What directors need to know about the 2024 proxy season

Investors believe workforce retention and development plus climate-related business transformation are critically important to long-term resilience. They recognize that companies are addressing urgent near-term challenges this year related to economic uncertainty, capital availability, geopolitical tensions and more, but expect them to maintain focus on long-term priorities while attending to these more immediate issues. Notably, the topics investors want companies to prioritize in 2024 differ from the topics boards will be prioritizing this year.

What investors want companies to prioritize in 2024

Investors want to understand how companies attract, retain and adapt their workforce

Nearly two-thirds of investors said they want companies to prioritize the talent agenda this year. These investors are particularly interested in how companies acquire and retain employees, including how they use compensation, flexibility, and training and development.

A few of these investors cited the recent strikes and collective bargaining efforts in various industries and suggested they are a signal that the paradigm of maximizing profits at the expense of worker satisfaction is being significantly challenged. They believe that these developments are creating higher stakes for companies in a tight labor market and a higher inflation environment and underscore the importance of company leaders being in touch with employee sentiment. Some investors also questioned whether companies have the right people with the right skills and training to execute on the investments the companies are making in digital transformation and innovation, including in AI.

Investors want companies to seize strategic opportunity in the energy transition and decarbonize

A majority (56%) of investors said they want companies to prioritize climate change and environmental stewardship this year. While this may come as a surprise to some who assume deceleration in investor interest in this issue amid a volatile economic environment, investor representatives we spoke with were clear that they continue to see alignment to longer-term growth for climate-impacted companies. Nearly half of these investors said they are most focused on how companies are innovating and adapting their business for a clean energy transition. They want to understand the capital expenditures behind those efforts and how companies are developing new products, services or business models that will help the company thrive in a low-carbon economy.

Investors are also focused on emissions reductions that they say will reduce systemic risk to the global economy and the long-term prospects of investors’ holdings. Additionally, they want to know how companies are managing the physical risks of climate change (e.g., critical industries with geographical concentrations in high climate risk areas, such as semiconductor manufacturers in water-stressed areas).

Investors and directors have different views on priority topics for 2024

Based on our survey of more than 350 directors across the Americas, boards will place top focus on economic conditions, capital allocation, and cybersecurity and data privacy for 2024. Those topics ranked highest among directors in terms of their importance to boards while the talent agenda and climate change and environmental stewardship – the top areas investors want companies to prioritize – ranked fifth and last, respectively.

This difference in prioritization may be explained in a number of ways. For example, directors may be thinking about the board’s time allocation vs. actual business activities, or prioritizing shorter-term areas, or they may think the company is progressing on its climate impact goals and therefore less board focus is needed now. Also, our conversations with asset managers were with individuals from investor stewardship teams, who may have different perspectives on priority topics than portfolio managers. While portfolio managers make investment decisions, stewardship teams make, or advise on, proxy voting decisions and regularly engage with portfolio companies as part of their fiduciary role. Those engagement dialogues tend to have a long-term focus, and that longer term lens informed their approach to this question.

Importantly, investors stressed the challenge of choosing priorities that are applicable to the thousands of companies held in their portfolios and emphasized that their answers would vary significantly depending on the company and what is most material for that business. Finally, these topics are interrelated so there may be common ground despite different prioritization. Still, boards should understand that even if climate change and environmental stewardship ranks low on their list of priorities for 2024, that may not be the case for their shareholders.

Recent developments in the shareholder activism and proxy landscape point to increasing willingness by investors to hold directors accountable. Three items stand out. First, there has been a significant decrease in support for the re-election of certain board and committee leaders in recent years. Second, investor groups have begun signaling opposition to certain director and other management votes.¹ Finally, the impact of universal proxy rules continues to unfold, and we have seen the launch of the first proxy fight by investors who historically used shareholder proposals to push for change.² What we heard from investors underscores that boards should prepare for increasing scrutiny of board effectiveness and director qualifications, and potentially an increasing willingness to vote against directors.

