The 2021 proxy season showcased important trends in shareholder engagement and active measures to improve company disclosures and policies around a range of issues. The number of proposals increased from 2020, as did shareholder support. Moreover, the array of matters expanded, with an increased focus on environmental and social issues.
The backdrop for this momentum was the truly extraordinary period we have been living through—the challenges of the COVID-19 pandemic, calls for racial justice and reduced inequality, and the growing urgency of climate change. In this environment of greater engagement between shareholders and boards, we accelerated our efforts around NB Votes. Now in its second year, this program seeks to amplify our voice by pre-announcing a select array of our voting choices balanced across issues and with a balance of votes in support and against management recommendations. The program underscores our commitment to bringing more transparency into the proxy voting decision-making process and, while we remain the only large asset manager providing regular advanced disclosure, we encourage others to do the same to create a better-functioning system.
Our goals are as follows:
- Encourage the companies we invest in to take steps to enhance long-term value for our clients
- Improve the transparency of our voting process, for the benefit of clients and the companies
- Demonstrate the fundamental, long-term focus of our investment teams, which informs our vote decisions
In this year’s program, we focused on roughly 60 key votes where our clients had material economic exposure and where we identified significant issues for our clients. We took positions against management 48% of the time and for management 52% of the time. A particular outcome in regards to supporting or opposing management was not our goal but rather we vote in the best interest of our clients, including where we wanted to make our position known, with the understanding that the process of modifying policies and practices may take more than one "bite at the apple." While our vote may not be in that majority in the first year, it can provide an important signal indicating the direction we would like the company to pursue.
We sought to balance our pre-announced votes across multiple areas of interest (see our Governance and Engagement Principles below), as well as between pro and con positions, to help highlight our thinking. In this turbulent environment, we felt it was important to zero in on issues we believe are particularly important for companies and stockholders, including operation during the pandemic (including compensation), management of environmental risks, and thoughtful equity, inclusion and diversity (EID) policies, all of which could help paint a picture of management and business quality. Moreover, with corporate engagement expanding globally, we sought to make our presence known in a broader array of markets.
In this publication, we provide a sampling of our NB Votes, the issues involved, and how we reached our position in each instance. We have organized the discussion around key topics of interest, proxy trends and functional benefits tied to pre-announced voting and engagement, as follows. (For a detailed listing of our NB Votes positioning and outcomes, click here.)
- Response to COVID-19 (General): Waste Connections
- Response to COVID-19 (Compensation): Sherwin-Williams, General Electric
- Climate: Royal Dutch Shell, Plc Berkshire Hathaway, Phillips 66, Caterpillar, Charter Communications, Inc.
- EID: First Solar, Cigna, Union Pacific
- Adapting by Market: Accton, Daibiru
- Judgment Matters: Dominion, Netflix
- Transparency Translates Into Action: Cigna, Univar
All our views are informed by our belief that engagement and communication, across multiple touch points, is essential to driving shareholder value for clients over time.
Response to COVID-19 (General)
During the voting season, a key topic of interest in our proxy voting was company reactions to the pandemic, where managements and boards made strategic choices about how to respond to short-term pressures while maintaining a focus on the long-term health and economic wellbeing of their business, employees, customers and communities.
Waste Connections: Health and Safety, Human Capital
Waste Connections is a North American integrated waste services company that provides waste collection, transfer, disposal and recycling services, primarily of solid waste. During the crisis we believe the management team responded appropriately as an essential business to protect its workers. The company raised pay for frontline employees, provided medical leave pay benefits, and modified internal safety controls to decrease person-to-person contact by changing employee check-in protocols and enhancing guidelines regarding disposal of garbage and hazardous waste in residential areas. We therefore voted for the reelection of the board as a whole to signal our support for its continued efforts to protect employees, customers and communities while maintaining operations.
Response to COVID-19 (Compensation)
While we typically view tactical amendments to in-flight plans as problematic, we recognized that, given the unique challenges posed by the pandemic, certain changes may have been warranted. We saw a number of companies choose to amend aspects of their annual bonus plans during the year and sought to understand the rationale for the changes and determine if they were justified and balanced. A smaller number of companies made changes to long-term incentive plans. In general, we looked less favorably on changes made to long-term plans given that their performance measurement periods extend beyond the time when the impact of the pandemic was most severe and uncertain.
