The flurry of activity coming out of the Trump Administration is ushering in a new paradigm for investment stewardship of environmental, social and governance (ESG) considerations. Over the course of a few weeks in February 2025, the SEC issued significant new guidance on topics ranging from shareholder proposals to investor engagement and communication. In some ways, this shift in approach raises questions about how business priorities and voting outcomes will be impacted during this year’s proxy season, while in other ways it may provide additional clarity.

As the market responds in real time, we anticipate that investors’ engagement and proxy voting strategies will evolve to address potential legal and regulatory risks. We foresee the return of “quiet diplomacy,” in which investors take less public credit for the impact of their stewardship activities and surreptitiously articulate their positions on governance issues related to specific companies. That said, investors will also seek to understand how boards are overseeing relevant business risks if company policies, practices or disclosures are modified. Here, we outline how these developments may unfold, along with steps boards and management teams can take to successfully navigate through proxy season.

Companies may experience a shift in investor engagement

As we head into the 2025 proxy season, we expect to see a marked change in how institutional investors communicate and engage with portfolio companies. In particular, investors may be less forthcoming and transparent in discussions with boards and management about their views on board composition, executive compensation and shareholder rights, among other issues.

Passive investors confront engagement limitations

One factor that may impact shareholder engagement is the SEC’s new guidance on who can be considered a large passive investor versus an active investor. Before this guidance, large active investors were generally understood to be those that took a position greater than 5% of a company’s shares with the intention of influencing its management or operations, like a hedge fund. However, the SEC expanded its interpretation of an active investor to include an investor who — through engagement — uses his or her vote to exert pressure on the company to change its governance, environmental, social, compensation or other practices. The new interpretation means that the largest investors, many of whom follow an index and have sizeable equity stakes in thousands of companies, will potentially need to change the way they engage with companies or stop doing so all together to avoid the cost and complexity associated with the reporting requirements for active investors.

Proxy voting policies become less prescriptive

Institutional investors are also softening the language they use in their voting guidelines, particularly about board diversity expectations. For example, several large investors have updated their voting guidelines to remove the mention of aspirational board diversity targets and broaden the definition of diversity beyond personal or demographic factors. Additionally, proxy advisor Institutional Shareholder Services (ISS) announced that it has halted the consideration of diversity factors when making voting recommendations for directors. Proxy advisor Glass Lewis also announced it will provide clients with research to help them consider multiple voting outcomes on board diversity.

What this means for companies

As institutional investors alter their voting policies and engagement practices, the onus will fall on companies to have line of sight into investors’ voting intentions. Investors have never been required to publicly disclose the rationale underpinning vote decisions, especially as they pertain to individual directors. And in some cases, there are several factors that come together, including insights from engagement discussions, that can’t be easily unwound. Ultimately, companies will need to analyze investors’ stewardship programs to understand what they are prioritizing and develop targeted communications strategies. Part of that analysis includes proactively identifying where governance practices do not align with shareholder expectations, so that the mismatch can be addressed in disclosures or engagement meetings without the investor raising it via the engagement. Otherwise, companies might miss out on opportunities to tend to the concerns of their top shareholders.

Shareholder proposals may fluctuate in quantity, scope and purpose

We expect shareholder proposals will continue to polarize investors, resulting in varying levels of support. Even so, we anticipate investors will focus on assessing proposals through a company-specific risk lens. Multiple factors are contributing to this trend.

Shareholder proposals face new restrictions

In February, the SEC rescinded prior guidance on shareholder proposals, making it easier for companies to exclude proposals that are not economically relevant, seek to micromanage or are too broad in nature rather than unique to the company’s circumstances.

Early data shows that the number of SEC no-action requests increased by 35% year-over-year before the SEC weighed in, indicating that the SEC’s action was largely anticipated. But the new guidance essentially places a higher burden on the proponent to demonstrate how the proposal is material to the company’s business. It remains to be seen how the SEC will apply this guidance to the no-action requests reviewed after the change, especially given how rarely the SEC has relied on the economic impact threshold in past decisions. However, some companies have already successfully eliminated shareholder proposals on topics that were permissible in the past, like corporate political activities.