Investors signal greater willingness to vote against directors

Investor discussions indicated different approaches for enforcing their points of view. A third (33%) of investors told us that in the current environment, all other things being equal, they are more likely to vote against specific directors than to vote for a related shareholder proposal if they have concerns about the board’s oversight of material risks and opportunities. These investors characterized director votes as more effective signals of concern when paired with direct communication to the company explaining the intention behind the vote. They indicated that voting in opposition of a specific director also conveys the seriousness with which they are approaching the issue and gives them more agency and flexibility to express their specific expectations on a timeline that they think is appropriate. Some investors also said that to support a shareholder proposal, the proposal would need to be precisely aligned with the investors’ position, and the motivation behind the proposal would need to be perceived as credible, which they said is less often the case in the current environment.

However, 29% of investors said that if they have concerns about the board’s oversight of material risks and opportunities, they are more likely to support a related shareholder proposal and view a vote against directors as an escalation tactic if the company is not responsive. Finally, many investors (38%) declined to choose one option over the other, explaining that they use both levers in tandem or in different ways (e.g., supporting a shareholder proposal related to topics that are still emerging and using the director vote related to well-established expectations) or prefer to focus on engagement to communicate concerns.

Importantly, investors noted that binary solutions, such as voting for or against a shareholder proposal or a director, are difficult given the nuance and complexity around these decisions. This makes engagement critical to understanding shareholders’ precise concerns, expectations and tactics.

The bar may be getting lower for activists making a case for change

Around three-quarters (73%) of investors told us that in considering how to vote on contested director elections, they start with determining whether there is a strategic case for change at the company and consider supporting dissident nominees only when that answer is yes. That aligns with what we heard from investors last year.

However, what is new this year is that a subset of these investors, 29% of investors overall, said that if presented with the right opportunity, they may be willing to support exceptional dissident nominees absent a strategic case for change. Or, put another way, they may consider the need for board refreshment a sufficient case for change. This is a notable shift from last year when more investors were adamant that they would resist supporting marginal change.

Investors said conditions that could contribute to such a decision include: an overly long-tenured board that lacks diversity or strategically relevant expertise; mediocre company performance relative to peers; a lack of investor responsiveness; or the investor having already planned to vote against certain of the company’s nominees based on their voting policies.

Further, an additional 17% of investors said they first and foremost consider the qualifications and experience of each nominee in a contested election and take the case for change as a given. The bottom line for boards is that through universal proxy rules, investors have more flexibility and choice in a contested election. As a result, the bar for the company to make its case may be getting higher, and the bar for activists to secure support may be getting lower.

How should boards demonstrate their expertise in areas like cybersecurity and climate?

Investor stewardship approaches vary. Some investors take a thematic approach and set out topics of focus for the year, often more aligned with long-term matters, and others take a more bottom-up company-specific approach. The nature of those discussions also varies, with investors asking companies to take specific steps in some cases and adopting a less prescriptive approach in others. Highlighted here are the focus areas that came up the most in our conversations with investors.

Topics investors will prioritize in their engagements with companies in 2024

Investors are fundamentally focused on how the board is executing oversight

One key theme is consistent across all the investor engagement priorities – investors want to understand how the board is governing material topics and executing its oversight responsibilities. Accordingly, investors will be asking questions such as:

• How are directors developing the competency needed to effectively oversee this matter?
• How are directors keeping pace with fast-evolving developments related to this topic?
• Who is the board hearing from on this topic, including from management and from external advisors and specialists?
• How often is the board discussing this topic?
• How are oversight responsibilities for this topic assigned at the committee level?

Investors are focused on five engagement topics

Our conversations revealed where investors plan to focus their engagement in 2024. While some topics were raised by a relatively small percentage of investors, in many cases these topics were still the focus of majority-supported shareholder proposals last year. These included employees’ freedom of association, workforce safety and wellbeing, company efforts to prevent harassment and discrimination, and climate lobbying.

1. Climate-related risks and opportunities, particularly for high emitting companies

Climate-related risks and opportunities was the most-cited investor engagement priority last year and remains so this year, with two-thirds of investors citing it as 2024 engagement focus. Many investors (31%) specified that they want companies to adopt science-based targets, which are validated by the Science Based Targets initiative and provide a defined path to reduce greenhouse gas emissions in line with the latest climate science. Where targets are in place, those investors seek climate transition plans that provide clarity on companies’ emissions reduction strategies. Some investors (8%) suggested they will seek disclosure on how companies’ political and lobbying efforts align to their climate commitments.

