New groups have recently been formed to take aim at the shareholder proposal process—its use by proponents and its implementation by Corp Fin—from both the right and the left ends of the political spectrum. In one case, the coalition formed is seeking to head off the recent surge of support by various institutional holders of shareholder proposals for environmental, social or governance disclosure or actions. For example, last year, proposals to enhance disclosures regarding climate change won majority votes at three major companies, in large part as a result of support from mammoth asset managers such as BlackRock and Vanguard, and two climate change proposals won majority support this year. It’s also been reported that nine ESG proposals were successful in winning majority votes this year. (See, e.g., this PubCo post.) On the other side is a group that is seeking to reform the shareholder proposal process to reverse a turn, as perceived by the group, by Corp Fin toward exclusion of more shareholder proposals related to ESG issues.
As discussed in this article from Axios and this opinion piece from The Hill, a group of five associations, the National Association of Manufacturers, the American Council for Capital Formation, the Equity Dealers of America, the Savings and Retirement Foundation and the Small Business and Entrepreneurship Council, has launched a new initiative, the Main Street Investors Coalition, formed to wage a multi-million dollar campaign aimed at countering the influence exercised by a number of large institutional investors and asset managers, like BlackRock and Vanguard, in the shareholder proposal process, particularly in connection with issues the Coalition views as inherently social or political. According to the Coalition, as the “size and influence of these massive institutional holders has grown, so too has their power, influence and share of voice— drowning out the voices and interests of Main Street investors who, despite controlling the single largest pool of equity capital in the world, have almost no ability today to influence the decisions these funds make on their behalf, with their money. The Main Street Investors Coalition was created to help change that.” The Coalition seeks to reform a system that it views as “badly broken, costly and inherently unfair.”
The Coalition will have its home at the National Association of Manufacturers and, according to Axios, will focus first on studies and op-eds in support of its positions. The longer term plan is to promote legislation and reforms at the SEC. (You might recall that NAM played a major role as a plaintiff challenging the conflict minerals rules. See this PubCo post.) The group’s executive director has taken aim at institutional investors and pension funds that “pursue political and social objectives ahead of maximizing value,” as well as a “proxy proposal process that all too often has little to do with either maximizing shareholder value or enhancing enterprise performance.” And in this post, he criticizes the “activist agendas” of mutual fund advisors, predicting that, as they “increase their level of shareholder activism, it will not necessarily be aimed at wealth maximization. The focus will instead be on demanding that companies serve all corporate stakeholders and identify a ‘social purpose,’ no matter the impact on the risk adjusted returns provided retail investors.” (See this PubCo post discussing a letter from the CEO of BlackRock advocating that public companies recognize their responsibilities to stakeholders beyond just shareholders—to employees, customers and communities.) However, it is not shareholder activism per se that is the object of his criticism, but rather the combination of activism with a “concentration of voting power that makes it almost a fait accompli, trumping the decision making of the board and executive management.…”
To address these issues, the Coalition proposes four solutions:
- “We will call for managers to focus on maximizing performance ahead of pursuing social and political objectives that have not been sanctioned by fund members.
- We will insist that public pension funds meet the same basic regulatory and reporting standards as private pension funds as the first step to addressing a broken and deteriorating system.
- We will require that retail investors who own passive funds through 401(k)s, index funds and other vehicles have a say in how their shares are voted.
- And we will demand that ‘black-box’ proxy-advisory firms be more transparent about potential conflicts of interest between their business areas in order to ensure that their guidance actually benefits shareholders.”
On the other end of the political spectrum is another coalition formed by a group of investors, the Shareholder Rights Group, which is focused on defending shareholders’ “rights to engage with public companies on governance and long-term value creation,” especially through the shareholder proposal process. The Group, which consists of 14 institutional investors that manage approximately $25 billion in assets, as reported by Bloomberg BNA, as well as a prolific proponent of shareholder proposals, John Chevedden. Members of the Group have submitted numerous shareholder proposals on a variety of ESG topics, such as climate change and corporate governance.
