Shareholder activism in the United States is on the rise this year, with a 9% increase in shareholder proxy votes put forward against companies compared to the first half of last year, according to a
Proxy votes refer to the process by which shareholders can propose and vote on amendments to business operations or leadership. Activist shareholders may approach companies with specific goals such as greater executive compensation disclosure, changed board positions and the implementation of
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Activist shareholders targeted 449 companies during the first six months of the year, with more than half of the campaigns waged against companies with market capitalizations above $10 billion.
As of June 30, activist shareholders had won 101 board seats, which represents 11% of seats they sought at U.S. companies — a considerable drop from this time last year, when activists had won 65% of board seats they lobbied for.
Universal proxy card rule
This year's proxy season was the second affected by the universal proxy card (UPC) rule, implemented by the Securities and Exchange Commission in late 2022. The rule specifically concerns board elections and requires all nominated board candidates in an election, regardless of the nominator, to be included on the same voting card. The rule was adopted to enfranchise voters who would not otherwise be aware of all eligible candidates in an election.
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With the UPC requirements in place, activist shareholders secured 46 settlements in the first half of this year. During the entirety of 2023, shareholders reached 70 settlements.
Richard Peterson, vice president of data strategy and services at Diligent, said in an interview with Financial Planning that UPCs have provided a new platform for shareholder activists.
"I think it's made it a bit easier for minorities to secure representation on the board," he said. "So activists are gaining more seats. It's small at this moment, but it's still meaningful."
Litigation
Settlements in the first half of the year rose in quantity and took less time to complete. Settlements took an average of 110 days to be resolved, which is 25% shorter than the 147-day average from the first half of 2022, before the implementation of the UPC rule.
Peterson noted that the introduction of universal proxy cards has compressed the amount of time it takes for parties to reach a settlement.
The overwhelming majority of settlements in the first half of 2024 took "zero days to settle," according to the report.
"As shareholder proposal filings reach record highs, there is the potential for more ESG advocates to use the courtroom as a method to push companies to strengthen their ESG efforts," wrote Will Arnot, senior editorial specialist at Diligent, in the report.
In an unprecedented move, Exxon Mobil in January sued two of its own shareholders, Arjuna Capital and Follow This, a climate advocacy group. The suit, which was later dismissed, sought to pressure the shareholders to withdraw a climate change-related proposal and deter future ESG-related proposals, according to Diligent.
Exxon claimed that the proposal "[did] not seek to improve ExxonMobil's economic performance or create shareholder value."
Arjuna Capital eventually backed down and promised to refrain from putting forth climate change-related proposals against ExxonMobil.
The lawsuit "put a spotlight on the widespread abuse of the shareholder proxy submission process," Exxon Mobil CEO Darren Woods
CalPERS, the retirement agency of California
"We find it concerning that certain companies have chosen to proceed with legal action against their own shareholders who submit proposals under Rule 14a-8. Companies should not sue their shareholders, the true owners of the businesses," said Elizabeth Gonzalez-Sussman, partner in the M&A group of Skadden, Arps, Slate, Meagher & Flom, in Diligent's report.
Diligent's report said that the rise in litigation to resolve proxy matters calls into question the efficacy of the SEC's Rule 14a-8, which allows shareholders to bring forth resolutions for review.
The rule also allows companies, in response to shareholder resolutions, to exclude certain proposals if they do not meet eligibility criteria. Companies can submit an informal "no-action request" regarding penalties given by the SEC's division of corporate finance that they would otherwise receive for excluding proposals.
"The irony of the suit is that Exxon did not utilize the option of going to the SEC and yet one of their major arguments, which likely would have prevailed at the SEC, was that the resolution was too similar to previous resolutions that had been filed which didn't get an adequate vote last year," Timothy Smith, senior policy advisor at the Interfaith Center on Corporate Responsibility, wrote in the report.
Expenses
On average, proxy contests cost companies $4.4 million, while they cost activists an average of $1.7 million, according to Diligent. Over the past four years, the costs for companies have increased by 42%, while expenses for activists have increased by 158%.
"A big chunk of it is related to more [shareholder] activity. It also has to do with the changing way the industry is coping with universal proxy cards," Peterson said.
According to the report, 71% of companies were forced to reimburse activists for the expenses accrued during proxy disagreements.
"You're seeing a lot more activists that are coming out into the news and really spending a lot of money on campaigns to affect their interests," Peterson said.
The first half of 2024 saw the most expensive proxy contest in the history of the United States, with Disney spending approximately $40 million to fight Nelson Peltz's Trian Fund Management. Trian hoped to gain board seats for Peltz and former Disney CFO Jay Rasulo and spent around $25 million on the contest.
Blackwells Capital, another activist investor, disapproved of Trian's efforts and nominated its own candidates to the board.
"We saw competing dissident slates at Disney this year and I can envision this trend continuing, although activists should be cautiously aware that competing dissident slates can potentially cannibalize votes for change, which may ultimately benefit a company's defense," Michael Fein, CEO and Founder of proxy advisory firm Campaign Management, said in the report.
Disney announced on April 3 that its nominations won by a substantial majority, keeping Trian's candidates off the board, though by the end of the dispute Trian walked away with $1 billion in profit.
"The campaign at Walt Disney highlighted a critical aspect of shareholder activism: even if an activist loses the election, it can still win the campaign," said Gonzalez-Sussman in the Diligent report.
ESG (and AI)
While the majority of shareholder demands, at 192 proposals, had to do with governance, the overall number of governance-related proposals decreased from the same time last year.
One notable example of a governance dispute was between asset manager Ancora Advisors and railroad operator Norfolk Southern. The shareholder bid for eight board seats and won three. Ancora called the Norfolk Southern's leadership "tone-deaf" and "unqualified" following the calamitous derailment of one of the company's freight trains last year in East Palestine, Ohio.
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On the other hand, proposals encompassing environmental and social concerns increased to a record 349 proposals across both categories. Six proposals received over 40% support, with five proposals centered around prompting companies to better disclose greenhouse gas emissions.
Proposals on environmental changes to companies came against the backdrop of
"I think you're going to see more and more ESG proposals coming forward to a vote at U.S. companies," Peterson said. "I think also you're going to see a lot more enthusiasm for either taking up those votes or settling with them, in a sense that ESG is not going away."
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Conservatives have recently criticized shareholder ESG proposals, the
The Republican ESG Working Group of the House of Representatives' Financial Services Committee on July 1 released a
"The recent surge in ESG-related proposals adds unnecessary pressure on corporate boards, wastes corporate resources, and hinders informed decision-making by retail investors, who must spend valuable time reading and evaluating these proposals," said the report.
A notable category of shareholder ESG proposals new to the list this year was AI-related proposals concerning company governance.
Shareholders put forth six proposals on
With the upcoming presidential election in November, the first half of the year saw 18 shareholder proposals advocating for better political spending disclosure. Almost 20% of shareholders, on average, supported the 58 proposals for companies to
