Shareholder Interest in ESG May Be Down - But Not Pay Equity

Pay equity continues to be a significant focus for investors and activists, with the first half of 2023 witnessing a notable increase in shareholder proposal activity, according to an Orrick memo. A total of 16 S&P 500 companies found themselves on the receiving end of shareholder proposals requesting the disclosure of unadjusted gender and racial pay gap data, with 10 of these proposals proceeding to a vote. While these numbers might appear relatively low in absolute terms, they mark a substantial uptick compared to figures for both 2021 and 2022, nearly doubling the count. The significant support for these proposals is indicative of the growing importance of this issue.

• In H1 2023, pay equity proposals gained substantial shareholder support, with an average of 34%, surpassing the 25% average for ESG-related proposals. This is significant as institutional shareholders often engage when a proposal receives 20% support. Even if a company defeats a pay equity proposal at its annual meeting, it's likely to remain on the agenda for investor relations teams the following year. 
  
  
• Despite anti-ESG sentiment and legal challenges, activist and investor interest in pay equity remains strong. This resilience highlights the issue's significance and its enduring presence on the ballot. 
  
  
• To reduce pay equity proposal risks, companies should focus on key indicators. Industry matters less than a company's own disclosure practices. In the past few years, when pay equity proposals have received majority support, it has been due to insufficient disclosure or commitment. Companies with prior disclosures and pay equity adjustments had lower shareholder support levels. 
  
  
• Investor voting and proxy advisor choices significantly impact pay equity proposals. ISS and Glass Lewis have distinct criteria. ISS prefers unadjusted pay gap disclosure and considers recent controversies or litigation, while Glass Lewis focuses on potential risks to operations and shareholders, with no strong preference for unadjusted data. 
  
  
• Certain factors correlate with lower pay equity proposal votes: Leadership diversity goals, adjusted pay gap data reporting, pay equity analyses, public pay equity commitments, and EEO-1 report publication are all positively correlated with votes against the proposals. Notably, leadership diversity goals have a stronger impact on proposal success, emphasizing the importance of a holistic diversity and inclusion approach.

Outlook. Companies can mitigate the risks associated with pay equity proposals by proactively disclosing diversity-related information in line with investor expectations and ensuring compliance with emerging ESG sentiment.