Getting Ahead of Proxy Voting Trends

19 November 2020
9 Minute Read

ESG in Action

Participating in proxy votes of major holdings is an important way for active investors to influence corporate behavior on ESG issues. At AllianceBernstein (AB), we’re increasingly aligning our votes on shareholder initiatives with management engagement efforts to support changes and enhance investment insights on the long-term return potential of key holdings.  

The Issue
Environmental and social issues are becoming more prominent topics in proxy votes for shareholders of major US companies.
The Investment Case
By voting to promote greater management accountability on issues from climate change to diversity, investors can help improve risk management and long-term return potential.
Engagement Goals
AB’s proxy voting and engagement efforts aim to promote sustainable policies based on our integrated research of a company’s ESG behavior and its business challenges.
Authors

Investors seeking to promote improvements in corporate behavior can’t stand on the sidelines. By participating in proxy votes, AB’s equity investment teams aim to get ahead of activist shareholder trends while bolstering our engagement efforts on environment, social and governance (ESG) issues.

In corporate democracy, some votes carry more weight than others. Passive investors, who make up an increasingly large part of the market, rarely challenge management decisions. As a result, active managers have an important role to play in voting on proposals related to business and ESG issues that might not be popular with management, but could create catalysts for lasting change.  

Today, companies that adopt standard sustainability policies to meet broad expectations may miss the mark. ESG efforts must be analyzed within the context of a company’s business environment to assess how management is addressing sustainability challenges. 

By engaging with management and voting on crucial shareholder initiatives, AB’s portfolio teams aim to sharpen investment insights on how a company’s ESG behavior might shape its long-term return potential. During the first half of 2020, our teams participated in 6,740 shareholder meetings and voted on 2,205 shareholder proposals for global companies (Display 1).

Display 1: Proxy Voting Is a Key Component of Our Active Investing Process
Table on left shows AB’s global participation in proxy votes in 2019 and 1H 2020, which is broken down by region on the right.

For illustrative purposes only.
As of June 30, 2020
*Australia and New Zealand data for the first half is relatively low because most Australian shareholder meetings take place in the third quarter of each year.  
Source: AllianceBernstein (AB)

How Are Shareholders Challenging Management in 2020?

In the US, most shareholder proposals are focused on ESG issues. By midyear, our teams voted on 59 environmental proposals, 208 social-related proposals and 551 governance-related proposals (Display 2). 

Display 2: ESG Issues Are Gaining Prominence in US Shareholder Meetings
AB Proxy Votes
The number of AB proxy votes on environmental, social and governance issues are shown for 2018, 2019 and 1H 2020.

For illustrative purposes only.
As of June 30, 2020
Based on shareholder meetings of US companies in which AB participated in proxy votes. Categorization of environmental, social and governance proposals is according to AB’s classifications and may not align with that of Institutional Shareholder Services or other market data providers.
*Numbers do not sum to 100 due to rounding.
Source: AllianceBernstein (AB)

Support is growing for environmental and social proposals on several key issues. In fact, based on Institutional Shareholder Services data, 17% of social proposals in global shareholder meetings through mid-October received majority support. About 35% of votes on diversity and inclusion (D&I) were cast in favor on average. That might sound like a low success rate. But very few shareholder proposals ever receive majority support. Proposals that receive at least 30% support tend to generate attention outside the company and often lead to pressure on management.

These proposals covered topics including human capital management, political contributions and lobbying, and employment diversity. In the US, most shareholder proposals are advisory and can’t force a company to take action. However, companies that ignore popular shareholder initiatives face reputational risk, especially when many proposals are shaped by events unfolding in the world. 

US Elections Raise Scrutiny of Political Contributions

For example, this year, shareholders voted on 68 proposals for companies to report on political contributions and lobbying. Six passed, while 13 received support from at least 40% of shareholders. We believe the relatively large number of proposals on this topic reflects heightened awareness of the need to scrutinize corporate involvement in elections and other political issues. More proposals on these issues are likely in 2021, in our view. 

