By Stone Washington, Competitive Enterprise Institute
With the 2023 proxy voting season officially behind us, we can note a few trends in corporate governance that stood out. For one, it was clear that environmental, social, and governance (ESG) themed measures are still part of a major push by activists to bring their politics into boardrooms. That has been the case for a few years now. What is new is increasing shareholder resistance to such measures.
ESG proposals had a 17 percent passage rate in 2021 and a still respectable 15 percent showing in 2022, according to Harvard Law School’s Forum on Corporate Governance. The success rate plummeted this year, however, with ESG proposals garnering a mere 5.1 percent passage rate.
Much of this decline can be attributed to business leaders’ increasing ambivalence about ESG adoption. Even prominent advocates of stakeholder capitalism, such as Larry Fink of BlackRock, are backpedaling their embrace of ESG. Fink pointed to how “weaponized” the term has become in recent months.
Additionally, the mere mention of “ESG” during quarterly corporate boardroom calls has rapidly declined among c-suite executives. Claims of ESG weaponization often refer to the anti-ESG sentiment brewing among policymakers. This year, Republicans have ramped up efforts in Congress and across state legislatures to combat ESG. A number of GOP state-level measures have refused state contracts to banks and asset management firms that prioritize ESG considerations over financial returns.
Corporate proposals were still on the rise. This year introduced a record number—869—of submitted ESG proposals, up 3 percent from the previous yearly record of 841 in 2022. When looking to the percentage of all proposals voted on, the 2023 season saw a rise of 483 (54 percent) measures, up from the 438 (50 percent) proposals considered during the 2022 season.
There has been a consistent upward trend of total shareholder proposals and total ESG measures submitted to corporations via the proxy process.
Perhaps the most notable trend has been the growing share of ESG-concerned proposals occupying the totality of submitted measures on a ballot. This year, proposals exhibiting ESG criteria (whether in favor or opposed) comprised of 83 percent of all submitted measures.
It remains true that many companies have consistently rejected ESG. Also, over the past season, BlackRock supported a mere 26 E&S proposals out of 339 (7 percent), substantially less than the firm would normally endorse.
This presents a sharp decline from last year’s amount, with BlackRock supporting 21 percent of the 321 proposals it considered in 2022 and 47 percent of 172 in 2021. In a recent report, CEO Larry Fink has been vocal against the new wave of ESG measures, justifying BlackRock’s declining support “because so many shareholder proposals were overreaching, lacking economic merit, or simply redundant.”
All of which amounts to additional evidence that the Securities and Exchange Commission (SEC) should repeal its infamous Staff Legal Bulletin No. 14L (SLB 14L), which has made it easier for investors to submit resolutions on a plethora of ESG topics. The rule lowers the barrier for shareholder measures to be presented on a proxy ballot.
This has severely undercut the ability of corporations to issue “no action” letters that exclude trivial or political proposals. Alongside SLB 14L is the SEC’s proposed amendments to the 14a-8 rule. Under this amendment, set to take effect in October, shareholders are permitted to submit any range of proposals, even those that fall far afield from the primary interests of the company’s board of directors.
Companies will face a much harder time dismissing shareholder proposals that are duplicates, resubmitted, already (“substantially”) implemented, and even those proposals that violate existing securities law (currently grounds for a no-action letter).
The 2023 season marked the second year in a row that no shareholder proposal was excluded from the review process as part of a continued decline for the number of no-action requests submitted (only 6.5 percent). Prior to SLB 14L, corporate proxy review insisted that a shareholder proposal must be economically relevant and cater to the interests of the company. There needed to be a “sufficient nexus between a proposal and the social concern raised in the proposal” and how the company’s activities would be impacted.
Other leading asset managers, including State Street and Vanguard, have taken issue with the ESG floodgate effect prompted by the SEC’s rule. While not as pronounced as BlackRock, State Street has also diminished its support for ESG proposals, citing the SEC’s measure as a contributing factor.
As a major proponent of ESG investing, State Street’s vocal rejection of this new wave of ESG measures is telling. It shows how problematic the SEC’s informal policy has become for public companies and asset firms.
The SEC should reconsider SBL 14L and the pending Rule 14a-8. These needlessly micromanage the shareholder review process while undermining the ability of corporations to block controversial proposals.
If nothing is done, we will likely see a continued surge of frivolous ESG measures. We could also see an even more marked decline in shareholder support for ESG.
Stone Washington is a Research Fellow with the Competitive Enterprise Institute’s Center for Advancing Capitalism.