October 12, 2022 Agenda Features Bruce Goldfarb’s Views on ESG Investor Campaigns and the Universal Proxy

Investors that publicly denounce companies’ ESG efforts are pressuring boards to name new directors; halt diversity, equity and inclusion programs; and increase investments in fossil fuels. These investors are moving beyond shareholder proposals and using many of the same tools pro-ESG investors often do — including letter-writing campaigns and, likely soon, the universal proxy, sources said.

For example, late last month, right-leaning nonprofit group the National Legal and Policy Center (NLPC) sent a letter to ExxonMobil’s board affairs committee asking it to nominate Donald van der Vaart, chief administrative law judge and director of the office of administrative hearings for North Carolina, to its board. The NLPC wants Exxon’s board to endorse van der Vaart, who formerly served as secretary for the North Carolina Department of Environmental Quality, as a board candidate.

The group wrote in a separate statement that once it knows Exxon’s decision it would “consider” its options, but highlighted in the press release the benefits of the universal proxy rule.

The group also wrote about van der Vaart’s call for “responsible fossil fuel development to sustain and expand the economic flourishing of the human race, while protecting the environment and its resources” as well as his research related to the risks of ESG investment priorities for pensioners, among other topics.

NLPC noted in the board letter that it had withdrawn a shareholder resolution on board diversity after “some good discussions” with Exxon’s investor relations and ESG management teams earlier this year. “We hope that consideration of Mr. van der Vaart’s potential role is similarly regarded and discussed,” the group wrote.

Experts say the move is likely one part of the group’s larger strategy.

“Companies don’t like to be told what to do in a public forum,” said Bruce Goldfarb, president and CEO of proxy solicitor Okapi Partners. “I don’t know what the process was behind the NLPC putting out this information publicly, but I presume either someone told them no or they didn’t get enough attention. It’s usually about more than getting someone on the board.”

The Exxon nomination comes soon after Strive Asset Management, the self-described anti-woke asset manager that pushes companies not to “mix business with politics,” sent letters to Apple, Chevron and Disney decrying ESG-related moves that the firm says is destroying value.

For example, Strive asked Chevron to produce more fossil fuels, discouraged the company from adopting Scope 3 emission reduction goals, and asked the company not to produce sustainability or ESG reports “unless you can demonstrate that such activities contribute to creating shareholder value,” wrote Vivek Ramaswamy, executive chairman of Strive, in the letter to Chevron.

“We have investors with points of view on all aspects of our business and certainly they’ve put forward some strong opinions on some things,” said Mike Wirth, chairman and CEO of Chevron, during a video interview with Bloomberg last month. “We engage with all of our shareholders and look forward to doing the same with Strive to understand better what they think, and it always helps to inform us and make us better.”

Strive has also launched two ETFs with the intention of pressuring companies to drop climate and DEI goals.

Sources advise boards to handle these situations carefully — it’s important to balance investor demands and take threats seriously, while also not getting distracted by noise meant to draw attention to specialized issue focuses. With the universal proxy in play, boards should expect more of these special-issue investor proxy fights on both sides of the ESG aisle, sources said.

“Boards are wise to prioritize the issues that are of particular importance to their shareholders, and advocacy groups that aren’t shareholders may receive less attention from boards,” said Chris Drewry, a corporate partner in Latham & Watkins’ Chicago office. “I think there’s noise on both sides — there’s a push on the ESG side, perhaps disproportionate, for the focus on managing the business, and the countervailing push as well.”

Universal Proxy

The universal proxy has been in play for more than a month, and sources say issue-driven investors are talking behind the scenes and preparing to use it.

According to Goldfarb, at many companies it’s easier to use the universal proxy than proxy access, the tool by which investors can nominate directors to a company’s board if they own a certain percentage of stock for a certain number of years. The universal proxy doesn’t have any stock-ownership hurdle and merely requires the investor to solicit 67% of holders.

Although the NLPC has not officially nominated van der Vaart using the universal proxy process, sources said they expect that investors like them will do this soon, and that this is just a taste of what’s to come.

“The universal proxy lowered the required expense to run a proxy contest significantly for special interest groups, including groups that pursue single issues,” said Kai Liekefett, co-chair of Sidley Austin’s shareholder activism practice. “I think what we are about to see is that a lot of these special interest groups who previously relied on proposals are going to use this new mechanism as a new tool to put pressure on target companies to pursue their agenda.”