Human capital was another top concern. Here, too, shareholders were motivated by growing awareness of gender issues amid the #MeToo movement’s rising profile and issues raised by the pandemic. More motions were submitted to ensure that companies have explicit policies, performance and improvement targets related to human capital risks and opportunities.

Bringing #MeToo into the Boardroom 

Board oversight is a particularly hot topic. As the #MeToo movement gained momentum, we’ve seen increasing calls to formalize board oversight of issues related to the status of women and to improve employee representation on boards. Companies were also pressed to disclose contractual provisions that would require employers to arbitrate employment-related complaints, including sexual misconduct claims.

COVID-19 has added urgency to human capital issues. Investors are pressing management for clarity on how they’re managing workforces and addressing employee benefits through the crisis, on issues including paid sick leave, flexible working arrangements and mental health issues.

Growing Awareness of Diversity and Inclusion

Diversity and inclusion is also high on the social agenda. During 2020, shareholders in US companies submitted a record 49 proposals on board diversity. Of these, 37% received majority support, up from 25% in 2019. We expect this trend to continue. 

Investors increasingly expect companies to pursue policies that ensure boards of directors are ethnically, racially and gender diverse. Yet some shareholders are also concerned that the limited pool of directors and executives from diverse backgrounds may result in “overboarding”—when a director holds too many board positions and may be stretched too thin to provide proper oversight.

Companies must do better on diversity, in our view. It’s not enough to add a director from a minority background who doesn’t have enough capacity to do the job right. In our engagement efforts, we’re promoting genuine diversity by encouraging companies to widen their searches for diverse director candidates. Based on our current policy for global holdings, AB typically votes against a governance committee’s chair if its company’s board isn’t gender diverse. 

However, we’re also attuned to country-specific differences. For example, Japanese companies are further behind developed market peers on diversity issues. So, instead of voting aggressively against Japanese board members, we’re actively engaging with portfolio holdings in Japan that lack gender diversity. In our view, behind-the-scenes engagement can sometimes be a more effective tactic for promoting corporate change. In 2021, our engagement campaign for major holdings will formally include diversity and inclusion as a theme, specifically targeting boards that lack either gender or ethnic diversity. 

Minding the Gender Pay Gap

While diversity and inclusion gained traction, proposals to narrow the gender pay gap were less successful this year. Investors voted on 12 proposals in this area, but none passed. 

Still, we believe the gender pay gap will come under greater scrutiny next year. Since 2019, US companies with more than 100 employees have been required to report pay data, broken down by ethnicity and gender to the US Equal Employment Commission, but not to the public. The so-called EEO-1 requirement will become the new “gold standard” for companies and will expose firms that have unacceptable pay disparities. At Charles Schwab, a proposal in 2020 to disclose EEO-1 data to the public received 42.6% support—which could be a sign of more shareholder pressure to come.

Narrowing the pay gap is an important measure of true inclusion in a workforce. An equitable pay scale can also help predict talent retention rates and how a company creates a diverse culture for enhanced creativity and risk oversight with varying perspectives. 

Pressing Facebook on Content and Privacy 

Many social-related shareholder initiatives focus on controversial issues. At Facebook’s annual general meeting in August 2020, AB supported shareholders’ requests that the company provide a report on its oversight of targeted advertisements and child sexual exploitation. 

Since the meeting, AB has engaged with Facebook executives to express why we consider content management concerns to be material to Facebook’s business. We also heard the company’s perspective on these challenges and their plans to strengthen risk management on issues such as data privacy and community safety and security. For example, Facebook said it plans to set up committees focused on topics including misinformation and “coordinated inauthentic behavior”. 

Enhanced oversight in these areas can bolster business risk management, which in turn lowers potential regulatory expenses and prevents reputational cost that could undermine shareholder value. Since 2018, when the European Union launched its General Data Protection Regulation, heightened regulatory focus has increased the potential costs companies may face from mismanaging data privacy issues. We will continue our dialogue with Facebook to monitor whether it meets its commitment to enhance oversight of content management and data privacy. 

Walmart’s Plastic Predicament 

While environmental issues haven’t been the highest priority at 2020 annual general meetings (AGMs), they’re still appearing as notable shareholder agenda items. At Walmart’s 2020 AGM, AB supported a shareholder proposal to report on the impact of single-use plastic bags, as our analysis suggested that the largest US retailer lags its peers and doesn’t have specific targets for completely phasing out the use of plastic bags.