Sherwin-Williams: Prudent Compensation Decisions
The paint and coatings company responded prudently to the impact of the COVID-19 pandemic by rescinding 2020 base-salary increases for top executives and named officers, having the CEO voluntarily forego a previously approved increase to payout opportunities, and adjusting the achievement level for previously established sales targets. Although we are typically wary of discretionary adjustments, we found that the company’s decision was informed by thoughtful analysis that involved various parts of the business, management and the compensation committee. The change was made with front-line workers in mind to reflect sales-related targets more fairly in the context of store closures and industrial/commercial customers that were shut down for lengthy periods because of the pandemic. As such, the adjustment particularly benefitted store-level associates whose compensation is meaningfully impacted by sales. Further, we believe the adjustment was not material in the context of overall sales. For these reasons, we voted in favor of the compensation plan in an advisory vote to signal our support for the company’s sound judgment and mindfulness of employees beyond senior leadership when adapting its executive compensation program to unprecedented circumstances caused by COVID-19.
General Electric: Compensation Targets at Issue
GE was greatly impacted by COVID-19, with large portions of its Aviation, Power and Renewables businesses experiencing notable declines in 2020. This resulted in significant share price declines, with the stock dipping below $6 for the first time since the 2008 – 09 financial crisis. We believe the disruption of COVID-19 also delayed the turnaround that GE’s chairman and CEO, H. Lawrence Culp, Jr., has been trying to accomplish since his appointment in 2018. Given this delay, the board chose to extend Mr. Culp’s employment agreement to secure his retention for two additional years beyond the original agreement. We were supportive of this decision as we believe that his leadership is a lynchpin to GE's successful turnaround.
While we supported the contract extension, we were opposed to adjustments made to compensation-related performance targets included in the contract. Although the environment was very uncertain during the pandemic, we generally believe that when performance targets are reduced, potential payout levels should also be lowered. We expect boards to establish performance targets that are sufficiently challenging and believe doing so is of heightened importance for awards granted outside of regularly scheduled compensation plans. In addition, we noted that boards at many other companies that were also negatively impacted by COVID-19 did not significantly reduce long-term compensation-related performance targets. GE was one of 13 S&P 500 companies that received less than 50% support for its say-on-pay proposal.1
Climate: Quality of Disclosures
As the issue of climate has become increasing influential across business and society at large, the focus for investors has largely shifted from whether companies provide disclosure on climate risk management to the substance and quality of that disclosure. During the proxy season, we supported shareholder proposals for enhanced emissions disclosure at Berkshire Hathaway, Phillips 66 and Caterpillar, while also urging the latter to align its reporting with the Task Force on Climate-Related Financial Disclosures (TCFD) framework.
A new environmental resolution presented to shareholders this year was the Say on Climate proposal, which generally included a request to submit a company’s climate risk management report or strategy to an advisory shareholder vote. The resolutions were presented by both managements and shareholders. While we encourage companies to publish reporting on their management of climate risk, we recognize that an annual vote on the company’s climate strategy report may not be the most effective mechanism to achieve consistent, comparable and quality reporting on climate risk and environmental, social and governance (ESG) topics generally. Given the complexity and dynamic nature of ESG issues, we believe there may be instances where it may be more appropriate to express our views to some companies through direct engagement or collaborative efforts. We also believe climate action plans are inherently long term and we would not expect these strategic plans to change significantly on an annual basis, therefore making an annual vote potentially less impactful than a vote in connection with material changes to such plans. We also have concerns that this type of proposal could have unintended consequences, such as insulating directors from accountability on climate issues through the mere passage of the advisory vote.
As such, we examined these proposals on a case-by-case basis. In instances where management submitted the proposal and we found the company’s climate policies and practices to be adequate, we voted in favor to signal our support for the company’s continued effort. Such was the case at Royal Dutch Shell Plc, where we supported a management Say on Climate proposal and noted the company’s additional disclosure that the vote was intended to deepen engagement with shareholders on the topic and that the board would remain responsible for the oversight of the company’s energy transition strategy. In contrast, we abstained from voting on a Say on Climate shareholder proposal at Charter Communications, Inc. In this case, while the company provides some information related its sustainability initiatives, it does not disclose a climate change risk strategy, or its GHG emissions and related reduction targets/plans. In this regard, the company is in the minority of S&P 500 companies, most of which already report such information. Although we were supportive of the company providing more climate disclosure, we did not believe the annual vote aspect of the proposal was appropriate, given the administrative burden and long-term nature of the issues involved.
