Recently, ICR hosted a symposium to discuss ESG and shareholder activism. During the panel discussions, influential and expert representatives from companies like Travelers, BlackRock and Vanguard Group talked about a wide range of subjects including ESG scores, capital markets trends and shareholder activism in the universal proxy era.
ESG is a holistic view of risks and opportunities that could potentially impact a company’s ability to create value over time. Eighty-five percent of companies in the S&P 500 have a dedicated sustainability team. Also, ESG scores are slightly higher in the European Union due to higher labor law standards. Larger companies also have slightly higher ESG scores.
One panelist reported that three out of four companies they work with are showing increased ESG disclosure scores annually. The three main areas of increased disclosure are climate, gender diversity and supply chain (beyond Tier 1 suppliers). But disclosure doesn’t equal performance.
The 2023 proxy season is likely to get more controversial, especially when it comes to shareholder proposals related to ESG matters. Votes should be based on fundamental research.
The first step is to engage with a company when identifying a material ESG issue where the company is lagging. There’s a higher focus on ensuring engagements that are making a meaningful impact.
Activist focus has shifted away from return on capital toward traditional intrinsic value through cash flow and cost cutting. Universal proxy has made it easier for activists to get a minority amount of change on boards of directors, but harder to get control. This gives shareholders the incentive to have some change. Companies are also including more activist-driven proposals in proxy.
So, are shareholder activists really trying to take board seats or just advance policy positions? In many cases, they’re trying to advance policy positions and gain a platform.
To address ESG issues that are material, panelists concurred that companies should maintain a neutral stance and focus on long-term shareholder value and the margin that ESG issues will affect. Investors should approach ESG issues as a comprehensive set of risks and opportunities and continue to be steady in proxy voting trends and engagement, which is more important than ever.
It’s helpful for activists to engage directly with board nominees and understand the corporate strategy and how nominees’ skills align to that strategy. While a skills matrix is a usefultool, it may not be the best way by itself to evaluate board nominees.
Most companies don’t want to go back and forth with activist investors. It’s usually better to say nothing in situations where you don’t absolutely have to respond. Dissidents usually bring board members up for election, which shows their commitment to the cause.
When it comes to proxy fights having to do with “say on pay,” it’s helpful for companies to engage with investors before filing their proxy and to make as many changes as are reasonable prior to filing the next proxy. Companies should make sure investors understand they are listening and the specific efforts they are making to implement change.
Anti-ESG backlash has shifted the focus over the past year to what ESG means for shareholders and corporate strategy. New public companies warrant more frequent and fundamental help when it comes to ESG considerations such as shareholder rights and declassifying or staggering boards of directors.
There are opportunities for growth in the current market conditions, but how do activists identify targets? The process stays the same, but with multiple shifts based on how activism performs in market cycles. Clean balance sheets are becoming popular with a focus on companies that can generate cash, capital and a return over the long run across market cycles.
The 2023 proxy season promises to be an interesting one. Start planning now for how your company will respond to the challenges ahead.