United States: What's Next For Diversity Shareholder Proposals? A Look At Recent Trends

Following the death of George Floyd and mass protests against racial inequity in 2020 culminating years of slowly building stakeholder pressure on various aspects of diversity, many companies expressed their commitment to racial justice and implemented or enhanced diversity, equity and inclusion (DEI) programs. Such programs included setting hiring and promotion goals for racial minorities, contracting with minority-owned suppliers and service providers, and providing scholarships or grants to institutions providing services to minority communities. There was also a similar increase in diversity-related shareholder proposals such as those related to board diversity, conducting civil rights or racial equity audits and reporting on the effectiveness of DEI programs, some of which received relatively high levels of support from shareholders. However, more recently, there has been some backlash against DEI programs (and ESG initiatives more broadly), including calls by some opponents to dismantle them.

This report examines recent trends in support of DEI programs and recent pushback as revealed by annual meeting proxy voting for DEI-related shareholder proposals since 2020. This report also discusses the voting guidelines and stewardship policies of three of the largest asset managers—BlackRock, Vanguard and State Street (the "Big Three")—related to DEI shareholder proposals and their recent voting records on key DEI proposals, which can influence the success of such proposals, and compares it to their support of DEI shareholder proposals for the 2023 proxy season. Finally, we suggest some ways that companies can navigate the conflicting demands from various stakeholders regarding their DEI programs and initiatives in the current environment.

Recent Backlash

In the wake of the Supreme Court's decisions in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. UNC in June 2023, effectively ending affirmative action in college admissions, opponents of DEI programs may become more emboldened to increase their attacks on such programs by contending that they violate anti-discrimination laws. In July 2023, 13 attorneys general sent a letter to the CEOs of Fortune 100 companies warning them that their DEI programs could violate federal and state anti-discrimination laws. This follows campaigns in the last couple of years in which conservative activists have sent letters claiming that corporate DEI programs are discriminatory and demanding that companies dismantle their DEI initiatives or face legal action. Furthermore, such activists have also sent requests to the Equal Employment Opportunity Commission (EEOC) for civil rights investigations into the hiring and promotion practices of companies for their diversity initiatives. As discussed in more detail below, opponents of DEI initiatives have also used the shareholder proposal process for annual meetings as part of their attempts to weaken or eliminate DEI programs.

Opponents of environmental, social and governance (ESG) initiatives have accused the shareholder proposal process of being hijacked to promote social causes such as DEI at the expense of investor returns. In July 2023, the Committee on Financial Services of the U.S. House of Representatives held hearings on ESG in which certain representatives argued against ESG shareholder proposals and rulemaking, and proposed legislation that would limit the ability of shareholders to submit and vote on ESG-related shareholder proposals. In addition, Securities and Exchange Commission (SEC) Commissioner Mark Uyeda has suggested that companies adopt charter provisions to restrict the types of proposals that shareholders can submit, removing the SEC from its role of granting no-action relief in the shareholder approval process.

Also, in April 2023, the National Center for Public Policy Research (NCPPR), a conservative activist group, petitioned the Fifth Circuit Court of Appeals after the SEC agreed that The Kroger Co. could exclude its shareholder proposal regarding viewpoint discrimination under the "ordinary business" exception provided by Rule 14a-8(i)(7) of the Securities Exchange Act of 1934. The National Association of Manufacturers (NAM) successfully moved to intervene in the case, allowing it to ask the court to hear the question of whether the SEC has the right to compel a corporation to use its proxy statement to address any issues unrelated to its core business or the creation of shareholder value through the shareholder proposal process. The Fifth Circuit has yet to issue a ruling, and it is unclear whether it will reach the merits of the case or whether any substantive ruling will address the larger issue raised by NAM regarding the SEC's role in approving environmental and social proposals.

An adverse court decision or new law or regulation could hamper the use of shareholder proposals to address DEI concerns in the future.

While there are efforts to resist this backlash (for example, 21 attorneys general sent a letter to the Fortune 100 CEOs expressing support for their DEI initiatives and seeking to reassure them that such efforts are legal and reduce corporate risk), companies appear poised to face increasingly competing pressures in this area.

