AGM season during the COVID-19 pandemic: trends and themes

Challenges posed

With the onset of the COVID-19 pandemic, AGMs were forced to evolve into virtual and ‘hybrid’ formats. They adapted to honour government-mandated congregation restrictions whilst still meeting regulatory requirements. The widespread use of existing proxy voting technology prior to the crisis has been instrumental in allowing shareholder engagement through AGM voting to proceed where in-person attendance has not been possible. Only 7% of respondents to a PRI signatory survey said they experienced barriers to exercising their voice at company AGMs. The PRI discussed the new normal of company AGMs in this blog post. Despite forecasts that the pandemic would distract investor attention from ESG issues, the opposite has been seen, with a host of significant shareholder votes indicating that investors have certainly remained engaged.

Overall trends

Over the current AGM season, the proportion of resolutions going to votes has increased. We had previously seen a trend of a growing number of resolution withdrawals, often following successful negotiation with companies. According to ISS, there were fewer withdrawals this year, with a withdrawal rate of 14%, down from 27% last year[i]. It has been suggested that in the USA, where a large proportion of global ESG-related resolutions are filed, proposed SEC policy changes may have been influential in the reversal of this trend, through the anticipated additional hurdles to the proposal submission and resubmission processes that may come into effect before 2021’s AGM season. Companies may have been more willing to put issues to vote if they believe the resolutions may not meet the stricter requirements forecast for next year. Filers may have also been more driven toward getting the issue to vote for fear that they will not meet proposal requirements next year. The fact that we have seen fewer withdrawals leaves us with an open question about whether there has been decreased capacity for dialogue and negotiations between companies and investors this season, as a result of stretched resources on both sides.

We have also seen a noticeable increase in the number of resolutions achieving a high level of support from investors. Of the proposals tracked by the PRI on the Collaboration Platform this season, 32 received more than 40% votes in favour (out of 153 voted on at the time of writing). Similarly, we have seen more resolutions passing as ‘successful’, with more than 50% votes in favour: this year a record number of environmental and social proposals passed with majority support. Whilst most shareholder resolutions are advisory in nature (as opposed to binding), strong backing from investors sends a firm signal to management.

ESG themes

Environmental

Climate-related resolutions have received notably strong support at AGMs this year. A record number of at least five climate proposals achieved majority votes in favour, including particularly prominent examples at shipping and logistics giant J. B. Hunt[ii] and USA-based oil major energy giant Chevron[iii]. Looking back as recently as 2017, a year where climate-related resolutions also received significant focus, the key proposals drawing attention were those demanding ‘2-degree scenario assessment’. In comparison, ISS reported that 66% of the filed environmental proposals this year request action rather than just disclosure.

Some of the largest energy companies globally saw comprehensive resolutions calling for Paris-aligned emissions targets, including scope 3 emissions and addressing the short, medium and long-term. The resolutions filed by ACCR at Santos and Woodside both achieved majority votes, the resolutions filed by Follow This at Equinor and Shell saw the percentage of votes in favour at both double on last year, and at Total, where the proposal was the first ever climate resolution filed in France, 16.8% of shareholders voted in favour. This represents a huge step in support by investors in some of the most polluting companies.

In addition, a multifaceted approach to tackling climate concerns has been evident in the range of climate proposals. As well as direct calls for greenhouse gas emissions targets and Paris Agreement alignment, filers of climate resolutions targeted climate lobbying policy, banks’ financing of emissions-intense operations and called out individual board members for their lack of action in addressing climate-related risks. The role of good governance in tackling the climate crisis seems increasingly important to investors. For example, Blackrock, who joined the Climate Action 100+ initiative (CA100+) in January, cited inadequate climate action in their votes against four directors at Volvo. New York City cited JP Morgan board member Lee Raymond’s record of climate denial and opposition to climate change science and policy in launching a ‘vote no’ campaign against the former ExxonMobil CEO.

Strong investor attention to the climate crisis has been seen at AGMs in many markets. In South Africa, Nedbank took the opportunity to proactively table its own binding proposals on climate risk and financing a low-carbon transition. Japanese bank Mizuho saw 34% votes in favour of Japan’s first climate proposal, requesting climate risk disclosure. As Japan doesn’t have a strong history of shareholder engagement, this impressive result exemplifies the shifting landscape on climate concern. Such votes demonstrate sustained and building support for climate action by business, with the language of climate risk becoming increasingly normalised.

Social

The COVID-19 pandemic forced a spotlight on worker rights issues and working conditions within companies, especially in sectors such as manufacturing, and distribution and healthcare, much of which is considered ‘front-line’ work. Investor attention has certainly aligned with the focus upon these issues – we have seen numerous investor letters and working groups calling investee companies to respect worker rights through the crisis and beyond, many of which can be found on the PRI’s Collaboration Platform.

Whilst shareholder resolutions were largely filed in advance of the pandemic, such focussed public attention on worker rights may have contributed to the strong votes in support of ‘human capital management disclosure’ proposals this season. Such resolutions achieved 79.1% at Genuine Parts Company and 66.0% at O’Reilly Automotive, both against company management recommendations. Similarly, proposals addressing human rights in supply chains saw some strong votes, including at Lear Corp., Kroger Co. and General Motors among others. We can expect to see an increasing focus on employee concerns, such as health and safety, human rights and supply chain management moving into the future.

