In addition to those regarding the “E” and the “S” of ESG, we at Strive encountered a number of shareholder resolutions which concerned the “G,” or governance. As with other ESG measures, such proposals are often tendered by aggrieved political actors who—having failed to garner support in the legislatures or the courts—now look to the corporate sphere to reshape society. Whether it be forcing race or gender quotas on corporate boards, or lowering the proxy access threshold, shareholder activists can use changes in corporate governance structures to their advantage, strong-arming companies into adopting drastic, anti-fiduciary policies. They may hide behind the seemingly benevolent veil of “shareholder rights”; but in reality, these proposals would ultimately hurt shareholders, as well as the companies in which they invest.
The “G” proposals also include more standard corporate fare—issues that tend to garner less attention, but are important to get right, nonetheless. We have therefore shared our views on some of the major “G” issues we voted on this year to give you a sense of the breadth of proposals we encountered and the way we think about them.
Shareholder activists frequently targeted companies’ board nomination processes to advance their diversity goals. While nearly every company commits to selecting board nominees from a diverse pool of candidates to consider a variety of perspectives, backgrounds, and skills, many companies take it a step further and implement quota-like racial or gender targets. This past proxy season, several companies that did not place express value on gender or race during the board selection process faced board diversity proposals, urging them to establish specific quotas.
Other proposals have openly called for more diversity on boards, specifically regarding race and gender. With the SEC’s approval, Nasdaq has mandated that companies appoint a certain number of female, minority, and LGBTQ+ directors. However, this mandate is currently being reviewed by the U.S. Fifth Circuit Court of Appeals, as part of a suit filed by the Alliance for Fair Board Recruitment and the National Center for Public Policy Research.[91]
Businesses should be empowered to pursue excellence above all—above politics as well as bureaucracy—and an essential component of a company’s success lies in its leadership. Therefore, decisions regarding board composition should generally be deferred to the company because they know best the company’s operational needs, the appropriate methods to satisfy those needs, and the most qualified individuals to oversee such efforts. To install individuals on the board of directors on account of some immutable characteristic such as race or sex not only circumvents the objective vetting process but also creates significant governance risk by granting authority to potentially under-qualified directors.
Furthermore, there is no persuasive evidence that increasing racial and gender diversity increases financial performance.[92] In fact, much of the available evidence suggests that the opposite might be true. Texas A&M professor Jeremiah Green and University of North Carolina professor John Hand, for example, were unable to find a statistically significant correlation between financial performance and board diversity in S&P 500 companies.[93]
In another analysis, Dr. Katherine Klein of Wharton concludes, “Rigorous, peer-reviewed studies suggest that companies do not perform better when they have women on the board.”[94] Harvard Law professor Jesse Fried further explains that “rigorous scholarship—much of it by leading female economists—suggests that increasing board diversity can actually lead to lower share prices.”[95]
Strive opposes corporate quotas at any level of a company, because they deprioritize merit, deter talent, increase legal risks, and harm shareholder value. Consequently, we voted against such board diversity proposals, in order to preserve meritocracy in corporate board selection.
In 2022, NorthStar Asset Management, an ESG investment company, submitted a proposal at Home Depot that called for racial and gender equity on the Board of Directors.[96] Despite the Board’s objection, the proposal passed. In 2023, the National Center for Public Policy Research (NCPPR) submitted a proposal to rescind the resolution, and this time, the Board did an about-face: Due to activist pressure, Home Depot’s Board supported NorthStar’s 2022 proposal and recommended voting against the NCPPR’s measure. This is a prime example of how activist shareholders can push a company down a dangerous, anti-fiduciary path that has negative implications for corporate performance and shareholder return. As the NCPPR explains in its supporting statement, “To the extent that Home Depot hires, promotes, or trains on the basis of any metrics other than merit, it violates its fiduciary duties by privileging considerations that cannot enhance the financially measurable return on shareholder investment.”[97] Strive strongly concurs and thus voted for the NCPPR’s proposal.
