DEI on the Corporate Ballot: Strive’s Predictions for 2024

After nearly a decade of virtually unchallenged support for diversity, equity and inclusion (“DEI”) initiatives, 2023 saw the first significant criticism of the movement among investors, policymakers and the American public. It also brought increased scrutiny of the ESG movement and stakeholder capitalism more broadly. As a result, the 2024 proxy voting season will likely provide a test case for shareholder activists, asset managers, and companies alike. Strive’s analysis of the proxy voting landscape and expectations for this year’s voting season—including how we got here and what we see ahead—are laid out below. 

Background

Since at least the mid-2010s, American companies and the asset managers that own them have pledged, and steadily increased, commitments to DEI initiatives. These initiatives often take the form of gender and racial hiring quotas, self-described anti-racism training programs for employees, set-asides for minority and women-owned business suppliers, and special scholarships, recruitment and executive training programs open exclusively to members of certain racial and gender groups. More recently, they’ve included incorporating DEI metrics into executive compensation packages, hiring chief diversity officers and teams, and requiring board level oversight of DEI issues.

Since 2020, increasing these initiatives has been a priority for social activists, who have turned to using the corporate shareholder voting mechanism to influence corporate America. According to one study, the number of DEI shareholder proposals rose from 17 in 2020 to 129 in 2022. Support for many kinds of DEI proposals increased as well. When racial equity audits were first introduced in 2021, for example, they received an average of 33% support; by 2022, support jumped to 46%. Gender and racial pay gap reporting saw a similar increase in support.

2023 Proxy Voting Season

In 2023, companies continued to face an elevated number of shareholder proposals on DEI issues, including 109 that ultimately went to a vote. A key factor behind the 2022 and 2023 increase is the Securities and Exchange Commission’s relaxed standards for shareholder proposals. Prior to the change in regulatory guidance, the SEC would regularly allow companies to exclude shareholder proposals relating to ordinary business operations. In 2021, the SEC substantially expanded an exception for proposals that focus on a “significant social policy.” The regulatory change encouraged nonprofits and likeminded organizations to submit more socially-focused DEI proposals in the 2022 and 2023 proxy voting seasons.

These DEI initiatives, however, also received lower support from large asset managers, at least on the surface. “Yes” votes on proposals asking for reports on progress toward diversity targets, for example, dropped from an average of 37% to 27%. More broadly, BlackRock claimed that it voted for just 7% of ESG proposals, down from 22% in 2022. Vanguard likewise claimed it reduced its support from 12% to 2% in 2023. This numeric decline, however, paints an incomplete and, in Strive’s view, potentially misleading picture, as the asset managers frequently claimed they voted against a DEI proposal not because they disagreed with the underlying social goal, but because the company had already agreed to adopt it, rendering the proposal redundant. These voting figures have also been met with skepticism given BlackRock and other asset mangers’ claim that they are simply trying to quiet the controversy around ESG by using different terminology, while continuing to advance the same values.

Post-Proxy Voting Season Developments

Following the 2023 proxy voting season, DEI faced unprecedented scrutiny, increasing business risks for companies and asset managers that support such initiatives.  

In June, the U.S. Supreme Court decided Harvard v. Students for Fair Admission, holding the use of affirmative action in higher education was both unconstitutional and violated the Civil Rights Act. The reverberations of the decision were immediately felt in corporate America, as companies began to recognize the increasing legal risks associated with race-based programs. These risks soon began materializing, as high-profile lawsuits were filed against a series of companies over their DEI policies, including USA Today, Morgan Stanley and AT&T. A wave of EEOC complaints against companies like Kellogg’s, Mars and IBM have added to the potential liabilities, along with complaints to the Department of Labor’s Office of Federal Contract Compliance against Southwest, American and United Airlines.

