Proxy Season Shows Corporate Governance Keeps Evolving

Corporate governance is at a turning point in 2024. We saw Exxon’s high-profile lawsuit on the relevance of a shareholder proposal, new strategies deployed in director elections with universal proxy cards, and an increased willingness to take proxy advisory firms head-on.  

The Securities and Exchange Commission (SEC) eased its grip on shareholder proposal exclusions, and unions returned to activism at shareholder meetings. Public companies and their shareholders also wrestled with the decision to leave Delaware and reincorporate in states like Texas and Nevada for the first time. 

As practitioners pause to reflect on the past proxy season and companies look ahead to 2025, the message is clear: corporate governance is still evolving, and continuing to navigate fast-changing dynamics will be crucial to success at shareholder meetings in the future.

The U.S. Chamber is committed to helping companies and investors understand the changing corporate governance landscape. As part of that work, the Chamber hosted a discussion on September 18, 2024, about the 2024 Proxy Season, and the key takeaways from this event are summarized below.

Increased Shareholder Activism

The 2024 proxy season again saw a rise in shareholder activism with a record number of shareholder-led proposals on ballots. This increased activism was particularly focused on pushing companies to address current political issues in the United States. At the same time, there was a noticeable rise in the number of no-action requests granted by the SEC.

“We saw the requests rally, there was a 45% increase in the number of submissions; and if you only look at the submissions that are on substantive grounds, that increase was 62%, and then when you look at the number of successful no action requests this year the increase was 76% compared to the proxy season last year,” said June Hu, Sullivan & Cromwell Special Counsel.

Liz Wideman, Senior Vice President, Senior Deputy Counsel, and Assistant Secretary of Comcast pointed out that a notable portion of those successful no-action requests were related to violations of state law.

Universal Proxy Rules

The 2024 proxy season marked the first significant deployment of universal proxy rules, fundamentally altering the landscape of director elections. According to Jamie Smith, Director of the Center for Board Matters at Ernst & Young, and her team’s Top 5 Takeaways report, these rules have lowered the cost of running a proxy fight, making it easier for single-issue campaigns to gain traction.

“This shift has enabled more activist investors to challenge incumbent directors, presenting a more viable tactic than director challenges of the past and the increased activity underscores the need for companies to be more proactive in their engagement with shareholders and transparent about their governance practices,” Smith said.

Legal Battles Shape Corporate Strategies

ExxonMobil filed a lawsuit to prevent a recurring yet unpopular shareholder proposal from being included in its 2024 proxy statement. Each year, public corporations face numerous proposals from a small group of activist shareholders pushing social and political agendas that often diverge from shareholder value and could potentially undermine corporate success.

The SEC’s Rule 14a-8 allows any shareholder with a relatively small stake to have their proposal included in the company’s proxy materials. ExxonMobil’s lawsuit highlights the critical need to properly apply these exceptions to maintain the balance between shareholder input and the efficient operation of the company.

David Kern, Executive Counsel, Corporate and Securities Law at ExxonMobil, highlighted this about their lawsuit: “Ultimately this was about preserving both shareholder value for [ExxonMobil] and protecting [the 14a-8] process if the rules aren’t followed.”

Additionally, the U.S. Chamber filed an amicus brief regarding the lawsuit to protect shareholders and the financial system.

Investor Perspective

The 2024 proxy season saw a significant uptick in investor support for companies amid rising activism, underscoring the evolving dynamics of corporate governance and shareholder engagement. This trend was echoed by Ning Chiu, a Partner at Davis Polk & Wardwell, who highlighted the critical role of peer analysis in understanding a company's standing in its industry. Chiu's advice to “recognize where you stand relative to peers” points to companies' need to be aware of how they are perceived in the broader market context, an aspect that investors increasingly prioritize.

Additionally, Zach Oleksiuk, Managing Director at Evercore, emphasized the need for directors to proactively communicate the value of the board to institutional investors, suggesting that effective communication can significantly influence investor support.

Adding to this perspective, John Galloway, Global Head of Investment Stewardship at Vanguard, remarked that investors are returning to core governance issues, signaling a shift away from environmental and social agendas to focus on fundamental corporate governance and management practices. This collective insight from industry leaders indicates a broader trend in investor evaluations where strong governance and strategic positioning are becoming paramount.

Bottom line: As companies navigate these evolving dynamics, the key takeaway is clear: Adaptation is essential for staying ahead in the rapidly changing corporate governance landscape.