Shareholder Activism and ESG: What Proxy Season Looks Like in 2023


It’s probably safe to say that there’s as much uncertainty in the markets heading into 2023 as there has ever been, including persistent inflation and rising interest rates. On top of this, regulations are coming down from the SEC regarding environmental, social and governance, or ESG, practices.

How will these regulations impact your 2023 proxy season? Several industry experts chimed in on the subject at a panel called “2023 Preview: ESG, Shareholder Activism & Proxy Season” at this year’s ICR Conference.

ISS Policy Updates: The Bellwether Event

The panel’s moderator, Lyndon Park, ICR managing partner – global ESG advisory & shareholder activism, noted that Institutional Shareholder Services (ISS) policy updates are probably the bellwether event given that they dictate a lot of proxy policies of the investors. And very notably, ISS now is refusing to grandfather certain companies when it comes to anti-takeover statutes.

“This certainly has become an issue that many of my clients have faced over the past several years,” said Bob Marese, the president of Mackenzie Partners, a full-service proxy, solicitation and advisory firm. “In their rules update for 2023, the ISS has indicated that there needs to be a date certain for these policies. They established seven years as the period of time that all companies need to put [these policies] to bed.”

Lawrence Elbaum, a partner with Vinson & Elkins who co-heads the shareholder activism practice, said that when working with management teams getting ready to navigate a proxy season, the first thing they tell them is they need to lay out rules for their board so the board doesn’t get whipsawed by a negative recommendation and vote.

“We’re talking about helping them save face,” Elbaum said. “So as a matter of planning, we strongly recommend putting these updates in front of the nominating governance committee and then the full board when appropriate so that no one gets surprised. Boards don’t like surprises, and frankly, management teams don’t like surprises either.”

Cameron O’Neill, managing director and head of operations Americas with ISS Corporate Solutions (ICS), agreed with Elbaum. “I think having a plan, having the discussions and knowing where you want to be is extremely important,” she said. “For the dual class shares, it is new this year that ISS policy applies for dual class shares to all companies.”

O’Neill pointed out that of the companies that do have dual class shares in the Russell 3000, 62% of them have sunsets. “It’s just that only about 10% of those meet the criteria of reasonableness that ISS has put out as seven years,” she said. “So there’s a lot of companies that do have the sunset that have done the planning, but it’s just further out than what shareholders are looking for.”

Expectations on Proxy Disclosures

Park asked O’Neill to highlight some of the expectations on proxy disclosures in the CD&A, especially as they related to the new SEC rule on pay for performance, and what issuers should look out for in the proxy season.

“Some people are comparing this to pay ratio a few years ago when everyone was stressed out but it turned out to be a non-event,” said O’Neil. “We don’t think that it’s going to be a non-event with this pay-for-performance disclosure. Because of the way that it’s being tagged and tracked in the proxy, it’s going to be much easier for investors to pull that data to compare it across. The things that we’re talking to our clients about are making sure that you are starting early, that you are looking how to calculate this, and that you’re figuring out which metrics you want to be including.”

Elbaum noted how much data public companies get from their shareholders and the proxy advisory firms. He recommended that public companies start thinking about compensation disclosures and their proxy for the upcoming year in June or July when they have their annual meeting. “Get your ISS and Glass Lewis recommendations and your shareholder voting records from your annual meeting and do the archeology there on what happened, what you did well and what you did bad,” he said.

Park asked Marese what he’s advising clients to do to follow good hygiene when it comes to compensation. “First, you should understand how your investors voted at your meeting,” he said. “It’s not always intuitive or in alignment with ISS and Glass Lewis recommendations. The second aspect is post your annual meeting, going on a governance listening tour where you engage with some subset of your investors. Not all of them will necessarily want to engage, but I do think there is goodwill that is established by making the offer to engage.”

Universal Proxy: The Gorilla in the Room

Park asked Elbaum about universal proxy, which he called the “gorilla in the room.” “These are SEC rules governing how a proxy card has to look,” said Elbaum. “In the past, the company had its own proxy card, the activist had its own proxy card and shareholders had to pick one card over the other. But the SEC has said ‘no more’: All the candidates now go on one card. That creates a fertile ground for investors to be able to mix and match as opposed to choosing one slate over the other.”

According to Elbaum, there’s a rumor that some environmental activists are going to use the universal proxy tool to try to get one or two directors on a board. “I think it remains to be seen the types of candidates that they can come up with,” he said. “But if they can make an economic case for change and they’ve got an interesting candidate to effectuate change, that’s better than a board candidate if anything’s possible.”

Marese said he’s not sure the John Cheveddens of the world are going to try to run universal proxy contests. “I think they’re more likely to rely on the 14a-8 process to advance their agendas,” he said. “It’s not without cost. You have to reach around two-thirds of the voting power of the stock, and company by company that cannot necessarily translate into the top 10 investors. And it can require an extensive distribution of materials, which is not inexpensive.

“I think as an activist, if you’re going to undertake this exercise, you have to put yourself in a position to actually be successful,” Marese added. “And that means spending money and trying to put forth the best campaign that you possibly can.”

Buckle Your Seatbelt!

Marese advised attendees to buckle their seatbelts in preparation for more ESG shareholder activism during the 2023 proxy season. “There’s still a lot of data to be collected,” he said. “But where all indications are, it’s probably going to be a rather robust activism proxy season.”

Get more detail on what the SEC pay-for-performance rules mean for 2023 proxy, read the ICR Insights blog.