ESG Proposal or Director Nomination?
As "proxy season" (are we the only ones who don't like that phrase? there's no season for activist investing) wraps up, ESG activists can look at initial results with some satisfaction. Proponents submitted a record number of proposals, with increases in support overall and in the number of proposals that won a majority of shares voted.
Yet, ESG proponents can do even more. How about electing one or more directors that support an ESG proposal, instead of settling for a report about what a company might do about climate change or social justice? With the new universal proxy card (UPC) rule, that unimaginable goal is within reach.
We've written much lately about UPC, and collected a range of resources for activists. We also plan a webinar on this subject. Here, we compare the new environment for director elections under UPC to the tried-and-true one for shareholder proposals.
With UPC, activists will find it easier to pursue a proxy contest than before. In contrast, submitting a proposal became more difficult in the past couple of years, as ESG activists know well. Of course, activists should find winning one or more director seats far better than winning a vote on a proposal.
Minimum Requirements Lower for Directors than Proposals
The requirements for submitting an ESG proposal increased in the past two years. They've always been quite low to submit a director nomination.
For many years, the SEC had a basic requirement to submit a proposal: own $2,000 worth of shares for a year. Most proposals fail to gain a majority of votes, As long as a failed proposal increased its support each year, a proponent could submit the proposal again.
In 2020, the SEC increased the ownership threshold to $25,000 worth of shares for proponents that owned shares for a year. This level does decrease the longer a shareholder owns its shares. It increased the votes needed to resubmit a proposal in subsequent years, too. The SEC also made it easier for companies to reject proposals, say because of the "ordinary business" exception.
In contrast, to nominate a director, a shareholder needs to own a single share of a company. Companies with an advance notice rule (most of them) also require the shareholder to demonstrate ownership at the time of the notice, say four months before the scheduled shareholder meeting, compared to at least one year for proposals.
UPC Makes the Process Easier
ESG proposals have always cost relatively little. Writing and submitting a proposal doesn't require much legal work, just the time and ink or bytes needed to navigate the SEC no-action process. Since the company includes the proposal in the proxy materials, an ESG activist can spend what it wants to promote it to other shareholders.
With UPC, running a director election campaign becomes easier. Elsewhere we explain how the SEC estimates the cost at as little as around $5,000 for a "notional" proxy solicitation. Because the company lists the activist nominees in the proxy statement the process for promoting a director nominee now starts to resemble the same one for promoting an ESG proposal.
WIth UPC, an activist does need to solicit a minimum number of shareholders. We also show that requirement likely won't be difficult to meet, either.
Director or Proposal? Why Even Ask?
ESG activists should really prefer winning a BoD seat compared to winning approval of a proposal.
Proposals are non-binding. A company can ignore a winning proposal, although lately a company that does so risks further ire from shareholders.
After a few years of company inaction on the proposal, an ESG proponent could escalate the pressure with a high-profile BoD campaign. Why not just start with that now?
A proposal also don't change much at a company. Most require a report or analysis of an ESG subject, rather than concrete action to address climate change or social justice. A company can also slow-walk a proposal, and deliver a report months or years after a shareholder vote.
Winning a BoD seat represents an entirely new, greater level of impact on a company. A director can advocate directly for one or another ESG program, with access to other directors and senior executives. Directors of course have access to company information that an ESG proponent can only aspire to see.
Of course, an activist can even do both - submit a proposal and nominate a director candidate. Nothing in SEC regulation, state corporate law, or company bylaws precludes this. The activist can then solicit votes for both at the same time. That'll be interesting to watch.