Proxy Landscape – “The Times They are A-Changin”

I. Overview

As suggested by the musician Bob Dylan, in the Proxy field, the times are changing. This installment aims to address some of those changes and, perhaps more importantly, implications for those connected to the corporate proxy space and the implications for this proxy season.

Our view is simple, and that is that most investors seek to protect and enhance wealth. Hence, endorsing proposals in shareholder meetings that align with this focus makes sense. Additionally, as fewer asset managers gain market share from smaller ones, they can blunt criticism that they wield too much power by allowing investors to select votes themselves or, more realistically, rely on a third-party like Egan-Jones to do so.

II. Pressure from the top

In our February 14th article, we outlined how the current presidential administration is seeking to eliminate diversity, equity, inclusion (DEI), and environmental protection/resilience, social, and governance (ESG) efforts across government and corporate America. These challenges are outlined below.

Point 1: Executive order 14173 aimed to eliminate DEI.

• To eliminate DEI within government, the EO requests all agencies outline their plan to target their “most egregious and discriminatory DEI practitioners.”
• To eliminate DEI outside government, the EO also directed agencies to identify civil investigations into “illegal” DEI efforts at public companies, higher education, and non-profit foundations. Federal agencies often regulate or partner with entities outside government and thus are well positioned to identify “illegal” DEI efforts. The justice department may then pursue the cases.

Point 2: SEC Bulletin 14M[1] will likely hamper shareholder proposals focused on ESG

• Bulletin 14M allows companies to exclude shareholder proposals that (A) seek to micromanage or (B) are not “significantly” related to the company’s business.
  

Point 3: SEC Question 103.12 will likely induce more costly disclosures if beneficial owners exert pressure on issuers to pursue ESG

On February 11, the SEC issued new guidance, effectively directing beneficial owners (owners of more than 5% of any class of securities) to produce a substantial disclosure (Schedule 13D) if they “engage” issuers on ESG.

Beneficial owners may avoid a substantial disclosure and opt for a short-form one (Schedule 13G) if they avoid “exerting pressure” on the issuer regarding ESG. Of course, reasonable people may disagree as to what constitutes “exerting pressure.”

This guidance only affects a subset of investors, notably large asset managers and the largest shareholders. These beneficial owners will rethink their ESG activism this season.[2] Excerpts from the SEC are below.

“Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:

• Recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
• Discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.”

III. Companies are responding to anti-ESG

And you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’

With so much action in the past month and proxy season quickly drawing nearer, companies do not have much time to respond. Even so, many companies, and especially large financial institutions, have taken swift action to change hiring practices, remove references to DEI from their annual reports, and replace DEI programs and positions. Here is a non-exhaustive list of some of the changes that have recently taken place:

• Salesforce, in its most recent annual disclosures, has removed references to DEI as well as its diversity hiring targets and executive compensation metrics tied to diversity.[3]
• Warner Bros. Discovery has announced that they are ‘updating’ their language to only refer to Inclusion. Hiring practices will also be changed and third-party workplace surveys are ending.[4]
• Paramount has announced that DEI metrics will not be used anymore in their short-term incentive plans and instead will have a “workforce culture and development” metric. Additionally, they are ending their workplace diversity targets.
• State Street recently amended its own proxy voting guidelines, dropping racial and gender diversity requirements for S&P 500 companies.[5]
• Bank of America has scrapped requirements for its hiring process that required a diverse applicant pool and diverse interviewing panel.[6]
• Blackrock has likewise changed its hiring process to stop mandating a diverse hiring pool and have removed workforce diversity requirements. Additionally, their DEI team will be subsumed into a ‘Talent and Culture’ team in an effort to scrub the phrase from the Company.[7]
• Goldmans Sachs ended its policy of only taking public those companies that had at least two female directors. Additionally, they have scrubbed racial and gender equity pages from their website and removed diversity goals from their 2024 10K filing.[8]
• Citigroup has scrapped requirements mandating a diverse pool of candidates and diverse interviewers. They have also renamed their DEI team to ‘talent management and engagement.’[9]
• Wells Fargo has not only ended hiring policies requiring a diverse pool of candidates (for senior-level roles)[10] but has also interestingly moved into the ‘E’ of ESG by ending its 2030 interim and 2050 net-zero goals.[11]

Wells Fargo dropping its net-zero goals signals a possible further contraction of ESG. While many companies, not just the financial institutions listed above, have dropped many DEI goals (the ‘S’ in ESG), there have not been many companies dropping the ‘E’, possibly because it has not been a priority of the Trump Administration (yet). However, Wells Fargo dropping those requirements signals they are thinking that 1) change will be coming soon or 2) they can ‘get away with it’ in this new political environment.

As is evidenced by so many companies dropping DEI programs, it’s likely that most feel it is a bigger risk to keep than to get rid of DEI. It is also important to note that many of these firms are trying to find the right balance of responding to stakeholder and shareholders who do still care about DEI while not painting a target on their back for the Trump Administration.

In statements announcing these changes, company executives emphasize the continued importance of diversity in their organization. For example, a Salesforce representative explained that “While we are not specifying representation goals, we remain committed to our core value of equality.”

However, as a cautionary tale, Target has recently been hit with a class-action lawsuit as investors argue that Target did not properly disclose the risks of their DEI policies[12]. They further claim that these DEI policies caused Target’s stock price to fall as boycotts ensued.

IV. Implications for proxy

With these changes so close to proxy season, it is likely that we will (continue to) see the following trends:

1. Large asset managers will seek to reduce risk: They will likely increasingly adopt pass-through-voting to reduce their own risk. Blackrock[13], Vanguard[14], and State Street[15] have all implemented programs to allow retail investors more say in how their proxies are voted. Importantly, the policy choices to investors have greatly expanded with the addition of Egan-Jones’ Wealth-Focused policy[16], which provides a needed and different perspective, as the other major proxy advisory firms have been faulted for their inability to deliver unbiased and ESG-free recommendations.[17]
2. Proxy advisory firms and asset managers will update their proxy guidelines: They will reconsider diversity criteria, as has already happened with ISS removing diversity criteria. Glass Lewis has stated that it will reconsider its criteria but has not yet released updated guidance. While in previous years, supporting ESG shareholder proposals was thought to be a common place and common-sense risk reduction act, supporting ESG and DEI may now be viewed as risky. Shareholders and proxy advisory firms will have to critically consider how to approach these proposals.
3. Proxy season will be delayed as companies scramble: It is already noticeable that annual reports, proxy statements, and annual shareholder meetings are delayed as companies are reconsidering their stance on these key issues. Additionally, companies will likely be seeking no-action relief from the SEC considering the new guidelines.

Boards, proxy advisors, asset managers, and retail investors should stay abreast of this changing proxy landscape as the nature of legal and reputational risks will continue to evolve.