In particular, the Group levels criticism at the SEC for a perceived recent shift in approach to shareholder proposals, especially its implementation in practice of the 2017 SLB 14I and its recent decisions under Rule 14a-8(i)(9), the exclusion for conflicting proposals. As discussed in this PubCo post, SLB 14I addressed the application of the Rule 14a-8(i)(7) “ordinary business” exclusion and the Rule 14a-8(i)(5) “economic relevance” exclusion, taking the position that Corp Fin’s prior application of Rule 14a-8(i)(5) was too narrow and unduly limited the exclusion’s availability. The SLB also invited company boards to weigh in, as part of company request for no-action, with their analyses as to whether the proposal was “significantly related” to or involved “significant policy issues” with a nexus to the company business. In addition, in practice, the Group contends, Corp Fin changed its interpretation of the type of proposal that would constitute excludable ”micromanagement,” providing more opportunities to exclude ESG proposals related to climate change, notwithstanding the recent uptick in shareholder approval of these types of proposals. For example, the Group argues that, for example, with regard to certain proposals setting emissions targets, Corp Fin had “generally allowed proposals addressing issues at a broad policy level,” but in 2018, began to exclude these types of proposals as micromanagement. In addition, the Group charges, Corp Fin began to exclude proposals as micromanaging under the theory that they sought “to impose specific methods for implementing complex policies.” (See also this April 20, 2018, article in CFO.com, which reports on an S&P analysis finding that SEC staff rejected only one of 11 company requests to use the “ordinary business” exception to exclude proposals on environmental matters.)
With regard to Rule 14a-8(i)(9), the Group is critical of Corp Fin decisions to allow companies to “game the process” by introducing their own conflicting management proposals after receipt of the shareholder proposals.
To address these issues, the Group presented Corp Fin with a series of recommendations:
- “Confirm that proposals requesting that a company set targets or improve its performance on significant policy issues are not considered micromanagement unless they attempt to direct minutiae of operations.” Corp Fin should recognize that “investors have a practical ability to request both disclosure and action on long term business strategy on ESG matters, including goal setting and increasing the scale, pace and rigor of responses to significant policy issues.” In addition, Corp Fin should “[d]elineate clear limits on the new micromanagement doctrine of excluding proposals that seek specific methods for addressing complex policies. The fact that a company has complex policies in place is not a basis for exclusion of proposals. Complex policies can also be ineffectual policies. The correct path for evaluating the adequacy of company activities as a basis for exclusion is under Rule 14a-8(i)(10) (substantial implementation) not under Rule 14a-8(i)(7).”
- “Prevent the abuse of the conflicting proposals rule, Rule 14a-8(i)(9).” The Group suggests establishing a rebuttable presumption against a “conflict” when a management seeks ratification of an existing policy or provision. In addition, exclusion under the Rule should be limited to binding proposals, as opposed to the typical non-binding advisory proposals, that “could not both be legally enacted simultaneously without creating a legal conflict.” The Group contends that, generally, advisory proposals cannot legally conflict with management proposals.
- “Provide additional detail in no-action decisions, applying the decision-making rule to the facts and language of the proposal to clarify the decisive issues.” This practice would eliminate guesswork and the need for “kitchen-sink” arguments.
- “Identify categories of proposals where board ‘findings’ tend to be less relevant” to the determination of “significance.” The Group suggests that these categories reflect areas where the board “is in no better position than proponents or the Staff to assess significance to shareholders,” such as the following:
- “Where the company’s externalities can impose portfolio-wide impacts for investors;
- Where the company’s activities may pose systemic risks;
- Where the company has material gaps in its ESG disclosure.”
- “Identify categories of proposals that the Staff views as ‘governance’ proposals exempt from relevance and significance challenges.”
- “Clarify the need for the board section of a no-action request to include analysis of the substance and significance of the proposal, as well as documentation regarding the content of the board process.” The Staff should encourage inclusion in these board analyses of specifics, such as data, minutes, experts consulted and other material reviewed to reach the conclusion.