At RBC Global Asset Management (RBC GAM), we believe that proxy voting is an important part of our stewardship process, as it provides a way for us to convey our views to the boards and management of our investee companies. We take an active and thoughtful approach to our proxy voting activities, and we exercise the voting rights of the portfolios we manage in the best interests of our clients, with a view to enhancing the long-term value of the securities held.
Each year, our Responsible Investment (RI) team monitors ongoing developments in corporate governance and, with input from our investment teams, updates the RBC GAM Proxy Voting Guidelines (the “Guidelines”) to reflect current trends and what we believe to be best practices. Each year, many issuers hold their annual shareholder meetings between April and June, a period known as “proxy voting season.” These meetings provide shareholders with the opportunity to vote on a range of issues including the election of directors, executive compensation, and shareholder proposals focused on environmental, social, and governance (ESG) issues, among other items.
In this article, we will outline relevant updates we made to the RBC GAM Proxy Voting Guidelines for 2024, as well as major themes and trends we are seeing in the market.
Notable updates
Nature-related risks
In March 2022, the Network for Greening the Financial System (NGFS), a collaboration of over 100 central banks and supervisors, released a statement acknowledging that nature-related risks could have significant macroeconomic implications, and that failure to account for, mitigate, and adapt to these implications may pose a material financial risk.1 Additionally, research from the World Economic Forum found that over half of the world’s GDP is either moderately or highly dependent on nature and its services.2 The potential systemic impacts of nature-related factors are also increasingly recognized. While not a legally binding agreement, the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF) by 188 countries in December 2022 was an important development as it set out goals, targets, and expectations regarding national commitments that aim to halt and reverse nature loss.3
Despite the global economy’s dependence on nature, efforts to quantify related risks and opportunities have been constrained by a lack of consistent and reliable data and methodologies. Recent progress has been made, with the release of the Taskforce on Nature-related Financial Disclosures’ (TNFD) final recommendations in September 2023.4 The TNFD provides a voluntary framework for issuers and financial institutions, and sector-specific guidance for the disclosure of nature-related dependencies, impacts, risks, and opportunities.5
2024 Guideline updates
This year, we added a new guideline on our approach to voting on shareholder proposals regarding nature-related risks. Following the success of COP15 (Conference of the Parties, the main decision-making body of the United Nations Convention on Climate Change) in 2022 and the launch of the TNFD recommendations, we believe greater focus may be applied on the nature-related risks faced by companies.
We believe investors may benefit from having more information on the governance of material nature-related risks. However, we recognize this is an emerging area with evolving standards. We will evaluate nature-related shareholder proposals on a case-by-case basis.
Auditor tenure
The audit plays an important role in the corporate governance process. Not only does it seek to verify the financial performance of a company, but it also aims to identify deficiencies in the internal control mechanisms of the company. We believe the audit committee has a responsibility to select and appoint an auditor in the best interests of shareholders, and we support the role of the external auditor being put to tender on a regular basis. Generally, we believe external auditor tenure exceeding 20 years is disproportionate compared to market norms.
2024 Guideline updates
In 2023, we engaged with investee companies and a Canadian industry organization on external auditor tenure. These engagements were initiated to discuss our approach to voting on the issue and in 2024 we updated our Guidelines to clarify this approach. We will not vote against the ratification of an auditor if the issuer is following regional requirements for audit tenure and the rotation of the lead audit partner. We support the role of external auditors being put to tender on a regular basis, which means the same auditor can be appointed but only after a competitive review.
Because of the average external auditor tenure observed in the market, our Guidelines also communicate that excess tenure may be a consideration in our assessment of corporate governance risks, if deemed material.
In 2024, to reflect this nuance, we updated our Guidelines to state that we will evaluate the adequacy of sunset clauses on a case-by-case basis
Dual-class stock & unequal voting rights
A company with dual-class shares gives multiple votes per share to a certain class of shares, resulting in unequal voting rights between classes of shares. This violates the principle of one share, one vote. Issuers with multiple voting shares give minority shareholders the ability to make decisions that may not be in the interests of all shareholders, or may not be supported by the majority of shareholders.
