Published on 24, Feb 2023

Simone Grimes Details How Boards Can Prepare for the 2023 Proxy Season

The past two years have demonstrated that investor activism is on the rise, and publicly traded companies need to anticipate the opportunities and challenges that come with proxy season. The only certainty boards should expect in 2023 is change. Proxy advisory leaders Glass Lewis and Institutional Shareholder Services (ISS) announced their 2023 priorities, which include a continued focus on ESG issues, an increased focus on board diversity and related disclosures, support for racial equity audits, and a continued focus on “say on pay.” Chairs of the nominating, compensation, and audit committees can expect less support for their re-nominations if they are not proactive about the significant issues at play in 2023. Simone Grimes, an experienced Chief Financial Officer and corporate board member serving on audit and governance committees, gives some useful suggestions for how directors can prepare for the challenges and opportunities of the 2023 proxy season.

Step 1: Understand the ESG issues that contribute to your organization’s risks and opportunities 

Simone Grimes explains that even billion-dollar companies can be out of touch with shareholders’ expectations regarding ESG.

“A board that is narrowly focused on compliance and risk management will fall short of institutional investor’s expectations that boards be fluent and proactive in ESG matters,” she says. For 2023, ISS will generally recommend votes against the incumbent chair of the responsible committee and other directors on a case-by-case basis and at companies that have not taken minimum steps needed to assess and mitigate the company’s climate-related risks. This is especially true for companies that are significant greenhouse gas (GHG) emitters, directly or indirectly, through their value chain. “This is why board members should invest time in educating themselves on ESG issues,” Simone Grimes explains.

To prepare, Simone Grimes recommends that boards dedicate time on the agenda to understanding the business’ ESG goals, differing approaches, and proxy advisor expectations. It is also beneficial for board members to meet regularly with senior sustainability leaders and external experts so that they can be educated on ESG issues and determine the adequacy of climate-related disclosures.

Step 2: Diversity, Diversity, Diversity

With the absence of state or federal laws or fixed stock exchange requirements, ISS and Glass Lewis are strengthening the power of their vote recommendations to influence greater board diversity. Glass Lewis will move from a fixed number approach to gender diversity to a 30% gender diversity expectation. It intends to vote against the chair of nominating committees that fail to meet the gender requirement or have a director from an underrepresented community. Boards should prepare to disclose their plans and timelines to appoint diverse directors generally no later than the next annual meeting. 

“This is the time for nominating committee chairs to get proactive in ensuring that their succession plans include a pipeline of qualified and diverse candidates as well as committee rotations and that they revisit tenure-limiting mechanisms,” Simone Grimes adds.  

ISS will expand its gender diversity requirements in 2023 to apply to all companies, not just Russell 3000 and S&P 1500 companies. Nominating committee chairs on boards with no gender diversity should be concerned and be prepared to address votes against their re-nomination. ISS would further like to see greater transparency in quantitative assessments of workforce diversity and inclusion metrics and goals to assess whether the company is making sufficient progress in the areas of racial equity and civil rights.

Step 3: Understand the new issues

Several new topics are being addressed in 2023 that seek to have greater transparency in the alignment between a company’s stated values and its financial commitments.

Directors should understand requests for Racial Equity Audits. For 2023, ISS added racial equity and civil rights audits as a new factor it will consider when evaluating on a case-by-case basis shareholder proposals requests to assess whether a company adequately discloses workforce diversity and inclusion metrics and goals, which ISS believes will allow for quantitative assessments of progress.

Boards should prepare for increased scrutiny on Political Spending. Under a new policy for 2023, ISS will evaluate on a case-by-case basis shareholder proposals requesting greater disclosure from companies about the alignment between their political contributions and lobbying efforts and their publicly stated values and policies. ISS will consider the company’s policies, management, board oversight, governance processes, and level of disclosure related to political expenditures and lobbying activities. Further, proxy advisors will look for the company’s disclosure regarding the reasons for its support of candidates, trade associations, and other political activities and any incongruencies between a company’s political expenditures and its publicly stated values and priorities.

