by Cydney Posner
In this article, the WSJ discusses the increased frequency and sophistication of shareholder proposals regarding the environment. In particular, the piece observes that shareholder proposals focusing on environmental issues have evolved “from requests for greenhouse gas emissions cuts to demands for disclosure of strategies to manage climate risks and for linking executive pay with sustainability performance.” But, with the imminent change to a new administration at the federal level, will these sustainability proposals continue to be viable?
According to the article, proponents have begun to shift their proposals from those seeking simply transparency regarding environmental policies to requests for more complex plans about risk mitigation and energy efficiency. For example, the Office of the NY State Comptroller submitted a proposal to one company asking for information about its strategy “to adapt its business model ‘to enable increased deployment of distributed low-carbon electricity generation resources’ that would both reduce greenhouse-gas emissions and protect shareholder value. The proposal cited various analyses by Wall Street banks that predict a transformation of the electric utility business as more solar and wind generation enter the grid.” A representative of a sustainable investment management firm commented in the article that the growing complexity of proposals could reflect a desire for a better response from management: “‘You can file a simple resolution and get a simple response….But if the company isn’t hearing you and you still think this is a significant concern in your portfolio, then you up your game. It’s an arms race.’” One recent variant proponents have begun to use has been to propose linking executive compensation to greenhouse-gas reduction and climate risk management.
Notably, investors have also expanded the targets of their proposals “beyond the obvious oil and gas companies to include electric utilities, mining, insurance companies, automakers, airlines and hotel operators.” For example, these proposals may request assessments of “exposure to financial and reputational risks from relationships with clients in carbon-intensive industries,” or requests for reports “‘assessing the feasibility and climate benefits of adopting enterprise-wide, quantitative and time-bound targets’ for increasing their renewable energy sourcing.”
According to Proxy Monitor, a plurality of shareholder proposals in 2015 and 2016 “involved environmental concerns,” addressing issues “including climate change, greenhouse gas emissions, ‘sustainability,’ recycling, water quality, genetically modified organisms (GMO), fossil fuels, nuclear power, and methane emissions.” Although, over the past 10 years, for the Fortune 250, no environment-related shareholder proposal received majority support over board opposition, Proxy Monitor reports, the average support for these proposals increased this year, with five environmental proposals receiving record support of at least 40%. And, according to the WSJ, the sustainable investment firm representative contended that “any percentage above 20% is nonetheless significant,” making it “hard to ignore” the proposal and leading some companies to negotiate with the proponents rather than submit the proposal to a shareholder vote. A representative of Proxy Monitor commented in the article that “around 50% of the gain in the voting power likely stems from investors voting in line with the recommendations of proxy advisory firms such as Institutional Shareholder Services and Glass Lewis.” He also observed that proponents seem to have learned that, if they focus the proposal on risks as opposed to directing companies to take specific actions, that may be rewarded with increased votes. He also characterized the shareholder proposal process as “a relatively low-cost exercise for shareholders thanks to Securities and Exchange Commission rules.”
But with the changing of the political guard in Washington, how long will that low-cost avenue remain open? As noted in Pro Publica, former Republican SEC Commissioner Paul Atkins “is overseeing the appointees to the independent financial regulators like the SEC and… will be able to help shape the Trump Administration approach to financial regulation” and, according to the Financial Times, he “could be named SEC chairman or given another key position.” This article in Politico (hat tip to thecorporatecounsel.net blog) reports that Atkins has “railed against” environmentalists, among others, “for challenging public companies through shareholder activism. He has called companies ‘weenies’ who often ‘cave’ to social activists.” At a Heritage Foundation event in 2012, the article reports, Atkins contended that the goal of these environmental groups and others has been “to put pressure on corporations through the shareholder proposal process.”
SideBar: As noted in the article, one example of this type of pressure could be the proposal submitted by a religious group to Wal-Mart to develop a policy regarding the sale of high-capacity firearms, such as the AR-15 assault rifle. Although Wal-Mart had succeeded in court in excluding the proposal, Wal-Mart subsequently announced that, in light of shifting consumer demand, it would stop selling AR-15s and other high-capacity semiautomatic rifles. (See this PubCo post.)
According to Politico, Atkins views the shareholder proposal process as a “megaphone of free publicity….Over the years, the SEC’s rules have been changed to benefit social activists, and that needs to swing back, he said. ‘The next big fight is going to be over corporate governance rules and shareholder communications and how corporations interact with shareholders…. Because right now the rules have really drifted way off to one side like I said between co-opting and disenfranchising. So I think it is going to have to be radically changed back.’ Labor unions will resist the rule changes, Atkins said. As their memberships decline, the unions are well aware of the tactical value the shareholder process gives them. ‘This is their last power,’ he said.” [Emphasis added.]
SideBar: In sync with Atkins’ views on shareholder proposals is this recent report from the Business Roundtable proposing modernization of the shareholder proposal process. The Roundtable contends that the current process “is dominated by a limited number of individuals who file common proposals across a wide range of companies but own only a nominal amount of shares in the companies they target. These investors are pursuing special interests — many of which have no rational relationship to the creation of shareholder value and conflict with what an investor may view as material to making an investment decision. As a result, the current process is often used to promote the self-interest of a minority of shareholders, frequently at a significant cost to the company.” The report recommends, among other things, that the dollar threshold for eligibility to submit a shareholder proposal be changed to a threshold of a percentage of company stock held for three years (and be set even higher when a proponent is relying on a proxy to submit a proposal); that the proponent disclosure requirements be expanded to include disclosure of the proponent’s motivations, goals, economic interests and holding in the company’s securities and any similar proposals it has submitted at other companies (as well as the results of those proposals); and that the threshold vote required to allow resubmission of a proposal be raised. With respect to the no-action process for exclusion of proposals, the Roundtable advocates changes to enhance consistency, such as more clearly defining the criteria for applying the “ordinary business” exclusion, revising the “conflicting proposal” exclusion to reflect the more generous interpretation that applied prior to the 2015 Staff Legal Bulletin (see this PubCo post), reevaluating the standard for excluding proposals that are materially false and misleading or vague (a standard the Roundtable contends is applied too narrowly), and converting the no-action process itself into a process for the issuance by the SEC of advisory opinions on major policy issues or at least enhancing the mechanisms for SEC review and oversight of the current process.
However, even if the shareholder proposal process is undermined or effectively eliminated for these social policy proponents, there may be one more new weapon in their arsenals. According to Politico, the “next front is likely to be attempts to get experts on climate issues on boards, making use of shareholders’ increased ability to nominate directors through proxy access….‘If you are trying to make the company more competitive in a changing world…you need someone with this kind of expertise on your board,’ said [the sustainable investment firm representative,] ‘That is the shoe that remains to drop.’”
SideBar: In contrast to hedge fund activists, environmentalists and other social policy activists are expected to find the low cost of proxy access nominations to be appealing and are much less likely to stumble over the representation that they have no control intent typically required in proxy access nominations. (See this PubCo post.)