Finally, shareholder activists have attempted to attack corporate DEI programs through the shareholder proposal process. The 2023 proxy season saw a significant increase in the number of so-called anti-ESG proposals submitted for annual meetings, including shareholder proposals opposing DEI initiatives. Sometimes the resolution language seemed facially neutral or supportive of a DEI initiative such as conducting a racial equity/civil rights audit or assessing the effectiveness of DEI programs, but the proponent identity or supporting language in the proxy statement belied a hostility to the applicable DEI program or initiative or implied that it was discriminatory or unjustified—at least in the view of a broad swath of investors and observers.

DEI Shareholder Proposals in 2023

Below, we outline some of the more common DEI-related shareholder proposals from the 2023 proxy season. The data used in our analysis was provided by Proxy Analytics. As used in this report, the proxy season refers to the period from July 1 – June 30 in which an annual meeting was held (e.g., the 2023 proxy season includes annual meetings held during the period from July 1, 2022, through June 30, 2023).

Racial Equity/Civil Rights Audits

Proposals for racial equity/civil rights audits, one of the more successful diversity-related shareholder proposals from the 2022 proxy season, saw a precipitous decline in 2023 in terms of the number of proposals and the level of support for them. These proposals generally ask a company to commission an independent review of the impact of its policies, practices and products or services on racial minorities (in the case of racial equity audits) or a broader protected class of individuals (in the case of civil rights audits). The input of a company's stakeholders, including employees, customers and civil rights organizations, was often sought as part of the assessment. Such audits may be conducted to identify potential biases in employee hiring or promotion, measure progress against stated diversity goals, identify ways to improve upon existing DEI policies and procedures, and assess product impact on diverse communities.

For the 2023 proxy season, 29 shareholder proposals were submitted, with 16 proposals going to a vote and none passing. This contrasts with the 2022 proxy season, in which 40 proposals were submitted, with 23 going to a vote and nine receiving majority support. Average support for these proposals was 22% in 2023 compared to 46% in 2022.

For anti-ESG racial equity/civil rights audits, the number of proposals submitted in 2023 increased to 12 from 10 during the 2022 proxy season. Average support for the proposals remained flat at just 2% in 2023, with eight companies voting on the proposals.

Report on the Effectiveness of DEI Efforts

These proposals generally request that a company produce a report to shareholders on the effectiveness of its DEI efforts using quantitative metrics for hiring, retention and promotion of employees, including data by gender, race and ethnicity. During the 2023 proxy season, shareholders submitted 34 such proposals, representing a slight increase from the 29 proposals submitted during the 2022 proxy season. However, average support for DEI effectiveness reporting proposals declined from approximately 37% for the 2022 proxy season to just 27% for the 2023 proxy season, with only one proposal passing out of the six on which shareholders voted.

Anti-ESG proposals on this topic were filed for the first time for the 2023 proxy season, with three proposals submitted and voted on. However, these proposals fared poorly, averaging less than 1% support. Generally, they requested that the company provide a report on the cost/benefit of DEI programs, implying that such programs lacked benefit and were potentially harmful—or at least that there is not empirical basis justifying the expense.

Gender/Racial Ethnic Pay Gap Disparity

These proposals generally sought for companies to report the disparity in compensation based on gender and/or race or ethnicity in a company's workforce. The requested report would provide both quantitative median and adjusted pay gaps across race and gender, and include associated policy, reputational, competitive and operational risks, and risks related to recruiting and retaining diverse talent. Overall, the number of these proposals increased almost 50%, from 11 proposals in 2022 to 16 in 2023. However, although 10 proposals went to a vote in 2023, only one proposal passed compared to two out of seven proposals in 2022. In addition, after showing increases in the last few proxy seasons, average support for these proposals fell slightly in 2023 to 34% compared to approximately 39% average support in 2022.

Report on Racism in Company Culture

This type of proposal seeks for the company's board of directors to prepare a report analyzing whether the company's written policies or unwritten norms reinforce racism in company culture and including any planned remedies. In the supporting statement, the company is encouraged to consider consulting outside expertise and to elicit feedback from employees. Although the number of these proposals increased slightly, from three in 2022 to four proposals in 2023, average support fell from approximately 18% to just 11%, with no proposals passing in 2023 or 2022.

