While 2025 saw a decrease, shareholders continue to submit precatory proposals under the Security and Exchange Commission’s (“SEC”) Proxy Rule 14a-8 for consideration at public company annual meetings, and these proposals continue to receive significant support from proxy advisors and institutional holders. As boards of public companies may be considering acting on precatory proposals approved at 2025 annual meetings, we want to review (a) the duties of directors of Maryland corporations regarding precatory proposals approved by shareholders and (b) the policies and recent practices of Institutional Shareholder Services Inc. (“ISS”) relating to approved precatory proposals.
Several governance proposals continue to receive broad support; for instance, in 2025, proposals calling for the elimination of supermajority voting requirements did particularly well. Proposals advocating for a majority standard passed at about two-thirds of companies where a vote took place, and averaged support of more than 70%. Notably, in 2025, there was an increase in omitted proposals due to SEC Staff Legal Bulletin No. 14M. If this trend continues, we anticipate shareholders may submit fewer environmental and social proposals in future years, and instead return to traditional governance proposals, which tend to receive higher levels of support.
Statutory Duties of Maryland Directors
We are often asked to advise boards of directors of Maryland corporations on their duties in connection with a precatory proposal approved by shareholders. For many years, we have advised that Maryland law does not require a board to take an action that is the subject of a shareholder proposal approved by a majority – even a significant majority – of the votes cast or even the votes entitled to be cast.
Section 2-401(a) of the Maryland General Corporation Law (the “MGCL”) provides that “[t]he business and affairs of a [Maryland] corporation shall be managed under the direction of a board of directors.” Section 2-401(b) confers on the board “[a]ll powers of the corporation . . . except as conferred on or reserved to the stockholders by law . . . .”In discharging his or her duties as a director of a Maryland corporation, Section 2-405.1(c) of the MGCL requires each director to act “[i]n good faith,” “[i]n a manner he [or she] reasonably believes to be in the best interests of the corporation,” and “[w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances.” Further, Section 2-405.1(g) unambiguously provides that:“ An act of a director of a corporation is presumed to satisfy the standards of subsection (c) . . . .” Pursuant to Section 8-601.1 of the Maryland REIT Law, these standards also apply to acts of trustees of Maryland real estate investment trusts.
The United States District Court for the District of Maryland has held that there is no duty for directors of a Maryland corporation to follow the wishes of holders of a majority of the shares. See Martin Marietta Corp. v. Bendix Corp., 549 F. Supp. 623, 633 n.5 (D. Md. 1982), quoted in Mountain Manor Realty, Inc. v. Buccheri, 55 Md. App. 185, 197-98 (1983).The court in Martin Marietta rejected the contention that an earlier Maryland case, Cummings v. United Artists Theatre Circuit, Inc., 237 Md. 1 (1964), prohibits the board of directors of a Maryland corporation from taking actions that it knows are disapproved by a majority of the shareholders. Martin Marietta, 549 F. Supp. at 633 n.5.Instead, the court held that “there is no reason to believe that a Maryland corporation’s directors, even [when] faced with a request from a majority shareholder, must always accede to that request.” Id. Moreover, the Court of Appeals of Maryland, our highest state court (since renamed as the Supreme Court of Maryland), has stated:“ As a general rule, the stockholders cannot act in relation to the ordinary business of the corporation, nor can they control the directors in the exercise of the judgment vested in them by virtue of their office.” Warren v. Fitzgerald, 189 Md. 476, 489 (1948) (quoting People ex rel. Manice v. Powell, 201 N.Y. 194, 201, 94 N.E. 634, 637 (1911)). “Shareholders are not ordinarily permitted to interfere in the management of the company; they are the owners of the company but not its managers.”Werbowsky v. Collomb, 362 Md. 581, 591 (2001).Even earlier, the Court of Appeals held that a resolution purporting to express “the will of the members” is not binding on the directors. Mutual Fire Ins. Co. v. Farquhar, 86 Md. 668, 674-75 (1898).See also James J. Hanks, Jr., Maryland Corporation Law §§ 6.01A and 7.01 (Supp. 2024, updated annually).
