The Advisors' Blog

I recently shared on The Proxy Season Blog on TheCorporateCounsel.net that “anti-ESG” groups have been responsible for about 20% of this year’s Rule 14a-8 shareholder proposals – which is a 5% uptick compared to last year and represents about 4x as many proposals. These proposals aren’t getting much support from shareholders. Still, there is one variation that compensation folks shouldn’t ignore.

This year, the National Legal and Policy Center has submitted several Rule 14a-8 proposals aimed at eliminating diversity metrics from incentive plans – including at Coca-Cola, American Express, and Merck. Although the wording varies, each resolution follows this general format:

Shareholders request the Board of Directors’ Compensation and Management Development Committee to revisit its incentive guidelines for executive pay, to identify and consider eliminating discriminatory DEI milestones from compensation inducements.

To the extent that companies use DEI-related metrics, they typically appear in annual programs – and as discussed in our “Top Compensation Consultants Speak” webcast last week and in my earlier blog, many companies have already moved away from these metrics, especially if they were quantitative. Yet, despite the wording of the proposal and the practice of companies revisiting their annual incentive metrics every year, the Corp Fin Staff didn’t agree that the proposal could be excluded based on company arguments of “substantial implementation.” While no-action responses are always fact-specific, this suggests companies may not be able to sidestep these proposals simply because they revisit their metrics each year – and that the bar for excluding these proposals under Rule 14a-8(i)(10) may be higher than some hoped.

On top of that, the proponent seems to broadly define “DEI milestones.” For example, Merck disclosed in last year’s proxy statement that its “Sustainability” metrics were based on worldwide access to health and engagement and inclusion of employees. On a standalone basis, that doesn’t scream “DEI milestones.” This year, the company clarified that this is measured through employee surveys.

All this to say, NLPC’s net is wide. If it continues to pursue this proposal, a company may find itself dealing with it even if the incentive plan doesn’t expressly incorporate DEI targets or refer to “diversity” – for example, if disclosures outside the CD&A discuss diversity programs or if the basis for non-financial incentives is unclear. The good news is that the companies that received the proposal this year have provided a good framework for statements in opposition.

– Liz Dunshee