Proxy battles to watch at banks' annual meetings

March 30, 2021 9:00 PM

That rite of spring known as annual meeting season begins soon, though social-distancing practices will make it largely a virtual affair for the second year in a row.

As always, bank investors will get to vote on a slew of proposals from their fellow shareholders. Proxy items in 2020 range from increasingly familiar issues such as environmental impacts and racial equity to more cutting-edge concerns about nuclear weapons financing and whether public companies should be restructured to make them more responsible to their communities.

But something makes this year unique: Extra pressure is mounting on activist investors to rack up votes for their initiatives ahead of a critical Securities and Exchange Commission rule change that takes effect in 2022. Proposals must earn 25% voter support by the third attempt in order to be reintroduced starting next year, up from the current 10%. The new rule will make it harder for activists to build support over time and means they either need to win this year or demonstrate substantial momentum to keep them viable.

Below is a look at the issues that will take center stage in the coming weeks and years and banks’ arguments against the proposals.

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Racial-equity audits

At least three of the largest banking companies — Bank of America, Wells Fargo and Citigroup — are facing shareholder proposals for racial equity audits of their businesses.

The activist firm CtW Investment Group and the Service Employees International Union pension fund want independent parties to grade not only the banks’ philanthropic investments stemming from last year’s nationwide reckoning on race, but their lending operations as well.

CtW pointed to Wells Fargo CEO Charlie Scharf’s

comments last year

about “a very limited pool of Black talent to recruit from” and a general lack of diversity within some bank executive hierarchies as reasons for examining their hiring practices as well, according to the proxy.

“As investors, we know that it is not always wise to accept management's statements that everything is rosy,” Dieter Waizenegger, executive director at CtW Investments wrote in a March 22

letter

to BofA shareholders. “That is why there are auditors, who look over management's shoulder and help assure that investors get an independent assessment of a company's condition.”

BofA, Wells and Citi advised shareholders to vote against the proposal, according to materials provided ahead of the annual meetings.

Wells Fargo is already conducting a human rights assessment that will focus on racial equity, the company said in its proxy statement. Its board and a third party will oversee the work. Citigroup and BofA pointed to in-house research done on the issue.

“The proposal assumes our company has ‘adverse impacts on nonwhite stakeholders and communities of color,’ ” BofA said in its proxy statement. “We believe the results of our activities demonstrate the converse is true, and we devote significant resources to strengthen the local communities where we operate and offer products and services to make customers’ financial lives better.”

Climate change

Large banks are still facing pressure from some shareholders to cut back on financing the fossil-fuel industry even as this business is shrinking.

Reduced demand for oil during the pandemic recession and societal pressure to tackle environmental issues have led to the decline in oil and gas lending at the four biggest banks.

But John C. Harrington, president of Harrington Investments in Napa, Calif., filed a proposal to change Bank of America into a “public benefit corporation” under Delaware law. The arrangement would preclude the bank from “helping to drive multigenerational climate change” by requiring the company to operate in a manner that benefits those affected by its conduct rather than just shareholders.

A similar proposal was filed with Citi.

Both companies have argued against what BofA called in its proxy statement a “radical'' proposal by citing their commitments to rein in their carbon portfolios. Only a handful of companies, including Amalgamated Bank in New York, have converted to a “public benefit corporation.” Such a move would create a multitude of uncertainties, especially for a big bank, BofA said in its proxy.

“The public benefit corporation model is new and largely untested, and is therefore inappropriate for a company of our size and complexity,” BofA said.

While banks are shrugging off such attempts, the filings show how much further some activist investors want banks to go in cutting off companies that contribute to climate change.

Lobbying disclosures

Miller/Howard Investments, which focuses on environmental-social-governance analysis, filed a proposal for Citigroup to produce a detailed annual report on the company’s lobbying efforts.

Citi spent more than $52 million in federal lobbying from 2010-2019, not counting state or European efforts, Miller/Howard said in its proposal. The firm is worried that Citi’s priorities on Capitol Hill are clashing with stated goals of the company, such as its $1 billion pledge to bridge racial wealth gaps while lobbying against fair lending rules.

“We believe the reputational damage stemming from these misalignments can harm the company’s long-term value creation,” the firm said. “Thus, we urge Citigroup to expand its lobbying disclosure.”

Citi is pushing back against the proposal saying such a report would be duplicative of disclosures it and other companies already provide, according to the company's proxy statement.

Miller/Howard noted that Citi should disclose its involvement with lobbying campaigns from trade groups the company belongs to, citing contradictions between Citi’s support for the Paris climate agreement that the investors said was “undermined” by the U.S. Chamber of Commerce.

Citi management, in the company's proxy statement, made a distinction between what the bank lobbies for on its own behalf and what certain trade groups are doing separately.

“While trade and business associations may lobby on behalf of the financial industry, this 'indirect' lobbying does not necessarily represent Citi’s positions."

Financing nuclear weapons

The Sisters of St. Joseph and the Sisters of Humility of Mary, which own shares in Pittsburgh-based PNC Financial Services Group, wants to require the company to issue a report on its financing of the manufacturing of nuclear weapons.

PNC lends more than $1.6 billion to nuclear weapons companies like General Dynamics. PNC management said lending to companies involved in nuclear weapons represents 0.3% of its loan book, according to its proxy statement.

The investor groups, citing worries over human rights, want an assessment of the legal and reputational risks that PNC may face by being in the business and how it plans to reduce potential exposure. Banks have faced pressure from activist groups like the “Stop Banking the Bomb Campaign,” and PNC has in the past reevaluated financing for private prisons and certain mining projects.

“The extent of PNC’s human rights due diligence around nuclear financing is not evident,” the investment groups said in the proxy.

PNC said in response that the board in February reviewed the loans to these companies and found no risks were posed, according to the proxy statement.

The “vast majority” of these companies’ revenue “bear no relationship to nuclear weapons,” PNC said in its proxy, adding that other banks have, in aggregate, more than 700 times more exposure to companies involved in the nuclear weapons business than PNC does.

Race, gender pay gaps

Proposed resolutions that would require disclosing median pay gaps that were submitted last year by the activist investor fund Arjuna Capital for JPMorgan Chase and Wells Fargo have not been reintroduced this year, according to the investment firm.

Arjuna is preparing to try again next year after votes last year did not meet the 10% threshold for reintroduction. Proxy advisers are working with Arjuna Capital to clarify on future proposals that the banks disclose median pay gaps for U.S. workers, instead of across the globe.

Shareholder proposals addressing pay equity are down overall. There have been seven resolutions filed against the companies Arjuna tracks in 2021, down from 19 last year and 29 the year before, the firm said in a March 23 report.

Arjuna noted in its report that the SEC changes alone aren’t responsible for the decline in proposals. Some companies are taking on the issue via more informal talks.

“Given the nation’s heightened awareness about racial justice, shareholders have found companies to be more receptive to this issue and consequently there are more company dialogues than resolutions,” Arjuna said in its report.

Three banks, Goldman Sachs, KeyCorp and Citizens Financial Group received failing grades for not making more specific disclosures about race and gender pay gaps, according to Arjuna’s report. But Bank of New York Mellon received an “A” after scoring a “B” the year before, in part for agreeing to disclose median pay gaps this year.