This year, we saw several proposals that aimed to make it easier for shareholders to call special meetings, make proposals, and otherwise change corporate behavior. Although such measures might appear to promote greater shareholder freedom, they expose the company to further attacks from activist investors, including those pursuing value-destructive ESG goals. Accordingly, we generally opposed such proposals, especially when the company management advised against them.
A shareholder placed a proposal on the 2023 Abbott Laboratories ballot to reduce the threshold for calling a special meeting to a mere 10 percent of shareholders.[98] With such a low bar, virtually any activist could strong-arm Abbott into hearing their demands by threatening to call such a meeting. If the issue at stake were truly relevant to the wider body of investors, then it should not be difficult to garner the current 20 percent of shareholder votes required to call the meeting; if less than 20 percent of shareholders were interested in the meeting, holding it would be a waste of company resources and unlikely to increase shareholder value. Therefore, Strive voted against this proposal.
This year, one proponent attempted to lower the required stock ownership amount to nominate an independent director at Wendy’s from three percent to two percent.[99] In our view, if the bar for nominating directors were set too low, insurgent investors could bombard company boards with nominees every year, specifically nominees whose interests are contrary to those of the company. The three percent standard for proxy access is not insurmountable, and it serves as an important safeguard against actors who seek to radically alter corporate board composition. Because lowering the threshold to nominate directors does not appear to increase long-term shareholder value, Strive voted against the proposal.
Kraft Heinz currently requires a supermajority vote in order to remove directors without cause; actions such as amendments to company by-laws, as well as the uncontested election of directors, can already be approved by a simple majority. This year, Kraft faced a shareholder proposal to eliminate the supermajority requirement so as to make it easier to remove directors.[100] Since this proposal was not linked to any demonstrable increase in long-term shareholder value, and because it could make Kraft a future target for activists who do not have shareholders’ best financial interests at heart, Strive voted against the proposal.
United Rentals faced a proposal this year to lower its threshold for shareholders to act by written consent, meaning that they could vote on issues without the need to call a special meeting.[101] Before the annual meeting, United Rentals had set its written consent threshold at 32 percent, whereas the shareholder proposal in question attempted to lower the bar to a paltry 10 percent. There is, as always, a balance between upholding shareholder rights and having sound corporate governance; United Rentals put forth its own proposal to lower the written consent threshold to 15 percent. To venture much below that, however, could expose the company to frivolous proposals or, worse, insurgent investors. Such exposure is unlikely to generate long-term financial value, and thus Strive voted against the shareholder proposal and for the management proposal.
During this past proxy season, we encountered many shareholder proposals that advocated the separation of a company’s CEO and the chairman of the company’s board of directors. Similar proposals demanded that the board chairman be an independent director on the board—that is, someone who has not been an employee at the company and does not have a material interest in the company.
There has been good reason to separate the CEO and chairman in years past. For example, we would have supported prohibiting former CEO Jeff Immelt from serving as chairman at General Electric. Although Immelt guided GE out of the turbulent 2000s, company performance sagged from his over-emphasis on some facets of the organization, such as GE Capital, as well as various investments and acquisitions that were ultimately unsuccessful. Had a board chair independence proposal been put forward at a GE shareholder meeting, Strive would likely have supported it.
There remain certain companies today where the two positions should indeed be held by different individuals. At Meta, for example, CEO Mark Zuckerberg wields an overwhelming and unassailable amount of power due to the company’s dual-class share structure. In this instance, Strive would approve the separation of the Chief Executive and Board Chairman, so that there could be a check on Zuckerberg’s otherwise unchecked control of Meta. Unfortunately, Meta did not face a proposal for an independent chair this year.