We believe that these cases follow, almost necessarily, from Section 2-401(a)’s delegation of power to the board to oversee the management of the corporation’s business and affairs and are relevant in the shareholder-proposal context. We reject any claim that the board of a Maryland corporation has a legal obligation to implement a shareholder-approved precatory proposal.
We recommend that directors of Maryland corporations, as part of their ordinary prudence duty quoted above, give appropriate consideration at an ensuing board meeting to the merits of a proposal approved by shareholders. Depending on the nature of the proposal, it may be appropriate to refer the matter to a committee of independent directors and to seek expert advice on the matter. In the end, however, as stated above, it is each director’s duty to act in a manner that he or she reasonably believes to be in the best interests of the corporation.
ISS Practice Regarding Precatory Proposals
ISS remains influential, and its recommendations on shareholder proposals, as well as on other proposals, are often outcome-determinative. Unfortunately, ISS’s recommendations are generally formulaic, rarely allowing room for company-specific considerations, such that the utility of the vote result to the company’s board is greatly diminished.
ISS will consider recommending against directors, committee members or the entire board if the board fails to act on even just one shareholder proposal that received the support of a majority of the votes cast in the previous year. If the board does not implement such a proposal, ISS will examine, inter alia, the outreach efforts of the board, any disclosure regarding why the proposal was not implemented, the subject matter of the proposal, the level of support for and opposition to the proposal in past meetings, action taken by the board in response to the vote (including its engagement with shareholders) and the continuation of the underlying issue as a voting item on the ballot. Despite the fact that ISS says its evaluation is case by case, we are not aware of any instance where a board decided not to implement a majority shareholder-approved proposal and ISS did not subsequently follow with a recommendation against the incumbent nominees.
While ISS’s policy and influence are frustrating, directors of Maryland corporations should be wary of taking or refraining from taking any action solely because of its possible impact on their re-election or the recommendation of a proxy advisory service.
Shareholder Outreach
If a company received a shareholder proposal that was approved at its 2025 annual meeting, consider conducting shareholder outreach before the board makes a final decision on implementation. Conversations with shareholders, especially large shareholders who voted in favor of the proposal, may provide more insight than just the vote result. If a board decides against implementing a shareholder-approved proposal, we believe that its decision should be reached after at least some, preferably significant, shareholder outreach and that such outreach should continue after the decision in order to explain the board’s thinking on why the proposal was not implemented, discuss any other responses the board may be considering and get a sense of any possible voting or other shareholder reactions at the next annual meeting. Often, shareholders will be satisfied with a thoughtful response even if it is not a full implementation of the proposal. In addition, it is our experience that it is helpful to be able to describe shareholder outreach in the next year’s proxy statement, especially if the company can say that holders of a substantial percentage of shares expressed satisfaction with the board’s response. While disclosing shareholder outreach is likely not enough to stave off a negative recommendation by ISS if a company does not address the issue at all, it could make a difference if the company makes a partial response.
Conclusion
While there is no legal obligation for a board to react in any particular way to the situations discussed above, we recommend that directors of Maryland corporations, as part of their ordinary prudence duty quoted above, give appropriate consideration to any proposal approved by stockholders (or even receiving a significant vote).Depending on the nature of the agenda item, it may be appropriate to refer the matter to the governance committee or other committee of independent directors, to seek expert advice on the matter or to engage in shareholder outreach related to the proposal. In the end, however, as stated above, it is each director's duty to act in a manner that she or he reasonably believes to be in the best interests of the corporation.
While the policies and influence of proxy advisory services such as ISS are a reality for public companies, directors of Maryland corporations should be wary of taking or refraining from taking any action solely because of its possible impact on their re-election or the recommendation of a proxy advisory service.
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As always, our colleagues and we are available at any time to discuss these or other matters.
This memorandum is provided for information purposes only and is not intended to provide legal advice. Such advice may be provided only after analysis of specific facts and circumstances and consideration of issues that may not be addressed in this document.