There has been a lot of speculation about the extent to which Congress would take advantage of the Congressional Review Act to dispense with some of the “midnight regulations” adopted during the prior administration. (See this PubCo post.) We may finally be getting some insight into that question. Senator Sherrod Brown has now introduced a joint resolution providing for congressional disapproval of the SEC’s new(ish) shareholder proposal amendments, which were the subject of strong dissents from the Democratic SEC Commissioners when they were adopted in September 2020. The resolution simply provides that Congress disapproves the rule and, as a result, the rule will have no force or effect. As reported by Bloomberg, Brown stated that “[b]y raising eligibility and resubmission thresholds for shareholder proposals, the rules take away an important tool to push for better corporate governance, increase transparency, and address the gender pay gap….Congress must repeal the rule, and we need to find ways to increase shareholder participation and to make executives more accountable.” As reported by Reuters, the National Association of Manufacturers described the resolution as “heavy-handed” and stated that it “does not believe the CRA is the appropriate mechanism for review of the SEC’s rule to modernize the proxy process […] and looks forward to engaging with the SEC to defend the vital reforms included within it.” Will the resolution win the necessary support?
Environmental, social and governance activism continues to adopt new approaches. One of the latest is from The Shareholder Commons, a non-profit organization founded by CEO Rick Alexander—you might recognize the name from B-Lab and Morris Nichols in Delaware—that uses “shareholder activism, thought leadership, and policy advocacy to catalyze systems-first investing and create a level playing field for sustainable competition.” In essence, TSC seeks to shift the focus from the impact of a company’s activities and conduct on its own financial performance to “systemic portfolio risk,” the impact of the company’s activities and conduct on society, the environment and the wider economy as a whole, which would affect most investment portfolios. In particular, the group has helped with submission of a number of shareholder proposals that address issues in its sweet spot—influencing corporate behavior regarding social and environmental systems that affect the economy as a whole. This season, the proposals have advocated conversion to public benefit corporations (see this PubCo post), disclosure of reports on the external public health costs created by the subject company’s retail food business, studies on the external costs resulting from underwriting of multi-class equity offerings, and reports on the external social costs (e.g., inequality) created by the company’s compensation policy. Earlier this year, TSC, working with a long-term shareholder, submitted a shareholder proposal to Yum! Brands, asking the company to disclose a study on “the external environmental and public health costs created by the use of antibiotics in the supply chain of [the] company… and the manner in which such costs affect the vast majority of its shareholders who rely on a healthy stock market.” TSC has just announced that it has withdrawn its proposal because Yum! has agreed to “provide comprehensive reporting on the systemic effects of the use of antibiotics in its supply chain by the end of 2021.”
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted (once again, three to two) to adopt highly controversial amendments to the requirements for submission of shareholder proposals in Rule 14a-8. According to the adopting release, the final amendments are intended to “modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders.” The final amendments modify the eligibility criteria for submission of proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. Notably, the submission threshold has not been amended since 1998, and the resubmission threshold since 1954. The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post.
The SEC may have postponed until next week the open meeting originally scheduled for yesterday to consider adoption of revisions to the shareholder proposal rules, but Reuters has the inside scoop on the outcome of at least one controversial provision: according to Reuters, say farewell to the “momentum” provision. The expected deletion of the provision, Reuters observed, “marks a critical reprieve for supporters of social and environmental motions, which can take years on the ballot to gain traction.” Reuters reports that investors have continued to press the SEC in letters and meetings with SEC staff, hoping to put the kibosh on the proposed amendments altogether. They appear to be having some impact. Will the SEC move ahead in the face of this strong opposition?
In 2019, investor support for shareholder proposals related to environmental, social and governance matters reached a record average high of 29%, according to Morningstar. And that doesn’t take into account the number of climate-related proposals that were withdrawn after successful negotiation—a number that exceeded the number of climate proposals that actually went to a vote. In this report, Morningstar analyzes the level of proxy voting support by 52 of the largest fund families for ESG-related shareholder proposals in 2019 and over the five years from 2015 to 2019. Although Morningstar finds substantial increases in average support over the last five years, five of the largest fund families, including BlackRock, voted against over 88% of ESG-related proposals, enough to prevent many of these proposals from achieving majority support. But, in 2020, with BlackRock having joined Climate Action 100+— reportedly “the world’s largest group of investors by assets pressuring companies to act on climate change”—and having announced that it was putting “sustainability at the center of [BlackRock’s] investment approach,” the question is whether that voting strategy is about to change?
In May 2019, comp consultant Mercer conducted a spot survey of 135 companies, looking at the prevalence and types of ESG (environmental, social and governance) metrics used in incentive compensation plans, including metrics related to the environment, employee engagement and culture, and diversity and inclusion. The survey found that 30% of respondents used ESG metrics in their incentive plans and 21% were considering using them. Mercer observes that with the “growing expectations for organizations to operate in an environmentally and socially conscious way, [ESG] incentive plan metrics are increasingly being considered as effective tools to reinforce positive actions.”
With 70% of the annual meetings for the Russell 3000 having now taken place (1,812 companies), in this article, ISS takes an early look at the 2019 proxy season. In brief, ISS found increases in opposition to director elections and to say-on-pay proposals, as well as increases in the number of, and withdrawal rates for, environmental and social (E&S) proposals relative to governance (the “G” in ESG) proposals. In addition, the disparity in the levels of support for E&S proposals relative to the historically more popular governance proposals has narrowed dramatically.
What’s next for the House after taking on Dodd-Frank in the Financial CHOICE Act? Apparently, it’s time to revisit SOX. The Subcommittee on Capital Markets, Securities, and Investment of the House Financial Services Committee held a hearing earlier this week entitled “The Cost of Being a Public Company in Light of Sarbanes-Oxley and the Federalization of Corporate Governance.” During the hearing, all subcommittee members continued bemoaning the decline in IPOs and in public companies, with the majority of the subcommittee attributing the decline largely to regulatory overload. A number of the witnesses trained their sights on, among other things, the internal control auditor attestation requirement of SOX 404(b). Is auditor attestation, for all but the very largest companies, about to hit the dust?