That said, empirical evidence does not support separating the CEO and chairman in the vast majority of cases.[102] Rather than to encourage more accountability or better company performance, many activist investors today target corporate boards in order to push pro-ESG agendas, as did Engine No. 1 when it waged a (successful) proxy contest at Exxon in 2021. In such an event, a chairman who were not the CEO or had no connection to the company would be more susceptible to removal by rebel shareholders. On the other hand, if the chair were also the CEO, then it would be much more difficult to unseat him or her, thereby stymieing ill-intentioned shareholder campaigns.
In short, we believe that chairman independence is not always de facto good governance and thus should be determined on a company-specific basis.
Shareholders can hold companies accountable for anti-fiduciary behavior in a variety of ways, including litigation. Nevertheless, some shareholder activists have, counterintuitively, presented proposals to mandate individual arbitration: Instead of allowing shareholders to take companies to court, the injured parties would be limited to making their case before a third-party arbitrator and could only do so individually, rather than as part of a class action claim. Such provisions would make it more difficult for shareholders to seek recourse in the event that the company breaches its fiduciary duties, particularly if the breach affects many shareholders with small holdings that may not be worth pursuing individually.[103] Further, mandatory arbitration requirements may not even be enforceable under Delaware law.[104] Given our concerns about these proposals, and their unlikelihood to increase long-term shareholder value, Strive voted against them.
A shareholder proposal at Johnson & Johnson’s 2023 meeting asked the company to revise its bylaws to require shareholders arbitrate disputes on an individual basis, rather than allow securities lawsuits to proceed in court.[105] The company opposed the proposal, explaining that it had a strong record of abiding by its fiduciary duties and that “other than the proponent of this shareholder proposal, none of our other shareholders have expressed to us an interest in having us adopt a mandatory arbitration bylaw.” Although Strive appreciates efforts to limit company legal expenses, the proponents provided no evidence that depriving shareholders of the right to sue in court is an effective way to maximize those same shareholders’ long-term value. Strive therefore agreed with J&J’s recommendation and voted against the proposal.
In late 2022, the Delaware legislature amended Delaware General Corporate Law to extend a provision allowing for the limitation of personal liability for breaches of the fiduciary duty of care to the executive officers of a corporation. Previously, such exculpation pursuant to General Corporate Law Section 102(b)(7) was only available to the non-executive directors of a corporation. To implement this limitation of executive officer liability, corporations must amend their articles of incorporation, which requires approval by a shareholder vote.
Following this change, 26 proposals seeking executive officer exculpation amendments appeared on proxy ballots for S&P 500 companies.[106] In practice, it is rare for any director or officer of a corporation to be found liable for a breach of the fiduciary duty of care.
But when it does happen, Strive believes it is important for shareholders to have adequate recourse, including the ability to name the breaching directors and officers as defendants in the suit. In response, companies often rationalize this limit on liability as necessary to attract and retain qualified executive officers. But, of course, Delaware companies have had no trouble recruiting top-tier executive talent to date.
In addition, nearly all large, publicly traded companies carry director and officer insurance policies that protect against such claims, so that shareholders can be adequately compensated in the event of a serious breach without bankrupting the company itself or deterring would-be executives from taking the job.
Strive’s focus on fiduciary responsibility is incompatible with such amendments seeking to limit any fiduciary duty owed to the shareholders. While it may be true that these exculpation clauses could have a chilling effect on frivolous litigation that could be costly to corporations, we believe that further eroding the accountability of corporate management to its shareholders is a misguided solution that is unlikely to increase long-term financial value for shareholders.
When determining whether any potential merger, acquisition, or related business combination is likely to favor long-term shareholder interests, Strive takes a four-pronged approach, focusing on: financial fairness, fiduciary responsibility, transaction motivation and shareholder sentiment.
Throughout the 2023 Proxy Season, Strive voted for 90 percent of merger related proposals. Our high transaction approval rate stems from a slowing M&A market (down 16 percent YoY through May),[107] and unfavorable deal-market conditions leading to a low number of contested and controversial public M&A transactions.