If you need additional counsel around this upcoming proxy season, or think your company may be at risk of receiving a new shareholder proposal or low support from investors on an existing item, please contact us. Our experienced proxy advisory team provides strategies to mitigate issues and to build an investor engagement plan tailored to your company.