Equity, Inclusion and Diversity: Situation-Specific Assessments
This proxy season, EID practices were front and center at many annual corporate meetings. Cigna (see below) is one example where we were impressed with progress by the company and supported its increased reporting around EID. However, in other situations, we felt that the management and board could take further steps around disclosure and equity efforts. For example, at First Solar, the solar energy company, we voted against a board with no minority representation and in favor of a shareholder proposal for additional disclosure on how First Solar seeks diverse candidates. In response, the company later appointed a diverse candidate to its board. And at Union Pacific, we supported a shareholder proposal for the mandatory disclosure of U.S. Equal Opportunity Commission workforce data (so-called EEO-1 reporting, submitted to the EEOC by larger employers), which passed with 86% support. We believe equitable, inclusive and diverse workforces are important elements of a company’s long-term success and we value transparency on workforce composition and information related to human capital policies, practices and outcomes. We have found that there is limited disclosure on workforce composition, and where information is disclosed, it is often not comparable across companies. As a result, we voted for all of the shareholder proposals related to EEO-1 and diversity reporting this proxy season.
Adapting by Market
As part of our expansion of NB Votes, we wanted to include a broader array of non-U.S. companies as part of the program. Of the 60 meetings included in NB Votes thus far in 2021, one third are non-U.S. companies. Proxy voting and related market expectations tend to vary significantly from market to market, which reinforces the importance of local expertise and avoiding a one-size-fits-all approach.
Accton Technology: Multiyear Engagement
We have engaged with Accton, a Taiwan-based networking company, over the last three years on increasing the independence of its board and adding directors with international experience to improve governance practices and strategy. As a result, the company nominated six new independent directors, many of whom are industry veterans with international expertise—a proposal that we supported. With this measure, Accton has become a leader in the Taiwanese market on board independence, with more than 66% independent members compared with the market’s 20% requirement. While we note that none of the independent director nominees is female, the company has committed to identifying such a nominee in the near term.
Daibiru Corp.: Work in Progress
Daibiru Corp. is a property developer based in Osaka, Japan, and a subsidiary of shipping giant Mitsui OSK Lines. Over the years, we have actively engaged with the company on capital efficiency, given its subpar return on equity due to weak growth in its core property leasing business and a poorly run balance sheet. Management has made some progress, for example conducting its first share buyback last year, but we believe it has yet to sufficiently address fundamental issues around allocation—triggering our decision to vote against the reelection of top management at this year’s proxy meeting.
Although we were not in the majority, we are reasonably optimistic about future improvements given continuing dialogue and next year’s introduction of the Japan Corporate Governance Code, which will require Daibiru and other companies to justify their presence in the Tokyo Stock Exchange’s coveted Prime Section. Membership in this group is crucial to maintaining social standing (for hiring and business relations). Hence, in the follow-up engagements, we will continue to suggest practical solutions to address capital management, as well as to improve boardroom independence and diversity.
As an active manager, leveraging the insights of our fundamentally driven investment teams is a critical element of our approach to voting, which we believe differentiates us from peers that employ a top-down approach to proxy voting. One of the central goals of NB Votes is to demonstrate how our company-specific knowledge and subject matter expertise are applied to our voting; ultimately, this will reflect the judgment required in many voting decisions, and highlight why we have reached different outcomes in optically similar management and shareholder proposals—something that passive managers will find difficult to achieve. One place where this was apparent in the 2021 proxy season was in proposals tied to political activities.
While corporate political activities have been the subject of proposals for a number of years, they reached heightened importance this year given concerns around the storming of the capitol in early January. Given the potential reputational impact of the use of company funds in relation to trade associations and political processes, we have encouraged companies to provide disclosures that will enable investors to understand both their political spending practices and related oversight mechanisms. While many companies have taken steps to meaningfully enhance their practices and disclosures, many others still warrant improvements. As such, this proxy season we voted for 65% of shareholder proposals related to political spending and lobbying activities where we determined enhancements were warranted.