*Before proxy statements are filed, we can gain preliminary insights into which proposals may be included on the corporate ballot through the tracking of 14a-8 no-action requests to the SEC and voluntary disclosures made by shareholder proponents. Some of the proposals tracked will be withdrawn based on engagement activities before the annual meeting. The rest will appear in proxy statements. There are several shareholders that do not announce where they have filed proposals ahead of time, so we will not know the final makeup until after proxy season.

Investors expected to gravitate towards ESG topics that impact company performance

Last year, investors generally did not use their votes to support shareholder proposals asking companies to curtail their ESG activities. In other words, there was no signal from investors that companies should back off from these efforts. This year, we expect a rise in both the number of shareholder proposals and proponents asking companies to reverse course on these topics. However, we do not expect to see significant changes in how investors vote on these “anti-ESG” proposals and anticipate they will continue to not support them.

The shareholder proposal “resolved clause” takes center stage

Although proponents with divergent political views are filing shareholder proposals, investors are demonstrating that they are more interested in the risks posed by the topic addressed in each proposal and the ask of the company — the resolved clause — than the proponent’s public postering on the issue. One example is the area of artificial intelligence (AI) oversight. Our recent survey of US investor priorities for 2025 affirms that investors representing a range of investment approaches are rallying around the opportunities presented by AI, which in turn invites greater scrutiny of companies’ practices. Last year, technology companies faced a swell of AI-related shareholder proposals asking for enhanced guardrails and more transparency about how boards are overseeing risks that may arise when this technology is deployed. Some of these proposals were filed by proponents across the political spectrum yet still received significant support from shareholders. For this year’s proxy season, Glass Lewis also developed a new approach to assessing AI risk oversight that may result in an increased number of adverse vote recommendations on directors and elevation of this topic during engagement meetings.

What this means for companies

Companies may find fewer shareholder proposals on the proxy statement this year. But when one does appear, it’s important to understand that the company-specific risks and actions requested in the shareholder proposal — not the proponent’s intent, reputation or political views — ultimately drive how investors will vote. According to our Stewardship investor survey, the resolved clause in the shareholder proposal is one of the most important factors in making a voting decision. On the other hand, the proponent’s perceived political leaning and public statements are some of the least important factors. Consequently, a company should focus on disclosing how it is managing the risks raised by a shareholder proposal in a manner aligned with value creation rather than simply arguing against the proponent’s position.

Shareholder activists may consider new strategies to signal concerns

As SEC reforms spur potential changes to the shareholder engagement and shareholder proposal landscape, shareholder activists may increasingly turn to other tactics such as vote “no” campaigns and proxy contests.

Activists encounter communication-related barriers

That said, the SEC recently introduced new limitations on how shareholder proponents can use the SEC’s electronic filing platform to communicate with other shareholders. With this in mind, activists may look for alternative ways to promote their messages.

One strategy is using a company’s advance notice bylaws to introduce shareholder proposals. Under this process, companies cannot exclude proposals from appearing on the ballot, and shareholders can put forth as many proposals as they choose without minimum shareholding requirements. But the notice process is more costly and cumbersome as companies have different information requirements and submission deadlines.

Another strategy is harnessing social media and other digital platforms to reach new audiences. Even traditional hedge fund activists are broadening their aperture as campaigns surge to greater levels.

What this means for companies

As shareholder activism continues to evolve, it is important for companies to understand how activists pursue their goals so they can prepare and respond accordingly. In 2024, over 70% of board members in our Annual Corporate Directors Survey said their boards had taken action in response to shareholder activism, including engaging a third party to advise the board and tracking ownership changes. As companies dedicate more time to activist preparedness, they should consider the potential for new activist scenarios.