With voting disclosures from the 2023 proxy season now released, Diligent Market Intelligence (DMI) examines how the world’s largest index funds, BlackRock, Vanguard and State Street Corp., voted on various ballot items in the U.S. from July 1, 2022 to June 30, 2023.
ESG support wavers amid concerns of prescriptivism
2023 was a challenging season for ESG, with rising inflation and depressed markets refocusing many investors toward financials and away from climate and social concerns. The Big Three supported fewer environmental and social (E&S) shareholder proposals compared to previous seasons.
In its voting spotlight report, BlackRock noted that an increasing number of shareholder proposals were “overly prescriptive or unduly constraining on management decision-making.” Proposals also faced opposition for “fail[ing] to recognize that companies had already substantively met their request.”
BlackRock supported 8.7% of U.S. E&S shareholder proposals in the 2023 season, compared to 41.3% and 23.7% in 2021 and 2022, respectively. Vanguard’s support for proposals of this kind dropped to 3%, from 12% a season prior, while State Street supported 21.2% of proposals, down from 28.6%.
Support similarly declined in Europe, with BlackRock supporting 3.6% of proposals, down from 22.2% in 2021 and 4.5% in 2022. Vanguard’s support declined to 4.5%, down from 14.8% two seasons prior, while State Street voted in favor of 7.1% of these proposals, compared to 11.1% in 2021.
In its U.S. regional brief, Vanguard similarly noted that it opposed shareholder proposals where proponents “raised a material risk at the company in question, [but] the board had already demonstrated appropriate oversight of the risk and evidenced its oversight through robust disclosure.”
Additional pressure on the Big Three to support fewer environmental proposals also came from various Republican state policymakers, several of which threatened to blacklist the asset managers amid claims that they were “boycotting” the energy sector.
Enhanced pay transparency wins over investors
2023 marked the first time in three seasons that Vanguard’s support for U.S. “say on pay” plans increased, with the asset manager voting in favor of 95.1% of proposals, up from 93.7% in 2022. State Street supported 90.9% of proposals of this kind, compared to 90.3% a season prior, while BlackRock’s support marginally decreased to 91.5%, down from 91.9% in 2022.
In its regional brief, Vanguard commended issuers for enhancing transparency around “how they planned to modify disclosures to improve the usefulness of their compensation-related disclosures,” in order to align with new Securities and Exchange Commission (SEC) Pay versus Performance disclosure requirements.
BlackRock also cited a “noticeable shift in one-time awards,” with out-of-plan awards being used “less frequently than in previous years.”
The Big Three took varied approaches when voting on European “say on pay” proposals. BlackRock supported 71.2% of European “say on pay” proposals, down from 72.3% in 2022, while Vanguard supported 81.3% of proposals, compared to 80.3% in 2022. State Street supported 69.3% of proposals of this kind in 2023, down from 76.7% in 2022.
BlackRock noted that “a number of Continental European companies have historically been less transparent on pay” when compared to their U.K. counterparts. This is the fourth year of the full implementation of the EU’s Shareholders Rights Directive II, which requires annual advisory votes on compensation, and has put further onus on companies to provide enhanced disclosure on compensation decisions taken during the year under review. BlackRock further noted that more companies are “now making improvements in their disclosures to better explain how their pay outcomes are aligned to long-term financial value creation.”
“Buffeted by the COVID-19 pandemic and then by the Russia-Ukraine War, Europe has continued to struggle economically, with its competitiveness taking a hit,” State Street said in a September whitepaper. “Yet Europe’s resilience has shone through these crises and green shoots of recovery are already visible. All things considered, investors should do well to look closer at a region that continues to surprise favorably despite the tough odds that it has faced recently.”
Robust director disclosure bolsters support
The Big Three’s support for U.S. director reelection proposals declined, with BlackRock backing 91.1% of directors, down from 92.5% a season prior. Vanguard supported 93.2% of such resolutions, compared to 94.5% a season prior, while State Street supported fewer directors than the previous season, at 83.9%.
“Board quality and composition was the top reason we did not support management on director elections in the Americas. However, improved disclosures on material business risks led to fewer votes against director elections on transparency grounds,” BlackRock’s season review reads.
In its regional brief, Vanguard noted that more companies established robust director commitment policies to “ensure that directors can dedicate the requisite time and attention to each board on which they serve.”
The importance of those policies was highlighted by an example the fund manager gave, where it supported a director on the board of one company that provided thorough disclosure on director commitments but opposed the same director on the board of another company, due to a failure “to provide us with an understanding of the board’s assessment of the director’s performance [and] its plans to monitor the director’s capacity.”
In contrast, European directors won increased backing from the Big Three. BlackRock voted for 86.6% of European director reelection proposals, compared to 84.7% a season prior. Vanguard supported 92.6%, up from 90.2%, while State Street supported 86.8% compared to 84.2% in 2022.