Shareholders will have more ways to press companies on topics like climate and human rights thanks to the SEC's reversal of Trump-era restrictions. We welcome this development as a win for shareholder democracy.
The reversal was issued on Wednesday via a staff legal bulletin by the SEC's Division of Corporate Finance. It rescinds earlier SEC guidance from 2017-19 that limits the types of issues shareholders can address via corporate proxy ballots. (We have previously discussed our opposition to these types of restrictions on shareholders' rights.)
What Changed From the Trump-Era Guidance?
The Trump-era guidance was part of a decidedly more corporate-friendly rulemaking agenda that many viewed as biased toward the interests of heavy emitters in the economy.
It raised the chances that shareholder-filed ballot measures would be excludable under the long-standing "ordinary business rule," which holds that companies can omit resolutions that appear to impact their day-to-day business management and operations unless the issue has a broader social policy relevance.
Companies can invoke this rule when a shareholder asks a company's management to take a specific action--such as setting climate targets and timelines against Paris-aligned benchmarks or commissioning civil and human rights impact audits--as opposed to merely reporting on an issue. To prove that the ordinary business rule does not apply to a resolution, and that a resolution does qualify for the proxy ballot, a resolution must demonstrate broad societal relevance and not attempt to "micromanage" the company.
The Trump-era interpretation of this rule established that social policy relevance was not enough, and that the issue being proposed had to also be demonstrably relevant to the specific company.
This framework allowed several companies facing resolutions that asked them to set and disclose greenhouse gas emission reduction targets to successfully petition the SEC for "no-action relief." No-action relief means that the SEC will not take enforcement action against a company for omitting a shareholder proposal from its corporate proxy ballot.
Consider the SEC's 2018 decision around energy company EOG Resources EOG. The SEC broke with years of precedent by granting the firm no-action relief for omitting a shareholder resolution asking it to "adopt companywide, quantitative, timebound targets for reducing greenhouse gas emissions, and issue a report discussing its plans and progress toward achieving these targets." This ruling signaled the SEC's new and more conservative approach to adjudicating appeals of shareholder climate resolutions, consistent with the staff legal bulletin issued just months before.
SEC filings show that at least five more resolutions were omitted on this basis in 2019, and it's likely that many more were deterred from being filed in the first place because of the prospect that they would not pass muster with the SEC.
Similarly, in 2020, Chevron CVX, Devon Energy DVN, Exxon Mobil XOM, and Hess HES were granted no-action relief for resolutions asking each company to describe plans to reduce their contributions to climate change and to align with the Paris Agreement's climate goals.
Now, the reversal issued on Wednesday states that "… staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company."
This new stance was already evident in at least two rulings earlier this year: The SEC declined no-action petitions by Chevron and ConocoPhillips COP to keep shareholder climate target proposals off their respective ballots. When these resolutions came to vote in May 2021, both ballot measures passed with clear majority shareholder support.
What Does This Mean for the Upcoming Proxy Season?
We know from our annual proxy season tracking that support for climate and social justice issues has been rising rapidly and reached record levels in 2021. When heavy-emitting companies were asked to set emissions reduction targets across scope 1, scope 2, and scope 3 emissions or to explain their decarbonization strategies, most resolutions passed with majority support.
Shareholder resolution filing is part of a "virtuous cycle" of shareholder influence supported by the proxy process. Because the reversal tilts favor back toward shareholders, it strengthens shareholders’ position in pre-proxy-season engagements. Corporate management will be more motivated to engage with shareholder proponents to achieve resolution of a proposal before it goes to a vote.
Most resolutions that will be voted on in the 2022 proxy season will have filing deadlines in December. This gives shareholders enough time to file resolutions that can take advantage of this new stance.
Many large asset managers and asset owners have made net-zero investing commitments in the past year and will be looking to press portfolio companies to also commit to decarbonization timelines covering scope 1, scope 2, and scope 3 emissions. Companies that fall short of expectations will not be able to count on the SEC for protection from a shareholder vote in the 2022 proxy season.