Board Diversity

These proposals generally requested that the company's board prepare a report on steps the company is taking to enhance gender and racial and ethnic board diversity. Suggested actions to increase board diversity included disclosing a commitment to gender, racial and ethnic diversity in governance documents; committing to include diverse candidate slates for board seats; disclosing the gender, racial and ethnic composition of the board of directors in the proxy statement; and discussing board strategies to reflect diversity in the company's workforce, community and customers. The companies receiving these proposals generally did not disclose any racial or ethnic board diversity and/or had no or limited gender and racial/ethnic diversity. The number of board diversity proposals decreased significantly in 2023, from 15 proposals in 2022 to just six proposals, of which shareholders voted on four. Although average support for these proposals increased to 19% from 11% in 2022, none passed in either proxy season.

Proxy Voting Trends Since 2020

Prior to the 2023 proxy season, the number of DEI proposals had increased significantly since 2020, most likely in response to the racial justice movement previously discussed. However, the 2023 proxy season saw a significant decline in the total number of DEI proposals, from 129 in the 2022 proxy season to 106. Of this number, 17 were so-called anti-ESG proposals, which increased from 12 for the 2022 proxy season.

In addition, there was a general decline in the support for DEI proposals in the 2023 proxy season—average votes in favor of proposals related to the effectiveness of DEI programs, racial equity/civil rights audits, gender and racial/ethnic pay gap disparity, and racism in company culture all decreased compared to 2022. On the other hand, although the number of anti-ESG DEI proposals increased, they garnered very low levels of shareholder support.

Below is an analysis of the voting results of some of the most common DEI shareholder proposals since the 2020 proxy season.

The trend in support for DEI-related shareholder proposals reflects the overall trend in social shareholder proposals in recent years. According to ISS, shareholder proposals for annual meetings held between Jan. 1 and May 31 jumped 14% from 2020 to 2023 at companies in the Russell 3000 Index, with social proposals composing approximately 35% of such proposals. However, social proposals declined in average shareholder support to approximately 25% and 23% in 2022 and 2023, respectively. Commentators, including ISS, have speculated that the decline in support stemmed from the more prescriptive nature of environmental and social proposals since the initial success of these proposals in 2021. Seeing the strong support that many social and environmental proposals received in 2021, many companies had addressed or promised to address the social and environmental concerns that were the subject of shareholder proposals, insulating them from subsequent, more aggressive proposals from activist shareholders or allowing for the successful negotiation of a proposal withdrawal. Institutional investors have also indicated that they would vote against shareholder proposals where companies have taken actions to oversee ESG-related activities or have provided sufficient ESG-related disclosure. Accordingly, more recent environmental and social proposals, including DEI proposals, have failed to garner the level of support enjoyed by earlier shareholder proposals.

The Role of Institutional Investors

Many large institutional investors have voiced support for DEI initiatives and indicated in their voting guidelines that they may vote in favor of diversity proposals. This support can be seen in the proxy voting guidelines and policies of the Big Three.

BlackRock

According to BlackRock's Proxy Voting Guidelines, "[c]ompanies should disclose the steps they are taking to advance diversity, equity, and inclusion; job categories and workforce demographics; and their responses to the U.S. Equal Employment Opportunity Commission's EEO-1 Survey." BlackRock's guidelines further state that it may vote against members of the appropriate committee or support relevant shareholder proposals where it believes that a company's disclosures or practices lag the market or peer companies, or it is unable to ascertain the board and management's effectiveness in overseeing related risks and opportunities. BlackRock also states in its commentary on human capital management that it seeks to "understand a company's efforts to recruit, retain, and develop diverse talent, create an inclusive workplace for all workers, support executive training for underrepresented groups, and address any compensation gaps across different workforce demographics."

Nevertheless, for the 2023 proxy season, BlackRock has seemingly scaled back some of its language regarding its push for the implementation of ESG initiatives in its engagement priorities and other public communications regarding its stewardship role. For example, BlackRock's CEO has stated that he will no longer use the term "ESG" in response to the backlash and politicization of ESG initiatives.

