Barri Rafferty is CEO, Americas, Morrow Sodali, a global advisory firm helping clients navigate the complexities of stakeholder engagement.
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Proxy season is getting underway. But companies still have a window of opportunity to refine their disclosures and pay attention to evolving trends and investor expectations. With the growing number of shareholder proposals, companies have even more reason to stay one step ahead.
Key issues have emerged during conversations with my colleagues at Morrow Sodali. I am confident that companies versed in potential roadblocks and opportunities will be better positioned for 2024 and beyond.
Below, I highlight three proxy season concerns for companies to keep in their purview.
1. Setting The Stage For Officer Exculpation Proposals
Delaware began permitting the exculpation of corporate officers in 2022, prompting some companies to move forward with proposals for shareholder approval last year. Now, many companies that held off are preparing proposals, which means they will need to file a preliminary proxy statement with the SEC. In addition, companies should be aware of a few additional points.
First, this vote requires at least a majority of the outstanding shares rather than just a majority of shares voting. Additionally, because the proposal is non-routine for brokerage firms, companies will not get the benefit of broker discretionary voting.
Given the higher threshold, companies need to deeply understand what their shareholder profile looks like and whether additional solicitation efforts will be needed. Glass Lewis generally recommends against the proposal, while Institutional Shareholder Services (ISS) leans more in favor, recommending to vote on a case-by-case basis. The two firms are influential to the vote outcome. As such, companies can benefit from understanding which institutions in their shareholder profile might follow Glass Lewis’s lead.
Thus far, I've noticed companies with a significant retail shareholder base have struggled to pass their proposals. A retail campaign could help those companies increase returns and their chances of passing the proposal.
2. AI On The Agenda
We will not know precise numbers for some time, but it’s shaping up to be another busy season with numerous shareholder proposals. Governance, climate-related and political lobbying topics are still holding strong. But new issues are also emerging as important concerns among shareholders, namely the potential abuse of artificial intelligence.
Focus on this topic has been intensifying. In a 2023 survey of several thousand organizational leaders and frontline employees, the vast majority of respondents called for responsible AI and regulation. Big tech companies have already been hit with AI-related proposals for greater algorithmic transparency, ethical guidelines and misinformation response.
This year, more companies may see proposals requesting a report regarding their routine use of AI. Issuers should also be looking ahead. In the coming years, as AI becomes more mature and widespread, proposals will likely increase in specificity and nuance. For example, the issue of AI replacing the workforce seems poised to gain traction and could lead to human capital management-themed proposals.
3. Retail Shareholders Gaining Power
In 2022, Charles Schwab Asset Management polled shareholders to understand their views on proxy issues. More recently, BlackRock expanded piloting its voting choice program, enabling individual investors to determine which themes—such as sustainability or faith-based values—they want their proportion of Blackrock’s proxy votes to prioritize. State Street has implemented a similar approach, while Vanguard has expanded its pass-through voting options to additional funds. This all points to a growing trend toward institutional investors handing more power to their investor base.
However we’ve yet to see significant participation in these programs, and they may be too complex for wide adoption as the newer programs target a subtier of retail shareholders who normally don’t cast votes.
The question is, when will those shareholders take advantage? Even if initiatives get little traction this season, companies should keep an eye on the trend. Otherwise, they may become vulnerable to votes influenced through these alternative funnels. There is an opportunity for shareholders, should they choose to organize. It could be years from now, but there will most likely be a case study at some point.
Finally, I would be remiss in not mentioning that changes to SEC disclosure laws take effect this year. The final SEC amendments aim to accelerate investor access to material information, especially in today’s volatile markets. It’s imperative that companies understand the shifts, which are intended to improve transparency. Significant filing deadlines for Schedules 13D and 13G are changing for the first time since 1968, and companies may see even tighter deadlines in the next few years.
As we head into an election cycle amid volatile geopolitical conflicts and persistent global economic uncertainty, much is riding on this year. Companies need to stay closer than ever to the sentiments of stakeholders and keep abreast of emerging trends to set themselves up for a successful proxy season.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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