Diversity and equal opportunities focused proposals have also garnered significant investor support this season. These include US cybersecurity specialist Fortinet at 70% and Fastenal at 61.1%. Importantly, the aforementioned successful workforce disclosure resolutions at Genuine Parts and O’Reilly also called for specific reporting on workforce racial and ethnic group breakdowns. It is likely that the increased attention drawn by recent protests against racial injustice will continue to put the discussion of racial diversity and equity firmly in investors’ concerns over the coming year, as well as encouraging stronger investor action to address institutionalised racism. The PRI’s CEO Fiona Reynolds tackled this subject in her blog, Responsible investors must unite for racial justice.

Governance

A key governance trend over this season has been an increase in the popularity of resolutions against CEO/chair duality. Existing governance concerns around transparency, independence and objective governance have been heightened by the COVID-19 pandemic, drawing attention to the limits of one individual to manage the workload brought on during a crisis.

This speaks more broadly to investor concerns around overboarding. We have seen over the past few months that, in times of crisis, a board member cannot commit their full undivided attention whilst juggling numerous other board positions. These topics were discussed in depth in the PRI’s recent podcast on COVID-19 and corporate governance in the AGM season. Strong support was garnered for ‘Separate Chair/CEO’ proposals at Dominion Energy, Bristol-Meyers Squibb, Gilead Sciences and Johnson & Johnson, to name a few. Investors’ appetite for independent and transparent leadership has been made clear. CA100+ flagged several of these resolutions, again highlighting the importance of tackling governance systems and their direct impact on climate action.

Investor demand for transparency has also been indicated by the continued strong support for political contributions and lobbying disclosure resolutions. The volume of proposals addressing corporate political activity has remained consistently high for some years and spending on lobbying and elections continues to be the single biggest subject of shareholder proposal interest. Political activity was the concern of 18% of filed resolutions[iv] this season, with at least seven proposals receiving more than 40% votes in favour.

Vote declarations

This season we observed several high-profile cases of vote declarations in favour of ESG shareholder resolutions. Notably, we saw some of the largest asset managers and owners declaring their support for ESG proposals, including LGIM, CalPERS, PGGM, the Church Commissioners and New York State. Blackrock committed to publishing vote bulletins explaining their voting decision on key climate votes, announcing their backing of climate-related resolutions at Ovintiv, Equinor, ExxonMobil and Chevron. Public declarations by such investors have the potential to continue building the momentum of ESG proposals, as they signal to the industry more broadly that ‘this is something leading managers are doing’.

As shareholder resolutions gain stronger public support from investors, it is likely to fuel the trend of increasing average level of support for proposals voted over time. Research has suggested proxy voting practices are often carried out strategically by investors, which further supports the impact that big, public declarations from influential investors can have. Over the AGM season, the PRI’s Vote Declaration System has provided an opportunity for investors to share such declarations across the signatory base, with declarations made across more than 100 ESG-related resolutions.

Looking to the future

Whilst the impacts of the pandemic will have influenced voting practices in some ways, it is important to remember that AGMs are backward looking in nature. It will likely be at next year’s AGM season that we see the full effects of COVID-19 on filing and voting practices. Specific sectors may attract particular attention, such as oil and gas, aviation and hospitality, where calls for a ‘Build back better’ recovery will have significant implications. As discussed earlier, social issues such as worker treatment, human rights and equality are likely to be key concerns. In addition, close attention is likely to be paid to executive compensation, as companies begin to recover or readjust post-pandemic. Questions may be raised around what constitutes a fair reward, how this relates to management performance through the pandemic, and how this plays out in companies that may have seen layoffs, dividend cuts or external financial assistance. Such questions may bring say-on-pay proposals to the fore in 2021.

Proxy advisory services have continued to face scrutiny through the 2020 AGM season, with investors increasingly seeking clarity in the methodologies used to inform their guidance. In some cases, their decisions to advise votes against several key ESG proposals have been criticised as a result of the significant weight carried by their recommendations. The impact on investor voting behaviour was illustrated in the diverging levels of backing for near-identical climate proposals at five oil majors. It remains to be seen how the changes proposed by the SEC last November to the regulations surrounding proxy advisors will affect their future voting recommendations in the US. As we look to the future, shareholder activism in the US may also face difficulties as a consequence of planned SEC changes, with stock ownership thresholds for some filers rising from $2,000 to $25,000 of shares, and strict resubmission thresholds stifling dialogue on new issues.

The votes from this year’s proxy season have demonstrated investors’ growing commitment to ESG concerns, even amid a pandemic. What is more, many of the issues that have gained strong support in votes have become central pillars of proposed COVID-19 recovery strategies. Investors have engaged strongly with these issues at AGMs and are now, in many cases, advocating action to prioritise their importance moving forward. Over the coming year, it will be interesting to follow this renewed focus on worker rights, diversity and climate action, as the lasting impacts of a turbulent year thus far are yet to be seen.