Looking ahead to 2020, the environmental and social policies of corporations are expected to continue to take center stage in shareholder voting. The Conference Board’s “Proxy Voting Analytics (2016-2019) and 2020 Season Preview” report, conducted in collaboration with ESG data analytics firm ESGAUGE, leadership advisory firm Russell Reynolds Associates, and the Rutgers Center for Corporate Law and Governance, found that institutional investors will continue to focus on issues pertaining to board diversity, disparities in the compensation of female employees and transparency around corporate political activities.

The study found that board composition is likely to continue to be a critical issue in 2020, prompting companies to evaluate existing skillsets, the over-boarding of incumbents and the diversity of new nominees. In the Russell 3000—a capitalization-weighted stock market index—maintained by FTSE Russell, the number of directors receiving less than 50-percent support level has climbed from 37 in 2016 to 54 in 2019. Similarly, The Conference Board counted 421 directors who received less than 70 percent of votes cast at annual shareholder meetings this year; there were only 273 in 2016.

“While these remain small numbers overall (more than 16,000 directors were up for re-election in the Russell 3000 in the examined 2019 period), they are part of a new upward trend, and that reflects some large institutions intensifying their scrutiny of board composition,” says Matteo Tonello, managing director of ESG Research at The Conference Board and the author of the publication.

As an example, The Conference Board gives CalPERS, the largest public pension fund in the country by volume of managed assets, which has pointed to issues of diversity and concerns about directors serving on multiple other public companies’ boards as the main factors influencing its decision to step up its vote against certain incumbents. And in early October 2019, New York City Comptroller Stringer announced the launch of a third phase of its Boardroom Accountability Project, calling on companies to adopt the so-called “Rooney Rule” and include diversity candidates in searches for new directors.

“Vote no” campaigns have been surging, the report highlights, with investors being galvanized by initiatives to refresh board composition. The past few years have seen a surge in “vote no” campaigns and other forms of “exempt solicitations.” In such instances, a shareholder solicits others to withhold their votes at a director election or to vote against a management proposal or a nomination to the board of directors submitted by management but does not circulate a dissident’s proxy card. In the 2019 period examined for the report, shareholders engaged in 124 exempt solicitations against management of Russell 3000 companies, compared to 100 solicitations of the same period in 2018 and 79 in 2016. By way of comparison, there were only 47 in the corresponding 2013 period and 18 in 2010.

Justus O’Brien, co-lead of the Russell Reynolds Board and CEO Advisory Partners Practice, notes, “The analysis points to ever-growing scrutiny over board composition, suggesting the need to periodically evaluate director skill sets and adopt refreshment strategies as needed.”

The Conference Board’s study suggests that the demand for corporate political activity disclosure may reach a tipping point in the months preceding the next presidential election. While endowment funds of religious orders and special stakeholder groups were the first to call attention to social and environmental policies of corporations, these issues have now moved to the front and center of proxy seasons for traditional investors. The topics are wide-ranging: they span political contribution disclosure to compliance with human rights in the supply chain, to the disclosure of business risks resulting from the opioid crisis, to the adoption of a climate change policy.

“Even though social and environmental shareholder proposals still tend to fail, the data show a slow but steady upward trend in terms of voting support,” says Matthew Goforth, vice president, corporate solutions, at ESGAUGE. “In the months preceding the next presidential election, companies may witness a record number of shareholder proposals and engagement efforts on the disclosure of political activities, including monetary contributions to campaigns and lobbying.”

It’s a category under which average investor support level has risen from 24.6 percent in 2017 to 33.6 percent in 2019.

In the report, The Conference Board recommends that companies prepare to consider disclosure on gender pay equity. Prominent corporations such as Amazon, American Express, Intel and Facebook were among the recipients of shareholder proposals on gender pay equity in 2019. While none of these proposals passed, several companies that were previously the target of similar requests preempted new investor demands by volunteering information on their compensation policies and by pledging to close the gaps. A sign of the issue’s rising significance identified in the report, a popular gender equality index tracking the most forthcoming companies on issues of gender diversity and pay equality, has doubled in size in 2019.

The Conference Board advises directors and executives to be aware that some investors are now targeting governance topics at smaller firms. After years of decline, the volume of shareholder resolutions on majority voting and board chair independence rose again in 2019, as institutional investors are shifting their attention to the smaller public companies outside of the S&P 500. That cohort has thus far remained immune to changes in their director election system and board leadership model. Ending a few years of hiatus, in 2019 CalPERS has been resuming its push for smaller Russell 3000 companies to also change their director election model to majority voting.

“The role of and expectations for public company directors continues to increase with greater oversight on topics from ESG to pay equity to board quality,” says Rusty O’Kelley, co-lead of the Russell Reynolds Board and CEO Advisory Partners Practice. “Smaller boards are soon going to feel that heightened scrutiny from institutional investors and will need to make changes to how they operate or risk negative investor votes.”

Matteo Gatti, professor of law at Rutgers Law School, adds, “Both the three-year trend and the 2019 snapshot suggest that the proxy ballet between corporations and investors has finally reached maturity. We see fewer but more focused proposals. Shareholders use alternative ways of communication—engagement, exempted campaigns, social media—when a formal proposal is not necessarily the most effective one. The corporate world may be a step closer to reaching consensus on once contentious corporate governance issues such as majority voting, board declassification and elimination of supermajority requirements. Extensive focus on social and environmental matters comes from all the major players in the investment industry and not just CSR activists. All these indicators point to a better use of the shareholder proposal device and a more sophisticated dialogue between stakeholders.”