BlackRock's voting for some of the DEI shareholder proposals for the 2023 and 2022 proxy seasons are presented in the table below.

Vanguard

Under its U.S. Proxy Voting Policy, Vanguard may support shareholder proposals that request disclosure of workforce demographics (inclusive of gender, racial and ethnic categories), the board's role in overseeing material DEI risks, a company's approach to board diversity and inclusion of protection for underrepresented groups or protected classes in a company's policies. However, such proposals should address a shortcoming in disclosure relative to market norms, reflect an industry-specific, materiality-driven approach and not be overly prescriptive. While Vanguard generally supports proposals regarding disclosure of DEI-related risks, changes to its policy in 2023 suggest less definitive support for such proposals from previous years (e.g., Vanguard recently changed from "is likely" to "may" in discussing its probability of support for environmental and social shareholder proposals).

Vanguard's voting for some of the DEI shareholder proposals for the 2023 and 2022 proxy seasons are detailed in the table below.

State Street

Pursuant to its Global Proxy Voting and Engagement Guidelines for Environmental and Social Factors, State Street will consider voting for proposals that will lead to alignment with expectations regarding public disclosure of board oversight of DEI risks and opportunities; DEI as it relates to human capital practices and long-term strategy; DEI goals, employee and board DEI metrics; and board diversity. State Street expects companies to provide disclosures in these areas and will consider the materiality of the proposal to a company's business and sector, its content and intent, the strength of the board's oversight of DEI and the prescriptiveness of the proposal in deciding whether to vote in favor of a DEI shareholder proposal. In 2023, it expanded its guidelines to state its expectations that U.S. companies publicly disclose their risks related to civil rights and adjusted pay gaps related to race and gender.

State Street's voting for some of the DEI shareholder proposals for the 2023 and 2022 proxy seasons are detailed in the table below.

Big Three Support for DEI Proposals in 2023

As indicated above, the number of the DEI shareholder proposals supported by BlackRock and Vanguard in the 2023 proxy season declined significantly, with the exception of proposals related to board diversity. In fact, with the exception of the board diversity proposals, which the Big Three supported at the same three companies, Vanguard did not vote in favor of any of the DEI shareholder proposals. State Street also supported fewer proposals in 2023 but broke with BlackRock and Vanguard in supporting a report on racism in company culture proposal at one company and splitting support for that proposal among its funds at a second company. Notably, at the three companies where the Big Three all voted in favor of their board diversity shareholder proposals, the companies lacked disclosure of any racial/ethnic diversity on their boards of directors in their proxy statements.

One can extrapolate from the overall recent decrease in support for DEI proposals and the softening of language on these topics in their guidelines that many institutional investors are likely to support only proposals intended to address the most egregious situations where diversity is lacking or DEI policies and practices are significantly below market norms.

Outlook and Recommendations

As companies increase their DEI-related disclosure and successfully negotiate withdrawals of proposals, it is likely that the most prescriptive proposals will end up going to a vote. As indicated by the voting guidelines and recent voting trends of the Big Three and other institutional investors, such proposals are not likely to garner much institutional investor support and will likely fail. Similarly, given institutional investor policies supporting DEI initiatives, it is unlikely that the anti-ESG DEI proposals will gain much traction in the coming years. Nevertheless, companies should monitor the voting policies and stewardship guidelines of these key investors as they continue to respond to anti-ESG activists and regulators.

Despite some recent backlash, there still appears to be strong support for DEI initiatives from various stakeholders. Companies and their boards should continue to monitor developments in this area, including litigation and shareholder activism. A company receiving a properly submitted DEI shareholder proposal, including an anti-ESG proposal, should assess whether it is in the long-term best interests of the company. To reach this conclusion, a company should engage with its key stakeholders to understand their views regarding the actions or initiatives called for by the proposal. Demonstrating that a DEI initiative is aligned with corporate strategy and long-term sustainable profitability will bolster a company's decision and will help to insulate it from unwarranted attacks by DEI opponents.

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