Step 4: Compensation committees should anticipate say-on-pay proposals

Investors' lack of tolerance for adjustments, discretion, and special grants in executive compensation is expected to result in lower levels of support for company say-on-pay proposals. Compensation committee chairs can be vulnerable to votes against their re-nomination if they are not proactive.

ISS will target Problematic Pay Practices. ISS maintains a list of examples of problematic pay practices that carry significant weight in its consideration of a company’s overall pay program and may result in negative vote recommendations. For 2023, ISS added as a new example severance payment made to an executive when the executive’s termination is not clearly disclosed as involuntary (e.g., a termination without cause or resignation for good reason).

Boards should expect an increase in shareholder proposals to strengthen ESG metrics in executive compensation. For 2023, ISS will continue to evaluate on a case-by-case basis shareholder proposals seeking increased disclosure on a company’s approach toward incorporating environmental and social (E&S) criteria into its executive compensation strategy, considering specified factors. ISS revised the policy to reflect its view that a company’s board or compensation committee is generally in the best position to determine performance metrics while also acknowledging that shareholders would benefit from improved disclosure about the rationale and considerations behind pay metrics. 

Step 5: Encourage board-shareholder engagement all year, not just during the proxy season

Boards should ideally engage with major investors throughout the year and avoid reaching out to them only in times of a crisis or challenging annual shareholder meetings.  

The benefits, Simone Grimes states, include the board demonstrating it is fluent in ESG and in investor policies. By engaging with investors more often, directors can hear the opinions of investors on the company’s ESG performance and on ESG issues themselves.

“Board governance is always evolving, and by keeping in touch with shareholders all year long, they will be leaders in their industry,” states Simone Grimes. “Try to keep the door open and create a way for major shareholders to engage with board members on ESG matters.”

Step 6: Redefine what makes a proxy season successful

A successful company is one whose board and shareholders have great relationships. While it is tempting to define a successful annual meeting through the support its shareholder proposals receive, this is too narrow.

“What is even more important is how engaged the shareholders are,” Simone Grimes believes. “Remember: you may be able to do little about the withdrawal of a shareholder proposal, and shareholders may just not support your position. While frustrating, keep the long term in mind - if you had good dialogue with your major investors despite things not going according to plan, you had an excellent proxy season.”

Step 7: Consider your options when endorsing, implementing, or withdrawing from a shareholder proposal

Simone Grimes adds that boards can benefit from selectively endorsing or implementing shareholder proposals. One major advantage is that it shows that the board is both listening to its shareholders and prioritizing strategic opportunities in pursuing E&S goals.  

“Remember, too, that the company may have more flexibility in implementing the proposal because it is endorsing it instead of negotiating its withdrawal,” she says. “Another strategy is for the company to implement the proposal ahead of the vote but on its own terms and utilizing its own strategy. This helps shareholders to see that the board is receptive to their concerns.”

She cautions that shareholders may be less willing to support a proposal if it has already been implemented. To decide whether to endorse, negotiate the withdrawal of, or preemptively implement a proposal, the board will have to consider the proposal, its proponent, and the precedent it will be setting by endorsing some of the proposals. 

ESG issues and multi-stakeholder capitalism are increasingly prioritized by institutional investors. With these steps, board members can be prepared for the 2023 proxy season and also for the future, one in which ESG will be critical to a corporation’s success.

Simone Grimes is an independent board member, audit committee financial expert, Chief Financial officer (CFO), and entrepreneur who has a BSC in Accounting, MS in Finance, and MBA from Cornell University. She has held financial leadership roles across various industries, including financial services, big-four (PwC) public accounting, tech, and consumer products. Simone Grimes serves on the audit committee of for-profit and nonprofit boards. 

The views represented are those of Simone Grimes and do not represent the position of Acadia Insurance or W.R. Berkley.