Goldfarb said it’s important not to completely ignore a situation like the NLPC’s board recommendation.

“It’s inadvisable in 2022 to not take a proposal [or director nomination] that reaches your offices seriously,” Goldfarb said. “You have to recognize that an investor has been given a forum to discuss the issues of significance to that investor, and that other investors may share that interest. It means you do have to address the issue in a serious way.”

This means boards should explain to their investors why they shouldn’t be supportive of the investor’s campaign, and how and why the company is considering the issues brought up, and should also emphasize that the company is taking appropriate actions to address the issues, Goldfarb said.

“Whether a campaign is pro-ESG or anti-ESG, you can’t be dismissive of either one,” Goldfarb said. “If you are, that could impact the results.”

Liekefett said “there’s a world of difference” between a proxy fight with a “professional” activist like Elliott Management or Starboard Value and a proxy contest with a special interest group. But companies should still prepare in the same way, though maybe not to the same extent.

“The latter is more of a nuisance than anything else, but it still means [the board has] to respond to things as there is more of a microscope on their own director candidates now,” Liekefett said. “At the end of the day, I believe proxy contests initiated by special interest groups will be rarely successful. But you shouldn’t take the risk of being dismissive without taking certain steps to ensure you are defended.”

Drewry added that it “remains to be seen” whether an advocacy group is willing to incur the costs associated with creating and mailing proxies that are part of the universal proxy rule.

Meanwhile, as part of a shareholder’s evaluation of a proxy fight or shareholder proposal, they evaluate not just the nominees or proposals put forward, but also the proponent and why they commenced the campaign, Goldfarb said. Boards should keep this in mind, he added.

Experts predict most of these issue-specific proxy contests will use the universal proxy to focus on pro-ESG issues. Indeed, over the past year, companies witnessed a taste of what future ESG-focused activism campaigns would look like.

These campaigns include Bluebell Partners at Glencore, Carl Icahn at Kroger and McDonald’s, Elliott Management at Suncor, Legion Partners at Guess, Starboard Value at Huntsman and Voss Capital at Griffon. Most of these campaigns also included a financial performance or operational element. As of July 31, there were 51 activist campaigns that included some type of ESG element, according to Insightia.

Other Tactics

Beyond the universal proxy, investors of all stripes, including anti-ESG, are continuing to employ letter-writing campaigns to draw attention to specific issues.

For example, in Strive’s letter to Apple, the firm asked the company to “[r]escind any commitments to conduct a racial equity audit and commit to making all employment decisions based on merit, without regard to race, sex, or political beliefs.” The firm wrote that racial equity audits “embrace and perpetuate identity politics” as well as “increase in-company racial division rather than ameliorating it.”

A proposal asking for the audit at Apple received majority support earlier this year.

Meanwhile, Strive’s letter to Disney focused on the company’s “public embrace of controversial political positions in deference to social activists.” In the letter, Strive asked Disney to “[a]dopt a formal corporate policy that Disney does not take public positions on political controversies that are unrelated to the company’s core business operations” and “publicly commit to political nondiscrimination amongst its employees and customers,” among other asks.

ESG-focused investors have long used public letters sent to boards and managements as a way to draw attention to causes. Groups including the Interfaith Center on Corporate Responsibility, Investor Advocates for Social Justice, the New York City Pension Funds, the SOC Investment Group, Trillium Asset Management and others have sent letters to large public companies on a range of issues.

Meanwhile, shareholder proposals are still a popular tool. As Agenda has reported, more conservative-leaning and anti-ESG proposals were filed for this proxy season — 54, up from 25 last year.

As ESG continues to grow in popularity, C-suite executives are becoming more vocal about their concerns with the attention placed on those issues. For example, according to a recent survey of 21 CFOs from CNBC, 45% said they supported recent moves by states to ban using ESG factors in pension fund investing, and only 25% supported the SEC’s climate disclosure proposal.

Additionally, according to a new survey from PwC, 57% of more than 600 directors surveyed said ESG issues are linked to company strategy, down from 64% last year. Fewer than half (45%) of directors think ESG issues have an impact on company performance, down from 54% last year.

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