A Proxy Season Wrap-up: Shareholder Proposals Target ESG and Equity Audits

May 25, 2023

In recent years, there has been a steady increase in shareholder proposals that target a public company’s ESG commitments, including diversity and inclusion data, environmental or emission programs, and community engagement. As of February, there were more than 542 shareholder resolutions filed during this proxy season regarding ESG issues. Morgan Lewis lawyers provide a high-level summary of how shareholder proposals can prompt change and the types of equity audits the proposals seek.

Shareholder Proposals

Under SEC Rule 14a-8, a shareholder can petition management to include a topic, which is typically opposed by the board of directors, for vote at the company’s annual meeting. As long as the shareholder meets certain requirements, the company must include the shareholder proposal in its proxy. Virtually all shareholder resolutions are nonbinding because under corporate legal principles, shareholders don’t have the right to manage the company. That said, the press can make these proposals a story, and board members may seek to implement the proposals as they could be voted out in future years if they do not act in accordance with the shareholders’ will.

ESG-Related Audits

In recent years, shareholders have requested independent audits of companies’ practices related to racial equity and/or civil rights. Investors and proxy advisors view these audits as a way to measure the success of the company’s DEI practices as well as an independent assessment of the internal and external impacts of an organization’s policies, practices, products, and services to determine whether any practices inadvertently result in discriminatory impacts. The scope of an audit may include workforce conditions, diversity and inclusion, health benefits, environmental impacts of operations, and corporate philanthropy and its impact on the company’s other commitments. An audit may also evaluate whether a company is reaching its ESG goals and provides shareholders, employees, and customers a credible and comprehensive evaluation of business representations, while mitigating reputational and legal risk.

Derivative Lawsuits

Allegations that a company and its executives fostered a “toxic” workplace and failed to provide their employees with an equitable and inclusive work environment are not just routine “personnel” or “employee relations” issues. Increasingly, corporations face shareholder derivative lawsuits based on their allegedly misleading statements about their commitment to diversity and equity as well as their alleged over commitment to diversity and inclusion. These lawsuits typically allege that the corporation’s directors breached their fiduciary duties either by failing to ensure the corporation complied with anti-discrimination laws or by authorizing false statements in public materials regarding the corporation’s commitment to diversity and inclusion. An equity audit is one tool to mitigate the risk of a derivative lawsuit by identifying issues before they become problems and providing an opportunity for a company to publicly display a commitment to mitigating those issues. Equity Audits, however, should be planned and implemented with caution because they may also provide a potential roadmap for action against the company and trigger statutory disclosure obligations.

If you are interested in Responding to Shareholder Demands for Equity Audits, as part of our Morgan Lewis Global Public Company Academy, we invite you to subscribe to Morgan Lewis publications to receive updates on trends, legal developments, and other relevant areas.