We engaged with management after the meeting to find out more about its environmental commitment, especially since the company lags peers on plastic waste management. Many of Walmart’s rivals including Costco and Whole Foods no longer use plastic grocery bags and 28 US states ban or charge a price for single-use plastic bags. This leaves Walmart exposed to regulatory risk, which could potentially hurt its brand value relative to other low-price retailers. Walmart still has a way to go to manage its environmental footprint, and we will continue to vote and engage with the company to encourage improvement. 

COVID-19: Virtual Votes Raise New Questions

Social and environmental issues were discussed this year in the shadow of the pandemic. Because of the pandemic, companies held a record number of virtual shareholder meetings in 2020. As a result, shareholder participation exceeded recent levels of attendance in physical meetings.

Will virtual meetings be the norm in the future? It’s too soon to say. Some large-cap Australian companies are already seeking to make all shareholder meetings virtual in the future—pandemic or not. Yet some shareholders are concerned that the virtual format gives more control to companies, as they can cherry-pick which questions to address, while investors can’t spontaneously speak out. 

COVID-19 also caused audit delays and changes in the evaluation of director election proposals in Japan and several other countries. In some cases, companies that were unable to complete audits in time because of the pandemic postponed or adjourned their AGMs. Some firms adjusted executive pay by reducing a portion of compensation in the second quarter to account for the market downturn during February and March. However, other companies lowered financial targets used for determining pay, saying executives shouldn’t be penalized for an unprecedented circumstance that was unrelated to their management of the business. 

 

Beyond executive compensation, companies have responded to the crisis with capital restructuring initiatives and by adopting poison pills, to prevent hostile takeovers when share prices fell sharply earlier in the year. With no end in sight to the pandemic, investors must closely monitor company decisions to ensure that current crisis management steps don’t undermine strategic long-term plans. 

Not every ESG shareholder proposal should be supported. In some cases, our analysis will determine that a proposal doesn’t really add value for shareholders. Yet active proxy voting, driven by a deep understanding of a company’s business, is an increasingly important component of an active managers’ responsible investing agenda. When backed by frequent engagement with management, proxy voting can help reshape company agendas in ways that deliver tangible investing benefits too. 

Past performance, historical and current analyses, and expectations do not guarantee future results. There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

References to specific securities are provided for the sole purpose of illustrating how research can be used to help identify investable ideas in the portfolio-management process and are not to be considered a recommendation by AllianceBernstein L.P. It should not be assumed that investments in any specific security were or will be profitable.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

The [A/B] logo is a service mark of AllianceBernstein and AllianceBernstein® is a registered trademark used by permission of the owner, AllianceBernstein L.P.

 

Note to Canadian Readers: AllianceBernstein provides its investment management services in Canada through its affiliates Sanford C. Bernstein & Co., LLC and AllianceBernstein Canada, Inc.

Notice to European Investors: This information is being made available to you for marketing purposes by AllianceBernstein Limited, 50 Berkeley Street, London W1J 8HA. Registered in England under number 2551144. AllianceBernstein Limited is authorized and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

Note to Austrian and German Readers: Local paying and information agents: Austria—UniCredit Bank Austria AG, Rothschildplatz 1, 1020 Vienna; Germany—BHF-Bank Aktiengesellschaft, Bockenheimer Landstraße 10, 60323 Frankfurt am Main.

Note to Liechtenstein Readers: The Fund is not registered for public distribution in Liechtenstein and, accordingly, shares may only be offered to a limited group of Professional Investors, in all cases and under all circumstances designed to preclude a public solicitation in Liechtenstein. This document may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have personally been sent by AB. Neither the Fund nor the shares described therein have been subject to the review and supervision of the Liechtenstein Financial Market Authority. 

Note to Swiss Readers: This document is issued by AllianceBernstein Schweiz AG, Zürich, a company registered in Switzerland under company number CHE-306.220.501. This document is directed at Qualified Investors only. 


About the Authors