Investors are particularly focused on how companies will meet near-term emissions reduction targets, and some suggested that absent robust, company-specific explanations, they will hold companies accountable for not meeting those targets. They understand that operating environments change and some room for evolution is needed but said there are only so many times companies can change or miss targets without losing credibility. Investors want evidence that these are credible commitments, and perceived complacency may raise concern.

2. Workforce and board diversity

Thirty-eight percent of investors said they plan to engage companies on workforce or board diversity in 2024, making that the second-most-cited engagement topic this year, in line with last year. Regarding workforce diversity, 19% of investors suggested they will continue to encourage more companies to disclose EEO-1 data and information on the effectiveness of Diversity Equity and Inclusion (DEI) efforts. Racial equity audits, which seek an independent review of the racial impacts of company policies, practices, products and services, also remain on the agenda, with 8% of investors sharing that they will call for such audits or are currently assessing audit outcomes. A few investors (2%) suggested they will be asking companies about their efforts to prevent harassment and discrimination and their use of arbitration and nondisclosure agreements in the context of certain types of allegations such as harassment and discrimination.

In terms of board diversity, 13% of investors suggested they will rachet up pressure on outlier boards that lack gender, racial or ethnic diversity. Note, whether or not investors raised board diversity with us as an engagement priority, many investor proxy voting guidelines inherently keep the pressure on board diversification: Our review of the publicly available proxy voting guidelines of the world’s 20 largest asset managers (based on an external ranking study³) found that board diversity considerations are factored into 88% of those managers’ director voting policies.

3. Strategic workforce issues beyond diversity

Thirty-five percent of investors cited other human capital management topics as an engagement priority, which is in line with last year. Following a wave of labor strikes across different industries, there is growing investor focus on how companies are protecting employees’ rights to organize and collectively bargain and ensuring compliance with federal labor laws. Ten percent of investors suggested they will raise the topic in engagements this year, focusing on companies with allegations of labor rights violations.

CEO and management succession planning is another area receiving increased attention this year. Along with many cases of companies struggling with CEO successions, investors noted seeing significant senior management turnover recently (which complicates CEO succession planning as the internal talent pipeline is disrupted). Investors who raised this topic (6%) shared that they want assurance that companies are planning for longer-term and emergency CEO successions, and that boards are planning for related board leadership changes. A few investors raised strong concerns about former CEOs staying on the board beyond a temporary transition period. 

Investors generally discussed wanting to know how companies are attracting the technology talent they need and upskilling and developing the workforce they have (particularly related to developments in AI), and a few raised concerns regarding the community impacts of workforce transformation. Additionally, 15% of investors suggested they will continue to engage companies on specific policies and practices related to living wage, paid sick leave, employee safety and wellbeing.

4. Nature and biodiversity risks

Around a quarter of investors (27%) cited risks and opportunities related to nature loss and biodiversity (i.e., the diversity within and among species, and of ecosystems) impacts as an engagement focus, up from 18% in 2023. These investors want companies in high-impact sectors to assess their nature-related dependencies as a step to addressing related material risks to the business (e.g., a beverage company’s reliance on fresh water, or a pharmaceutical company’s reliance on a specific raw material for a key product). While several developments are catalyzing action on in this space (e.g., the finalization of the Taskforce on Nature-related Financial Disclosures framework), nature-related business risks and opportunities continue to be an emerging issue; some investors may have specific requests and expectations⁴ but others suggested that they will engage to listen and have introductory conversations.

5. Responsible AI

Responsible AI emerged as an engagement priority for the first time this year. While 19% of investors said AI, and particularly generative AI, will be an engagement focus this year, most investors said it will not be at this early stage. Still, even investors who do not plan to prioritize AI in their engagements said they still expect AI to be a subject of discussion and are considering related questions, such as asking how companies are using AI across the business; managing related impacts on labor and the workforce; identifying and mitigating risks, including related to human rights; adhering to responsible AI guidelines; and allocating capital to AI initiatives. Many investors suggested that they will approach AI-related discussions with high-level questions and a learning mindset, not defined expectations. By far the most-cited topic of interest regarding AI (42% of investors) was governance and the role of the board in overseeing AI risks and opportunities. Investors emphasized a particular interest in related board training and education, including from external experts, to build director competence.