Sanford Lewis
Director
Shareholder Rights Group
Director
Shareholder Rights Group
In
a guidance issued November 1, the SEC Staff has taken an innovative “outside
the box” approach to the shareholder proposal process. The new Staff Legal Bulletin 14I has raised
numerous questions and uncertainties among investors and companies.
The House of
Representatives earlier this year passed a radical revision to the shareholder
proposal process in a section of the Financial Choice Act, which would dramatically
constrain the ability of shareholders to file proposals, including requirements
that would limit the filing of proposals to only the few wealthiest
shareowners. That bill is not expected to pass the Senate and become law. However,
this approach was recently echoed in a Treasury Department report that
recommended an upward revision of proposal filing and resubmission thresholds.
These reform
efforts do not appear grounded in evidence of an actual problem with the shareholder
proposal process. For instance, there has been no increase in the number of
proposals filed or appearing on corporate proxies in recent years. Instead, shareholder
proposals are winning larger supporting votes from shareholders, demonstrating
that the process is functioning well and fulfilling its intended purpose: to act as an
investor protection vehicle. In addition, cost estimates offered by companies
have been highly exaggerated. There is really no evidence that the shareholder
proposal process is posing new or difficult burdens on companies.
However,
the SEC Staff has now taken action that might be understood to be an attempt to
respond to corporate critics. In its new
Bulletin 14I, the SEC Staff requests that boards of directors weigh in on
issues of whether a proposal is relevant to a company or addresses a
significant policy issue that transcends ordinary business. A board’s
negative determinations on significance or relevance will apparently be given
substantial consideration in Staff decisions as to whether a shareholder
proposal must appear on the proxy:
A
board of directors, acting as steward with fiduciary duties to a company’s
shareholders, generally has significant duties of loyalty and care in
overseeing management and the strategic direction of the company. A board
acting in this capacity and with the knowledge of the company’s business and
the implications for a particular proposal on that company’s business is well
situated to analyze, determine and explain whether a particular issue is
sufficiently significant because the matter transcends ordinary business and
would be appropriate for a shareholder vote.
Accordingly,
going forward, we would expect a company’s no-action request to include a
discussion that reflects the board’s analysis of the particular policy issue
raised and its significance. That explanation would be most helpful if
it detailed the specific processes employed by the board to ensure that its
conclusions are well-informed and well-reasoned. We believe that a
well-developed discussion of the board’s analysis of these matters will greatly
assist the staff with its review of no-action requests under Rule 14a-8(i)(7).
[Emphasis added]
In
light of the SEC’s investor protection mission, the SEC Staff might find a
board statement useful, but legally speaking, it cannot be the final word. The shareholder proposal process is typically
utilized by investors to address issues that are being neglected by corporate
boards — blind spots that may lead to crushing
liabilities or reputational damage.
As
important, the proposal process has long allowed investors to provide
guidance to companies on issues where the board and company policies are posing
harm to society or the environment. (Examples recognized by the courts or the
Commission include dangers of nuclear power, the production of napalm by Dow
Chemical used in the Vietnam War, discrimination and concerns over animal
cruelty in the production of foie gras.) The courts and the SEC have long held
that board and management do not hold a monopoly on expertise on these issues
of societal impact beyond those of shareholders, and that shareholders have a
right through the proposal process to weigh in.
Moreover,
we have seen an increasing interest by share owners of all sizes in proposals
for addressing systemic risk, such as risk to the entire economy or to the
natural resource base on which the economy depends.
The history of board reactions to shareholder proposals is telling.
In thousands of instances, boards reflexively recommend a “No ” vote on
resolutions whether they are addressing a
governance matter or a social or environmental issue like climate
change. Even where a resolution topic
has merit, boards and corporate secretaries have long tried to keep corporate
proxies free from resolutions that provoke debate among investors. Investors perceive the goal of the corporate secretary
at many issuers as using legal tools to contest resolutions, even if they are
matters of legitimate policy debate, rather than engage in balanced
consideration of the pros and cons of the issue.
No wonder that many investors are skeptical about the approach of
the Bulletin. Will boards effectively deliberate on relevance and significance,
or use this invitation as an opportunity to continue and further advance their
reflexive opposition to proposals? Does the board’s potential fiduciary
liability for neglecting
important issues provide a check on abuse of the new bulletin? It seems a stretch to assume that in every instance a board finding
of irrelevance or insignificance is “considered” and “unbiased.”
So
while the board might share useful insights on how they think about an issue, these
insights are surely not the exclusive evidence of whether a proposal addresses
a significant policy concern for investors or is relevant to the company. If
the SEC is to continue protecting investor rights and interests, the Staff
surely needs to give substantial weight to investors’ evidence as well.
It
is in the realm of possible outcomes that this Bulletin could prove a positive
benefit to investors, by encouraging boards to consider the significance and
relevance of a proposal. At least theoretically, this could encourage more in
depth board consideration of a proposal, and increased communication with investors
instead of merely issuing routine statements in opposition to proposals.
The
outcome is uncertain. To say the least, we can expect an interesting proxy
season ahead.