Dominion and Netflix: Contrasting Oversight Levels
In our view, Dominion, the power company, sufficiently discloses its board oversight of and practices regarding its political spending and lobbying activities. Further, the company also regularly assesses whether its direct and indirect lobbying positions are aligned with its corporate strategy and commitments, including those related to climate risk, and the steps it would take if misalignment was identified. For these reasons, we voted against a proposal for lobbying and policy disclosure.
As for Netflix, the streaming company did not appear to maintain board-level oversight of political activities or a corporate political spending policy. Further, it did not disclose information regarding its direct or indirect political contributions or its trade association memberships. As such, we believed that enhanced disclosures would be important to better inform shareholders’ evaluation of Netflix’s risks associated with these activities, and to hold the board accountable.
Transparency Translates Into Action
We continue to see the proposals increase in both complexity and scope. To us, this underscores the importance of and need for further transparency from investors on the rationales that underpin voting decisions. We have been able to leverage NB Votes to provide more clarity on our expectations of companies on particular topics as well as give insight into the nuanced judgment that our investment teams apply to voting matters. This, in turn, has helped us influence corporate practices and deepen engagement, leading to concrete successes, as the following two examples demonstrate.
Cigna: Compensation and Race/Gender
We generally favor efforts to study and report on any discrepancies in compensation based on gender or race. At Cigna’s 2020 annual meeting, we supported a proposal for a report on median gender and racial pay equity, disclosing our vote and rationale in advance of the meeting through our NB Votes initiative, and engaged the company to share our perspective regarding opportunities to enhance the disclosure on the results of its pay equity results as well as include more granularity on the links between diversity progress and executive compensation. When evaluating the same proposal this year, we found that the company had been responsive to our feedback and had considerably improved the quality of its diversity and inclusion practices and programs and related disclosures.
In particular, we were pleased to see enhanced disclosure this year in the proxy where the company publishes pay equity numbers that speak to "equal pay for equal work" and introduced a diversity scorecard that aims to monitor progress against the company’s diversity goals and explicitly link them to executive compensation beginning in 2022. Further, the company is on track to meet its goal of achieving gender parity in senior leadership roles by 2024. As such, we decided that the company had disclosed sufficient information on its efforts to address any disparities across the organization, leading to our decision to decline to support this year’s proposal.
Univar: Incremental Progress on Compensation
Univar, a global chemicals distributor, has demonstrated incremental progress on its executive compensation structure in response to shareholder concerns. Such improvements have included the elimination of stock options and overlapping metrics across short- and long-term incentive plans and the introduction of a relative modifier and an ESG scorecard under the plan for fiscal year 2021. However, we have remaining concerns regarding the three separate one-year measurement periods for adjusted earnings per share under the long-term plan and would prefer long-term metrics to be measured across a longer time horizon and, in this case, cumulatively over a three-year period. Still, we voted for the proposal to signal our support of the improvements made to the executive compensation plan. We will continue to monitor and evaluate the structure of the plan on an ongoing basis.
Pre-announcement of proxy voting intentions is in its infancy, but we have been delighted to hear of asset management peers beginning to follow our example, while key organizations are highlighting the practice as an effective tool to advance change. As an active manager, we believe that ongoing engagement with corporate managements and boards, including the active use of our proxy votes, is an important means to creating value for clients. By extension, the pre-announcement of our voting choices through the NB Votes program amplifies our impact, helps companies understand what we are seeking to achieve, and, in our view, encourages best practices across industries and among our investor peers. Looking forward, we will watch the follow-through of managements and boards in relation to our votes, and continually assess our own practices to assure that we are focusing on the right matters and using our leverage in the most effective ways.
By the Numbers: 2021 U.S. Proxy Voting Season
- Shareholder proposals submitted for meetings in the first half of 2021 rose after trending downward in recent years, up 4% from 2020 to 733.
- The number of social and environmental proposals increased 27% and 29%, respectively, and collectively overtook governance proposals as the most common.
- Voter support generally increased: The average support level for environmental proposals was 41%, surpassing governance proposals for the highest level of support and increasing from 32% in 2020. This was largely driven by climate-related proposals. Support for social proposals rose to 30% from 28% in 2020, driven primarily by diversity-related items.
- The number of shareholder proposals that received majority support rose from 47 in 2020 to 66 in 2021.
- Companies faced scrutiny on executive compensation plans, with 60 companies failing their say-on-pay vote, up 11% from 2020.
Source: Sullivan and Cromwell, LLP and Alliance Advisors. Figures are through June 30, 2021.