January 13, 2022
January 13, 2022
Environmental, social, and governance (ESG) concerns will make headlines once again in spring 2022 as companies tally votes at their annual shareholder meetings. But while ESG activism is always to be expected in this venue, the coming annual meeting season may stand out for the high volume and progressive tone of resolutions being voted on, as shareholders take advantage of a pro-activist US Securities and Exchange Commission (SEC) under the leadership of Chair Gary Gensler.
Unlike predecessor Jay Clayton, who responded to corporate issuers’ complaints by passing rules curbing the influence of proxy voting advisors and by raising thresholds for shareholder voting and resubmission, Gensler has sought to undo some of these policies and to find ways to empower proxy season activists. Gensler and the two Democratic members of the five-member commission have supported pro-shareholder policies opposed by their Republican colleagues—soon to be reduced to one (Hester Peirce) with the anticipated departure of Elad Roisman before the end of January.
Examples of pro-shareholder sympathies by the current SEC include recently proposed rules on corporate stock buybacks (to speed up disclosure) and proxy voting advice (to weaken Trump-era rules for greater accuracy and more transparent disclosure), as well as a final rule mandating universal proxies (mix-and-match director slates) for proxy season 2023. In mid-December, shortly before Roisman announced his departure, Roisman and Peirce released a statement criticizing the Gensler regulatory agenda, which, they said, “fails to include any items intended to facilitate capital formation and misses opportunities to foster fair, orderly, and efficient markets and to further investor protection” (referring to the SEC’s mission).
Different SEC administrations vary in their points of emphasis, with Democratic appointees often emphasizing shareholder rights, and Republican appointees more likely to focus on corporate capital formation.
Given the activism of Gensler’s SEC, it is no surprise that the spring 2022 proxy season will see a rise in ESG advocacy—even advocacy that may wander into management turf. Federal securities laws, as traditionally interpreted, do not permit shareholders to propose resolutions or vote on “ordinary business” matters, which are excludable from proxy statements under Rule 14a-8.
Under this rule, companies can ask the SEC to provide a “no-action” assurance that the agency will not sue them if they leave a resolution off the proxy. There are 13 reasons why a company can validly exclude a proposal, and the ordinary business exclusion is one of the most common. (Of the 13 requests shown in the SEC’s recently discontinued Chart of No Action Responses, eight reference Rule 14a-8(i)(7), the technical name for the ordinary business exclusion.) The chart was discontinued after December 13, when the SEC announced that it would return to providing no-action assurance in the form of letters, abandoning the short-lived practice of giving responses in chart form without writing a formal letter.
Under Gensler, the ordinary business exclusion has weakened, along with the equally important “economic relevance” exclusion. In November, the SEC issued a new staff legal bulletin that narrowed the meaning of these two exclusions.
As for ordinary business, the bulletin states that staff will ask “whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” It gives as an example “proposals squarely raising human capital management issues with a broad societal impact,” saying such issues would not be excludable even if the proponent failed to make the case that the issue mattered for the company.
Similarly, when it comes to the economic relevance exclusion, the bulletin states, “Proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds” in Rule 14a-8(i)(5). Such an interpretation has emboldened shareholders to make more social resolutions at companies, opening a veritable Pandora’s box at proxy time.
Pre-season numbers tell the story. Of 27 resolutions filed by January 10 for the nation’s 250 largest public companies, says ProxyMonitor.org, two pertained to environmental issues, four to governance issues, and the remaining 21 to social issues, predominantly compensation. (To find current data, go to “advanced search,” choose the 2022 season, and organize by “proposal type.”) And that’s just the tip of the iceberg—many more are awaiting inclusion in 2022 proxies and have not yet been filed.
So far for the 2022 proxy statements, the SEC received 78 requests made in the last three months of 2021 (plus three climate changes filed in the first 10 days of January 2022). Most of these were still pending (listed here) and 13 were already resolved (listed here) as of this writing. This compares to 34 total requests made in October, November, and December of 2020 for the 2021 season, according to SEC archives for that year.
Of these 78, six were environmental (e.g., greenhouse gas reduction targets, environmental oversight, plastic pollution); 38 were social (e.g., employee training, social impact of operations or products, human rights, pay equity, CEO pay levels); and 30 aimed at changes in governance (e.g., independent chair, special meetings, proxy access, shareholder voting, single class of stock). Others were unique to the company’s operations.
Of the 13 proposals already resolved, nearly half (six) were withdrawn because the company and the shareholder (or shareholder group) reached an agreement on the issue. Of the remaining seven requests for exclusion, three succeeded in getting the SEC to agree that these could be left off the proxy on the grounds that the resolutions pertained to ordinary business. The other four of these earliest resolutions will be appearing on proxies.
Interestingly, these four early resolutions span the full ESG continuum.
The new SEC guidance will continue to have an impact as more companies approach the deadline for their proxy filings. Annual meetings are most commonly held in April, May, and June for companies that follow a calendar fiscal year, and shareholders are required to send in their proposals to companies at least 120 days in advance of the annual meeting (based on the date given in the company’s previous proxy statement). This gives companies 80 days to resolve the proposals, as their window for filing proxy statements is 40 days in advance of the annual meeting, whether virtual or in person. So, for annual meetings in mid-June, the deadline for shareholders to file resolutions falls in February, and the deadline for companies to send out proxies is not until May 1.
Therefore, most boards still have time to plan—and to choose the wisest course. Directors can support a request for “no-action” assurance from the SEC, and so exclude a resolution from the proxy. Alternatively, they can encourage management to negotiate with the shareholder to withdraw it or to go ahead and include it and communicate their side of the story to shareholders. Whatever boards decide, this 2022 proxy season promises to be a lively one.
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