The proxy season in corporate America is poised to be marked by a slew of politically charged shareholder proposals, highlighting the ongoing clash between different activist factions. Activists from left-wing groups are pushing for more initiatives focusing on environmental, social, and governance (ESG) concerns such as climate change and diversity, while right-wing groups emphasize a return to focusing on corporate profitability over ESG matters. This perpetual tug-of-war leaves many public companies entrenched in contentious issues that distract from their core business objectives as reported by the Wall Street Journal.
Despite this growing tide of propositions, these ESG-related and anti-ESG shareholder proposals rarely garner significant support, often failing to achieve majority backing. The 2024 proxy season is indicative of this trend; while the volume of updates continues to rise, support from investors, both institutional and retail, remains low. In a recent Harvard Law Review article, it was noted that the average support for such proposals has dipped from a peak of 33% in 2021 to just 16% in 2024.
The proliferation of shareholder proposals is driven in part by changes in the Securities and Exchange Commission’s (SEC) interpretation of proxy rules. These adjustments, enacted under the Biden administration, permit shareholder propositions on any topic considered to have a “broad societal impact.” An article on SEC.gov outlines how companies could previously exclude proposals lacking a “sufficient nexus” to their business, but that is no longer the case.
Nonetheless, Mohsen Manesh, a professor at the University of Oregon School of Law, suggests that corporate leaders don’t need to wait for a change in SEC policy to take action. He argues that companies governed under Delaware law, which covers around two-thirds of Fortune 500 firms, possess the ability to limit shareholder proposals through their charters and bylaws as elucidated in a recent Bloomberg Law article.
By crafting bylaws that set higher thresholds for shareholder ownership or limit repetitive proposals, firms can prevent themselves from becoming enmeshed in larger political arguments. Additionally, Delaware law affords corporations the ability to adjudicate disputes before a politically neutral court system, thus providing a more reliable resolution venue compared to the SEC’s no-action processes.
This legal maneuvering offers corporations a path to refocusing on vital governance issues and shielding themselves from being unwilling participants in the national culture wars. While there might be concerns about stifling shareholder engagement, data indicates that investors are, in fact, weary of these partisan influences on corporate governance.