We believe there are exceptions where it may be in shareholders’ best interests to continue operating under this unequal voting rights structure. For instance, there may be cases where we believe a founder or group of founders should continue to have control of the company to keep creating shareholder value. We also recognize that when investing in an issuer with unequal voting rights, this is a known factor to the investor, which can be incorporated into the investment analysis. But we believe these limited cases should generally be supported only if there are additional shareholder protections such as a sunset clause or a regular binding vote.
Last year, we updated our voting guideline to state that we may vote against members of governance committees for issuers that have historically used an unequal voting rights structure and do not have adequate safeguards in place for minority shareholders. We defined adequate safeguards to include, at minimum, (1) a regular binding vote for holders of subordinate voting shares on whether the capital structure should be maintained, or (2) the existence of a sunset clause to eliminate the unequal voting rights structure.
2024 Guideline updates
In 2023, we reviewed several sunset clauses through the application of our updated voting guideline. The sunset clauses we reviewed were nuanced, affected by both the characteristics of the clause itself (e.g., time-based clause, dilution-based clause, etc.) and the governance of the issuer (e.g., independence, insider ownership, etc.). Further, although the existence of a sunset clause appeared to be a positive governance trait on the surface, we determined some were not structured in shareholders’ best interests.
In 2024, to reflect this nuance, we updated our Guidelines to state that we will evaluate the adequacy of sunset clauses on a case-by-case basis. We will consider the length and structure of each sunset clause, in addition to the overall corporate governance of the issuer when assessing its adequacy.
Trends
Technology risks
In October 2022, the White House Office of Science and Technology Policy developed a Blueprint for an AI Bill of Rights, which was intended to guide the design, use, and development of artificial intelligence (AI).6 In July 2023, the Biden administration secured voluntary commitments from Amazon, Anthropic, Google, Inflection, Meta, Microsoft, and OpenAI in an attempt to mitigate risks posed by AI.7 Such risks are also being increasingly recognized by shareholders. For example, at Microsoft’s last annual meeting in December 2023, 21% of shareholders supported a resolution requesting increased transparency around risks posed by misinformation generated and disseminated through AI.8 More recently, at Apple’s February 28 meeting this year, a similar proposal received 37.5% support.9 Moving forward, we expect to continue to see increased shareholder attention paid to both risks and opportunities related to AI.
Shareholder proposal trends and support
In 2021, the Securities and Exchange Commission (SEC) communicated changes to the application of its rules around no-action letters,10 and as a result, U.S.-listed companies have seen considerable growth in the number of shareholder proposals (SHPs) focused on environmental and social (E&S) issues. According to Institutional Shareholder Services (ISS), the number of E&S-related SHPs submitted at U.S. companies was at least 625 last year, representing a 39% increase from 2020. Globally, 2023 saw a 2% year-over-year increase in SHPs submitted, the highest since 2016.11
Simultaneously, support for these SHPs has been on the decline. Average support for SHPs during the 2023 proxy season dropped by 10%.12 Breaking this down further, support for SHPs focused on environmental issues dropped from 33% in 2022 to 21% in 2023, while social SHPs experienced a 5% drop year-over-year.13 Overall, just 3% of all SHPs submitted in the 2023 proxy season received majority support, in comparison to 9% in 2022.14
In addition, ExxonMobil is suing two proponents that filed a SHP for the company’s 2024 annual meeting. The SHP requested that the company set stronger climate targets with respect to Scope 3 emissions. Following the legal action taken by the company in Texas federal court, the proposal was withdrawn. However, ExxonMobil is continuing to pursue litigation. The move may put in motion a more combative dynamic this proxy season, and we expect both investors and companies will be watching the case closely.