IN-DEPTH: Surge in investor support for governance reforms
Support for governance-themed shareholder proposals targeting U.S.-listed companies has surged by over 18% so far this year, with investors seeing greatest success with demands for majority voting, board declassification and improved shareholder rights.
As of June 30, 2024, the 107 governance-themed shareholder proposals subject to a vote at U.S.-listed company annual meetings secured 48.1% average support, compared to 92 winning 31.6% support during the same period in 2023, according to Diligent Market Intelligence (DMI) Voting data.
“Many of the proponents go after companies that could be considered low-hanging fruit with antiquated governance provisions," Soundboard Governance President Doug Chia told DMI in an interview.
Challenging the status quo
Shareholder proposals asking companies to adopt simple majority votes proved to be especially popular, with the 45 such proposals averaging 70.5% support, up from 57.9% average support for the 13 proposals advanced in the same period in 2023.
Some 16 of such demands this season received north of 90% support including that advanced at Domino's Pizza where shareholder advocate John Chevedden secured 98.8% support, after arguing that supermajority voting requirements are an entrenching mechanism used by boards to block initiatives supported by most shareholders but opposed by a "status quo management."
“Shareholders have doubled down on standout topics like majority voting that speak to the benefit of extra checks and balances which is just plain good governance,” Chevedden told DMI, adding that arguments against majority voting "very rarely have any merit.”
Board declassification demands have also both increased in number and attracted record levels of support with the 10 such proposals advanced in the half year period receiving 59% average support, compared to 37.3% for four proposals brought forward during the same period in 2023.
And, with almost 98% backing and no recommendation from the board, Chevedden was the proponent behind one of the best performing declassification demands this year targeting IT services company EPAM Systems to reorganize into one class to give its shareholders more leverage if the board of directors performs poorly.
“Boards will rarely adopt these changes unless they’re forced to by shareholders voting for a proposal on the topic,” Chevedden said. “However, I don’t think they have much of a choice once a majority vote has been cast. The governance of Russell 3000 companies tends to be sub-par compared to the S&P 500 because a lot of them never get shareholder proposals, meaning they’re less inclined to adopt best practices.”
Shareholder rights
Investor efforts to enhance shareholder rights have also seen increased levels of attention and backing in the first half of this year.
Eight resolutions on the right to act by written consent secured 37.8% average support, up from 31.3% in the first half of 2023 while five received north of 40% support.
Shareholder proposals requesting the right to call a special meeting also saw support climb from an average of 35.4% in 2023 to 42.6% this year. Two of the proposals secured north of 70% support from investors, while 14 won more than 40% backing.
With 47.8% support, one of the best performing written consent proposals was also advanced by Chevedden and targeted professional services firm Marsh & McLennan Companies. Chevedden had argued that while the right is very rarely used, it gives shareholders at least significant standing to engage effectively with management and avoid stonewalling.
“Management likes to claim that shareholders have multiple means to communicate with them, but in most cases these means are as effective as mailing a post card to the CEO,” he argued.
Ahead of the next season and as the final quarter of 2024 eases in, such ongoing shareholder engagement is considered crucial for boards.
“While most companies may not want to adopt the best practices, at the other end of the spectrum they also don’t want to be the posterchild of poor governance or be seen to ignore the concerns of their shareholders,” Michael Fein, founder and CEO of Campaign Management told DMI in a recent Proxy Season Review webinar. “You may disagree with a shareholder on a particular issue, but if that’s the case you should come up with a rationale, messaging and a strategy to explain why your path is the correct one.”
