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Aug 21, 2023

RBC GAM reviews ESG trends from proxy season 2023

Nureen Nagra looks at key developments and how they align with the asset manager’s voting guidelines

At RBC Global Asset Management (RBC GAM), we believe proxy voting is an important part of our stewardship process, as it provides an important way for us to convey our views to the board 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 responsible investment team monitors developments in corporate governance and, with input from our investment teams, updates the RBC GAM proxy voting guidelines to reflect current trends and what we believe to be best practice. Below are some of the top trends we have seen in the 2023 proxy season, and how they align with our guidelines on ESG.

The impacts of climate change are apparent and climate change remained one of the top proxy season topics in 2023. Over the years, investors have pushed for companies to publish climate-transition plans but a new trend has emerged where businesses hold periodic advisory shareholder votes on these climate plans. This practice, known as say on climate, emerged from a campaign by activist investors in 2020. This year, many public companies have voluntarily agreed to propose a recurring advisory vote on climate plans.

Companies are asking shareholders for approval of their 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 in order to follow the most recent and ambitious recommendations from climate science. Essentially, shareholders are now able to convey to management and the board, through a non-binding vote, how well their investee companies are managing their climate-related risks.

Our approach to say-on-climate proposals
This year, we updated the language in our guidelines to better communicate how we evaluate such proposals. We evaluate say-on-climate management proposals on a case-by-case basis. We 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 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.

As disclosure of employee diversity data is becoming more widespread – such as through public disclosure of equal employment opportunity data in the US – we saw more investors ask for companies to disclose their diversity, equity & inclusion (DE&I) metrics within the workplace and what their ethnic and racial diversity breakdown at the company looks like, including at the board level. With increased availability of data, investors can be better positioned to engage with companies that are seen as laggards and press for more information about their strategies and targets for improvement.

Another recent DE&I 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 US firms have committed to carrying out these audits. In 2023, investors continued to request similar audits from companies in 2023.

Our approach to DE&I proposals
We believe 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 DE&I programs and related metrics have become more common, particularly in the US. Although our guidelines previously covered this type of reporting, in 2023 we added specific expectations regarding this issue, given the prevalence of these requests.

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

In the 2023 proxy season, many investors pushed for ‘one share, one vote’. When a company issues multiple classes of shares and one or more classes of shares carries additional voting rights, it results in unequal voting rights between classes of shares. Generally, this takes the form of a dual-class share structure: common shares (subordinate shares) with one vote per share, and a multiple voting class, where each share carries multiple votes (for example, five or 10 votes per share). This structure contravenes the principle of one share, one vote. Unequal voting right structures can allow minority shareholders to make decisions that may not be supported by most shareholders.

Some investors 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 and oversight risks and pave the way for poor alignment between pay and performance.

Nonetheless, such control is sometimes desired by investors as 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 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. But these limited cases would generally be supported only if there are additional shareholder protections such as a sunset clause or a regular binding vote. 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 investment analysis.

Our approach to unequal voting rights
The governance issue of unequal voting rights is a long-standing one. 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 in place, we may vote against members of the corporate governance committee.

At a minimum, we believe 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, 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 share.

Nureen Nagra is a senior analyst with the responsible investment team at RBC GAM