At RBC Global Asset Management (RBC GAM), we believe that proxy voting is a key part of our stewardship process, as it provides an important 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, and with a view to enhancing the long-term value of the securities held.

Each year, our Corporate Governance & Responsible Investment (CGRI) 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 discuss E, S, and G considerations for the upcoming proxy voting season, and outline relevant updates we made to the RBC GAM Proxy Voting Guidelines for 2023.

E: Management “say-on-climate” proposals

As investors push issuers to publish climate transition plans, a recent trend has emerged where issuers hold periodic advisory shareholder votes on the plans. This practice, known as “say-on-climate,” emerged from a campaign by a few activist investors in 2020. Spanish airport operator Aena was the first company to establish an annual vote on climate change in response, and an increasing number of issuers worldwide have since done the same. Several public companies have voluntarily agreed to propose a recurring – frequently annual – advisory vote on climate plans.¹

These relatively new management proposals ask shareholders for their approval of the firm’s climate transition strategies, progress reports, and climate-related disclosures. A climate transition plan is a time-bound action plan that describes how a company will adjust its business model, if needed, in order to follow the most recent and ambitious recommendations from climate science.

Although we expect management say-on-climate proposals to remain on the rise in 2023, we expect shareholder scrutiny to remain steady or increase, as evidenced by decreasing support levels in 2022. Support levels for future proposals are difficult to predict, but 2022 showed an interesting short-term trend, which could be indicative of investors familiarizing themselves with these proposals.

The growing impact of say-on-climate proposals in 2022

2023 Guidelines update

This year, we updated the language in our Guidelines to better communicate how we evaluate such proposals. When evaluating say-on-climate management proposals, we will consider the completeness of climate-related plans as well as the suitability of said plans, as determined by RBC GAM, for the company on a best-efforts basis. In addition, we will consider newly disclosed climate transition plans with room for improvement if there is demonstrable evidence and commitments indicating improvements are forthcoming.

We generally do not support proposals if climate-related plans do not provide sufficient and transparent disclosure of the governance, strategy, risk management, metrics, and objectives as they relate to climate-related risks and opportunities. Moreover, we may not support plans that do not enhance disclosure and performance, where applicable, or do not have objectives and carbon reductions at least on par with peers.

Top priorities in assessing say-on-climate proposals

Completeness

Suitability

Transparency

S: Diversity, Equity, and Inclusion (DEI) and Racial Equity

As disclosure of aggregate employee diversity data is becoming more widespread – such as through public disclosure of Equal Employment Opportunity data in the U.S. – and as more businesses publish the promotion, recruitment, and retention rates of their employees, we believe investor expectations are changing with regard to this important factor.

With increased availability of data, investors are better positioned to engage with companies that are seen as laggards and press for more information about their strategy and targets for improvement. Based on 2022 shareholder proposal trends, other workforce DEI topics investors are monitoring include the effectiveness of issuers’ efforts to prevent harassment and discrimination, and greater disclosure on concealment clauses in employment agreements that may restrict employees' ability to discuss unlawful acts in the workplace, such as harassment and discrimination.²

Another recent DEI focus area on proxy voting ballots has been "racial equity audits," which typically seek an independent examination of the impacts of business policies and practices on underrepresented racial or ethnic groups. Several U.S. firms have committed to carrying out these audits, and in the 2022 proxy voting season, 21 shareholder proposals on this subject received an average of 44% support.³ Early signs indicate investors will continue to request similar audits from companies in 2023, and with some issuers having now completed requested audits from past proxy voting seasons, investors in those issuers may be able engage on audit results.

2023 Guidelines update

We believe that initiatives that promote diversity, dignity, and safety in the workplace can benefit issuers and their investors. In recent years, requests for enhanced disclosures on workplace DEI programs and related metrics have become more common, particularly in the U.S. Although our guidelines previously covered this type of reporting, in 2023, we added specific expectations with regarding this issue, given the prevalence of these requests.

We will generally vote in support of proposals that ask companies to enhance disclosure of DEI issues in the workplace, including DEI programs, goals, and demographic metrics. We will also generally support proposals that request that companies report on racial or gender pay equity where the company has inadequate policies or disclosure and its practices lag behind peers’, or the company has been the subject of a recent controversy, including litigation, related to racial or gender pay equity.

G: Dual-class shares and unequal voting rights

When a firm has dual-class shares, some classes of shares are given multiple votes per share, which results in unequal voting rights between classes of shares. The principle of “one share, one vote” is contravened by this structure. Unequal voting right structures can allow minority shareholders to make decisions that may not be supported by most shareholders.

We believe dual-class share arrangements can negatively impact minority investors by giving insiders who are both shareholders and managers voting power that is disproportionate to their equity participation. In our view, this can facilitate controlling shareholders making decisions that are not in the best interests of minority shareholders, such as pursuing or rejecting certain transactions. Furthermore, it can lead to governance risks and oversight risks, and pave the way for poor alignment between pay and performance. Nonetheless, such control is sometimes desired by investors since it can enable management and business owners to carry out their plans more efficiently (particularly in the initial years of a newly public firm). The key argument in such scenarios is that management’s ability to act with more efficiency outweighs the governance risks associated with such an arrangement.

We believe that 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 full control of the company to keep creating shareholder value. That said, we believe these cases should generally be supported by shareholder protections. 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 analysis.

2023 Guidelines Update

The governance issue of unequal voting rights is a longstanding one, and in 2023, we updated our Guidelines to reflect our general voting approach for issuers with unequal voting right structures. Specifically, where an issuer that has historically used an unequal voting rights structure does not have adequate protections for minority shareholders, we may vote against members of the corporate governance committee. At a minimum, we believe that adequate protections for minority shareholders should include either:

• a regular binding vote for holders of subordinate voting shares on whether the capital structure should be maintained; or
• a sunset clause to eliminate the unequal voting right structure.

Finally, in order to increase transparency and give minority shareholders and the board a better understanding of how the various classes of shares were voted, we strongly encourage companies that maintain a share structure with unequal voting rights to disclose voting results broken down by each class of shares.

On the radar: new SEC rules on universal proxy cards

Starting in September 2022, a new SEC rule regarding contested board elections at U.S. publicly listed companies will see shareholders electing directors from a full list of candidates nominated by both the company and dissident. Historically, proxy contests involved the company and the dissident distributing separate proxy cards for shareholders to vote on. The separate cards would often contain a different mix of nominees, and shareholders wishing to support the election of individual nominees from both the dissident and the company were not able to do so by proxy.

In our view, the new rules provide investors with more effective tools to influence the composition of boards of directors at publicly listed companies. As a result, we expect a higher volume of proxy contests in the coming years, with more individual directors likely to be targets of these contests and potentially more shareholders inclined to vote for a change.

At RBC GAM, we believe it is important to understand what both management and the dissident are proposing, and its implications on governance and performance going forward. We will review dissident shareholder proposals for director nominees on a case-by-case basis to determine which will result in the best governance and performance for the company over both the short and long term.