Companies advised to be alert to racial equity audit proposals

Governance teams and boards have been warned to stay alert to the prospect of facing shareholder proposals in 2022 urging them to commission racial equity audits.

Speaking at the recent Corporate Secretary Forum, Rose Marie Glazer, senior vice president, corporate secretary and deputy general counsel at AIG, described the proposals as ‘an interesting manifestation of the focus on social issues that is coming [from] activist shareholders.’

SOC Investment Group (previously known as CtW Investment Group), working alongside the Service Employees International Union, has over the last year been the prime mover behind shareholder proposals seeking racial equity audits. SOC and the union between them filed such measures at eight major financial institutions this proxy season: Bank of America, BlackRock, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp and Wells Fargo.

Tejal Patel, corporate governance director with SOC, earlier this year told Corporate Secretary sister publication IR Magazine that racial equity audits are ‘a novel approach to an important societal issue’ that go beyond the usual disclosure model for such proposals.

Glazer noted that support for such proposals this year varied from percentages in the teens to more than 40 percent – a figure she described as significant, particularly for a first-time proposal. Glazer also noted that the SEC had not accepted arguments from companies seeking to exclude racial equity audit proposals from their proxy statements, which she said underlined the need for companies to take them seriously.

The potential impact of such proposals was highlighted last month when Citigroup agreed to have a third party conduct a racial equity audit of the bank. The announcement came six months after a significant number of its shareholders – though not a majority – voted for such a step.

Glazer said she had seen companies trying to get out ahead of shareholder proposals on the topic and expected others to do the same in 2022, particularly in the financial services industry. Part of those efforts may involve conducting audits on a company’s terms rather than have those dictated by a proposal, she added.

Support for the racial equity audit proposals will likely be even higher if both proxy advisory firms come out in favor of them for the 2022 proxy season, Glazer said.

She added that the passage of legislation or regulation mandating that companies take similar action could deter the filing of some proposals. But she said: ‘If those don’t happen, I think companies are going to see this come forward. They would probably be better off trying to work with activists to avoid the proposal by acceding to the request.’


DIRECTORS IN THE CROSSHAIRS
Another feature of the 2021 proxy was the targeting of some individual directors by activists in ESG-related situations, notably at ExxonMobil.

Speaking on the same panel, Paul, Weiss, Rifkind, Wharton & Garrison partner Krishna Veeraraghavan said this did not signal a sea change in activist investor tactics. He noted that directors have always been potential targets as activists look at companies’ core strategies and performance.  

However, Veeraraghavan said that the more ‘holistic basis’ by which ESG issues are now being contemplated means that there will be ‘many more instances’ in which they will intersect in a more tangible way with companies’ core businesses and performance.

Activists are and will continue to be opportunistic and therefore will use ESG issues as ‘the tip of the spear’ if they can, he said. As a result, boards and their companies should be reviewing their ESG-related strategies and oversight even if they don’t think this will be key to a critique of the company, according to Veeraraghavan.

He added that they should also be looking at how board composition is aligned to help with ESG issues, such as in terms of industry expertise. Shifting board composition has a lengthy lead time and therefore director succession plans should take these considerations in account from now on, Veeraraghavan advised.