Why proxy season 2023 looked different, and what boards can do to prepare for next year
Proxy season as we know it is changing. Two landmark rulings from the Securities and Exchange Commission (SEC) have upended the way leadership needs to handle compensation disclosures and proxy cards, while a rise in shareholder activism has created new pressure around issues like ESG and DEI. Heading into this year’s proxy season, boards were faced with the intimidating prospect of pivoting very quickly in an effort to remain compliant and practice effective investor relations (IR).
In short, 2023 showed us that the way we prepare for proxy season needs to change –– fast. This article looks back on the changes that went into effect this past proxy season and provides guidance for improving your investor relations posture going into future annual general meetings.
Responding to heightened scrutiny
It’s no secret that directors are facing increased scrutiny from shareholders, and proxy season 2023 proved this trend is still in full effect. This year, shareholder support for global director elections fell to 95.5%, down from 96.1% in 2022 and 96.4% in 2021. This downward trajectory is also reflected in insights from prominent advisory services Glass Lewis and Institutional Shareholder Services (ISS), who endorsed fewer S&P 500 director election and re-election proposals compared to those for FTSE 350 directors in the same period (93.4% and 97.1% versus 98.7% and 99%, respectively).
Amidst this intensifying scrutiny, the late-2022 implementation of Dodd-Frank pay versus performance disclosure requirements left companies scrambling to adopt new disclosure practices heading into proxy season. Some companies were left with the prospect of disclosing figures that didn’t align perfectly with the compensation story they had been delivering to shareholders.
Moving forward, it's important to incorporate this disclosure requirement into a strong investor relations strategy. Being direct and transparent with your shareholders is critical, especially regarding any discrepancies between past compensation criteria and those now mandated by the SEC. Benchmarking your performance against different peer groups can also help you gain a better understanding of how investors are likely to analyze pay versus performance at your company.
Crucially, the SEC gives companies that disclose their three most important financial measures the freedom to include non-financial measures, communicating the relationship between pay and performance. This is a key opportunity to provide your shareholders with a compelling, holistic compensation story –– a cornerstone of all good IR strategies.
Navigating the new universal proxy card
The new universal proxy card presents another change directors had to contend with this year. It allows shareholders to elect directors from a full list of candidates nominated by the company and activists in contested board elections. The rule strengthens the position of investors, who now have more influence over the makeup of the board. This, combined with the broader trend of growing director scrutiny, will almost certainly result in more proxy contests targeting sitting directors. Board members need to be prepared.
Similar to the previous strategy around pay versus performance, managing the universal proxy card boils down to meaningful investor engagement. Gone are the days of one-dimensional communications around board activity. Boards need to craft a better story for investors — one that communicates value and directly ties to specific board functions.
How can you accomplish this? Here are a few ways to start:
- Identify vulnerabilities (whether in the form of compensation, board composition, etc.) and determine if steps can be taken to ameliorate those weak points before proxy season is in full swing.
- Assemble engaging materials that reintroduce the board to shareholders through bios, skills matrices, succession planning and engagement summaries. These materials are prime opportunities for addressing shareholder concerns and connecting them to actions the board has taken/is taking.
- Develop a response plan that allows you to control the narrative and maintain credibility by delivering clear, detailed game plans in the face of activist campaigns.
Activism is on the rise
Activism has always been a core proxy season challenge. But in light of recent SEC rulings and shifts in public sentiment, the face of activism is changing, particularly with regard to ESG and DEI initiatives.
In the first half of 2023, 62 U.S.-based companies were publicly subjected to climate change and GHG demands, a 22% increase compared to the same period in 2022. This reflects a growing appetite among shareholders for action and strong communication in the face of emerging climate-related risks.
DEI activism is witnessing a similar trend. Globally, 144 companies were publicly subjected to social demands in the first half of 2023, an 11% increase compared to the same period in 2022. Shareholders are paying attention to board composition and skill matrices, as well as company-wide hiring practices and DEI initiatives.
Generally speaking, shareholders are demonstrating an increased desire for more high-quality information from top leadership, and boards who fail to meet this demand risk exposing themselves to avoidable activist hurdles. Developing a strong IR strategy that responds to this changing activism landscape will be key for stability, continuity and progress.
Using technology to navigate proxy season
Software solutions, such as Diligent Market Intelligence, equip directors with insights that help them manage shareholder pressures and strengthen investor relations.
Market Intelligence addresses new pay-versus-performance pressures with benchmarking and shareholder analysis tools that alert you to potential proxy issues while keeping you SEC-compliant. You can also access key insights into activism targets in real time for maximum clarity and more preparation time going into future proxy seasons.
Moving from incremental to continuous digital transformation
The trends evident in this year’s proxy season point to a broader reality: Accelerating regulatory change continues chasing the tails of evolving and expanding risks, and shareholders and stakeholders aren’t about to let up on their high expectations. With every organization facing urgent challenges coming left and right, any notion of settling into a status quo needs to be cast into history. Moreover, digital transformation — that decade-old buzzword — matters more than ever. But, critically, businesses need to shift from viewing digital transformation as a set of discrete projects toward a new model of continuous, evolutionary digital transformation as a core cultural and operational value.
A new Diligent executive brief makes the case for this paradigm shift, and outlines actionable steps that boards and executive leadership can take to make that move. Download the executive brief here.
