This article first appeared in FT Agenda on March 13, 2023

U.S. companies will have a lot on their plates this proxy season. At the top of the list of changes and challenges facing companies and their boards is an aggressive agenda of reforms from the U.S. Securities and Exchange Commission. Among the new SEC rules making their debut this season will be Universal Proxy, which officially took effect in September 2022. Companies will also be working to comply with rules due later this year targeting shareholder proposals, climate disclosure, cybersecurity and other issues.

Companies and boards will face more shareholder proposals, especially on the environment. From 2021 to 2022, the number of shareholder environmental proposals on corporate proxy ballots nearly doubled, increasing from just 159 to 309. That growth is expected to continue in 2023, and could even accelerate due to Universal Proxy and other factors.

Companies this year will also be keeping a close eye on pilot client-directed or pass-through voting programs for passive funds. Asset managers are working with technology providers like Broadridge to build the processes and platforms needed to give retail investors more say in how index funds vote proxy ballots. Major asset management firms are experimenting with client-directed initiatives this year and will use results to help develop longer-term strategies. Congress is also getting involved with the Index Act, a bill that would require fund managers to empower their retail investors with some form of client-directed voting.

How should companies respond to these changes? Based on our work with hundreds of publicly traded companies and conversations with some of the market’s biggest institutional shareholders, Broadridge is offering companies and boards the following advice: Focus on the fundamentals. Companies that adhere to the core principles of sound governance, disclosure and shareholder engagement will be strongly positioned to navigate even the most radical changes to the proxy landscape.

Build a Foundation of Governance

Although governance has been linked with environmental and social considerations in the ESG moniker, it actually stands apart as something more fundamental. Those are the words of Anne Robinson, general counsel of the Vanguard Group and secretary of the Vanguard funds. Speaking at the 2023 Broadridge Corporate Governance Outlook Webinar in January, Robinson explained that good governance is the lens through which investors and companies should view virtually all important issues relating to the environment, social concerns and other topics. “Where environmental and social issues present risks, good governance is the remedy,” she said. “Where they present strategic opportunities, good governance is an enabler.”

Vanguard starts its analysis of both portfolio company practices and shareholder proposals with a review of relevant corporate governance policies. Robinson’s team focuses on what it calls the Four Principles of Good Governance:

1. Board Composition: Does the roster of directors show the mix of independence, skills, experience, and diversity of both personal and professional characteristics needed to provide effective oversight and deliver long-term shareholder value?
2. Oversight of Strategy and Risk: Has the board established the practices needed to provide effective oversight? Does it have the right committees and programs? How involved is the board in identifying and managing risks? How does the board prioritize key material risks, which will vary dramatically from company to company? Do individual board members understand the strategy and material risks?
3. Executive Compensation: How and how well does the board align executive and shareholder interests? Is compensation structured to incentivize long-term performance?
4. Shareholder Rights: Does the structure of the governance program empower shareholders to use their voices and votes to influence the company and hold directors accountable?

Boards that adhere to these four principles will be more in tune with the perspective and expectations of shareholders, regulators and other stakeholders. Companies with a foundation of solid governance will be less likely to require sweeping changes to comply with new regulations, and will be less susceptible to disruptive proposals from activists and other shareholder groups.

Get Ahead of Issues with Enhanced Disclosure

Enhancing disclosure policies is one the most effective steps companies can take to prepare the company for any changes to the regulatory and proxy environment. Many new SEC proposals are aimed directly at disclosure on environmental, DEI and other social issues. Disclosure of environmental and other risks is also one of the central goals of activist shareholders. Getting in front of these issues by expanding and improving disclosure policies can help keep companies out of the crosshairs of both groups. Companies that embrace transparency will also be in a much stronger position if and when they face shareholder proposals on environmental and social issues. Vanguard’s Robinson said her firm only supports shareholder proposals that address gaps in companies’ disclosure policies and business practices. Proposals seen as duplicative to existing policies won’t get its vote.

Companies should also be thinking about changes to specific disclosure policies. One important example concerns information about the background and experience of the company’s slate of directors on this year’s proxy ballot. Because Universal Proxy will make it easier for shareholders to vote for or against individual directors on an à la carte basis, companies should be making an extra effort to disclose details about the skills, expertise and perspective their nominees bring to the table, and how and where those traits contribute to the board.   

Shore Up Support Through Shareholder Engagement

Companies and boards should make shareholder engagement a top priority this year. There are many reasons why companies should be working to expand and deepen their engagement with shareholders. First, retail investors are making up a growing part of the shareholder base, and many companies don’t have much experience engaging with them. Retail will take on even more clout when client directed voting starts giving them a bigger voice in how major asset management funds vote their shares.

Second, shareholder engagement is perhaps the best tool for cultivating support of important institutional investors, and warding off proxy proposals from activist shareholders and other groups. Many institutional investors have adopted stewardship as a core tenet. These investors generally prefer sitting down with companies one-on-one to examine and address areas of concern, rather than launching or supporting shareholder proposals that would force change.

In fact, Vanguard’s Robinson says one of the first things her firm considers when reviewing a shareholder proposal for one its portfolio companies is whether the company has engaged with the shareholders in good faith and taken steps to provide necessary information or act directly on an issue. Companies that regularly and sincerely engage with their shareholders will be more alert to the issues most important to their investor base. They will have less chance of facing a disruptive shareholder initiative, and a better chance of winning the support of key institutions if when shareholder proposals do make it onto the ballot.