There is also a growing divide in popular opinion over DEI policies, which increases business risk to companies. Whereas diversity was once mostly talked about as a generic positive, it is now a politically polarized topic. Customer boycotts following controversies at Bud Light and Target have further highlighted the financial risks of DEI initiatives. Disney’s high-profile dispute with Florida Governor Ron DeSantis over the Parental Rights in Education Act, along with Elon Musk’s recent offer to fund discrimination lawsuits against the company, serve as further warnings that DEI initiatives may not be the risk-free PR opportunities that some companies hoped for.

So far, the most common strategy companies have deployed is to quiet the rhetoric on DEI issues and try to stay out of the spotlight. By design, these efforts make it more difficult to assess whether, and to what extent, companies are continuing to pursue long-established DEI policies amid mounting legal and business risks. This year’s proxy season may therefore provide a unique opportunity to gain insight into corporate America’s thinking, as companies are forced to respond to and address various shareholder proposals from across the political spectrum.

What We See For 2024

Traditional DEI Activism Will Continue; Most Action Will Happen Behind the Scenes

In 2024, we anticipate traditional activism for DEI shareholder proposals will continue, with some new issues and tweaks to proposals made in prior years. The major categories of resolutions submitted so far include:

• DEI Voting Report: New for 2024, a coalition of nonprofit groups and socially responsible investment firms have filed resolutions at BlackRock, State Street, JP Morgan and Goldman Sachs asking the companies to address the misalignment between their public commitments to racial justice and their decline in voting for pro-DEI resolutions at portfolio companies.
• Reports on DEI Effectiveness: This year, shareholder activist group As You Sow and affiliated organizations have filed over a dozen resolutions at companies including Berkshire Hathaway, Dell, Paramount and UPS asking each to provide a more detailed, quantitative breakdown of employees by race and gender so that As You Sow can assess the company’s progress in increasing the number of women and racial minorities that the company hires and promotes.
• Racial Equity/Civil Rights Audits: Companies should also be prepared to receive shareholder proposals seeking racial equity audits, which were popularized in 2021 and 2022, but received little shareholder support in 2023. One such proposal is pending at Wendy’s; another was filed at Valero before it was subsequently withdrawn.
• Pay Gap Reports: We expect that companies will continue to receive shareholder proposals asking companies to report on pay gaps between men and women and among members of different racial groups, similar to the proposal Apple received for its upcoming meeting. These proposals proved to be the exception to the trend of declining voting support, with BlackRock, State Street and Vanguard each supporting 75% of pay gap reporting proposals last year.
• AI Equity Proposals: New for 2024 are a series of proposals asking companies to adopt ethics policies associated with their use and development of artificial intelligence. While the proposals often highlight a number of social concerns, some of those concerns center around potential bias and racial discrimination in AI use.
• Board Diversity: Companies may also see proposals calling for greater diversity on company boards. As EY recently noted, however, regardless of whether or not investors make board diversity an engagement priority, “many investor proxy voting guidelines inherently keep the pressure on board diversification” given that 88% of the world’s largest asset managers claim they consider race and gender when deciding whether to support a director nominee.

Despite the number of shareholder proposals at issue, we believe most of the action will happen behind the scenes, as companies negotiate with activists to keep proposals off the ballot.  Perhaps counterintuitively, DEI supporters may find they have more leverage to push companies to adopt more aggressive DEI policies this year as companies will likely be more eager than ever to keep themselves out of the spotlight by keeping such proposals off the ballot.

For those proposals that do get put to a shareholder vote, we expect to see levels of support similar to last year’s. We anticipate that large asset managers will continue to vote against most DEI proposals in an effort to convince returns-focused clients that they have retreated from ESG, while continuing to promote DEI through their engagement efforts and voting rationales to assuage clients who support such measures.

DEI Debate Will Move Beyond Shareholder Proposals

In 2024, the debate over DEI will likely move beyond shareholder proposals and extend into votes on issues like executive compensation and director elections.

