Today, that positioning has all but disappeared in what seems like an instant. Companies are jettisoning diversity, equity and inclusion programs and environmental, social and governance initiatives as quickly as they ever hugged them. Evidence of this shift is emerging in proxy statements from companies across industries, as DEI and ESG disappear as considerations for executive compensation plans and board composition.
Consumer goods manufacturer Procter & Gamble announced in a filing with the Securities and Exchange Commission in August that it had removed an ESG metric from its compensation structure. According to the company, the ESG consideration has “served its purpose by strengthening the integration of environmental, social and governance priorities” into Procter & Gamble’s mission. MasterCard made a similar disclosure in April, stating that removing an ESG factor from its compensation plans “reflects the significant progress made since 2021 on greenhouse gas emissions, financial inclusion and gender equality.” Salesforce dropped ESG from its compensation metrics a year earlier and revealed that it was limiting its definition of corporate performance to “pre-established financial performance measures and objectives.”
Recent decisions from Goldman Sachs provide insight into the investment community’s consensus on corporate America’s budget cuts. Last year, the banking powerhouse dropped the mandate that companies must have different boards of directors before Goldman can take them public. News then broke this month that Goldman eliminated its own requirements to consider factors such as race, gender and sexual orientation when evaluating candidates to add to the board.
For business activists hoping to turn the tide in favor of sustainability and similar issues, the regulatory environment appears equally unaccommodating. The SEC recently issued guidance stating that it opposes publishing so-called exempt solicitations from shareholders who do not own at least $5 million worth of a company’s stock. That effectively stops smaller activist investors from using any of their favorite strategies to promote their corporate agendas.
In addition, the SEC’s Division of Corporation Finance announced in November that it planned to stop providing substantive responses to most companies’ requests for informal guidance on the decision to exclude shareholder proposals from proxy votes. Instead, the agency has taken the position that companies should determine for themselves whether they have a “reasonable basis” to reject the proposals. It appears that the guidelines are most likely to impact DEI and ESG-related proposals and counter-proposals.
In other words, activist investors will find it more difficult to submit their proposals for approval, thanks to the SEC’s new policy. Moreover, they face new restrictions on how they can lobby for those proposals if they land on proxy statements.
Given the rollbacks of existing programs, it appears that DEI/ESG advocates are in control. In response to this Some activists are taking their cases to court. For example, PepsiCo has been sued for excluding an animal welfare proposal from the proxy vote. Meanwhile, New York City pension funds have sued AT&T over its exclusion from a proposal for reporting on workforce diversity. (It’s worth noting that in a letter to SEC Chairman Paul Atkinsthe Council of Institutional Investors warned that companies that exclude shareholder proposals under the agency’s new framework could face no-vote campaigns and lawsuits.)
Opponents of DEI and ESG programs appear to have gained the upper hand in boardrooms for the time being. However, they may find these battles harder to win in courtrooms.
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