Over the past several years, DEI proponents have fought for companies to incorporate DEI metrics into executive compensation packages. These efforts have largely succeeded. Today, more than 75% of S&P 500 companies tie executive compensation to ESG broadly, with a specific increase in DEI goals. Historically, these policies have not made major headlines. To the extent executive compensation packages were discussed in the mainstream media at all, it was typically over the eyepopping figures CEOs earn, not the fact that rewards for hitting non-financial targets were slowly becoming part of the mix. In 2023, however, public scrutiny over ESG-based executive compensation packages has increased, particularly after Elon Musk highlighted Boeing’s executive compensation policy to argue the company prioritized DEI over safety. This increased scrutiny may force asset managers to take a closer look at ESG-linked executive compensation packages, or be prepared to explain to their clients why voting in favor of DEI-linked packages is in their best financial interests.

For similar reasons, companywide DEI policies may also fuel board fights and inform asset managers’ decisions on whether or not to support nominees, particularly where companies seek reelection of directors that are in charge of ESG oversight committees or are CEOs of companies that have been embroiled in DEI controversies. Disney’s board challenge by Nelson Pelz, prompted in part by a concern over Disney’s handling of recent controversies, may serve as a cautionary tale.

Such a strategy shift would serve as yet another instance in which pro-shareholder activists are borrowing escalation tactics that pro-DEI groups have used for years. ESG-minded asset managers and their advisors have indicated that they vote out board members when a company has failed to meet their DEI quotas. BlackRock, for example, has a “floor of two women” on company boards, and in 2023, proxy advisory firm Institutional Shareholder Services (“ISS”) announced that it would recommend voting against the chair of the nominating committee unless the committees’ nominees meet ISS’s targets for immutable demographic characteristics.

Equality-Over-Equity Proposals Will Proliferate

2023 saw a substantial increase in the number of equality-related proposals from right-of-center groups, predominantly from the National Center on Public Policy Research. These proposals largely ask companies to rescind commitments to conduct racial equity audits, include viewpoint as a protected trait in their anti-discrimination policies, and conduct audits to assess whether the potential benefits of DEI policies are outweighed by their costs.

This year, we anticipate similar proposals, likely coupled with an even closer tie towards the financial benefits the proponents believe companies will reap. The types of proposals that have been submitted so far include:

• Civil Rights Audits: These proposals are the mirror image of the racial justice audits filed by pro-ESG groups, but ask companies to consider a wide range of views when conducting the audit, including by seeking input from some right-leaning organizations. Last year ten companies faced such proposals. A similar proposal has been filed at John Deere this year.
• DEI Risk Reports: We also expect to see a number of companies facing proposals asking them to conduct a DEI risk report to assess whether their DEI policies constitute or increase the risk of illegal discrimination and evaluate the associated costs of such increased legal and business risks. These reports are similar in some respects to the civil rights audits discussed above, but are typically prepared internally at the company, rather than conducted by a third party.
• Viewpoint Discrimination Reports: Several companies, including Walgreens and Apple, have faced or will be facing proposals asking them to report on risks related to alleged viewpoint discrimination, including a failure to explicitly prohibit discrimination based on political beliefs or viewpoints in company policies.
• Transgender Benefits Report: Disney is facing a shareholder proposal this year asking the company to report on the benefits it offers to transgender employees. The proposal suggests that Disney may offer benefits to employees seeking to transition to a different sex, but not to employees seeking to detransition, which the resolution’s proponents believe may constitute discrimination and present business risks.
• Affinity Group Report: Starbucks is facing a shareholder proposal asking the company to report on the risks associated with its race, gender and sexual-orientation-based affinity groups, including the legal risks and associated costs of such programs.

Despite the uptick in number and variety of equality-over-equity proposals, we expect such proposals to receive limited support from shareholders. In 2023, for example, none of the Big Three asset managers voted for a single shareholder proposal filed by a right-of-center group. And proxy advisory firms ISS and Glass Lewis consistently advise shareholders to vote against such proposals, often classifying them with derogatory labels such as “anti-social.” Given this hostility, we do not expect to see significant support for these proposals in 2024.  

Conclusion

The 2024 proxy voting season promises to be full of debate on the business, legal and social merits of corporate DEI initiatives. Accordingly, it may provide a rare glimpse into the internal positions of companies and management on an issue that companies are increasingly trying to keep under wraps.