June 6, 2024

What happened with no-action requests this proxy season?

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According to “SEC No Action Statistics to May 1, 2024” from the Shareholder Rights Group, this proxy season, the SEC staff “has nearly doubled the number of exclusions” of shareholder proposals compared with 2023; that is, relative to the prior year, the staff has issued almost twice the number of letters indicating that it would not recommend enforcement action if the company excluded the proposal from its proxy statement. While that surge reflects primarily a “sharp increase” in the number of requests for no-action filed by companies, importantly, the article indicates that it also reflects an increase in the relative proportion of no-action requests granted. From November 1, 2023 to May 1, 2024, the article reports, the SEC has granted company requests for no-action regarding shareholder proposals about 68% of the time (excluding requests withdrawn), compared with 56% at the same point last year. Notably, the article reports, that percentage (68%) is fairly comparable to the average exclusion rate (69%) during the prior administration (2017 to 2020). Since the issuance of SLB 14L in 2021, the staff has come in for criticism for applying a revised approach to evaluating no-action requests that some market participants considered perhaps a bit too generous to proponents of proposals, leading to an excess of overly prescriptive proposals presented at shareholder meetings. As the article suggests, has this criticism led to a moderation of that approach?

The Shareholder Rights Group describes itself as “an association of investors formed to defend the shareowner’s right to engage with public companies on governance, corporate accountability and long-term value creation.”

According to the article, as of May 1, the staff had made 259 decisions (203 excluding withdrawals) on requests for no action, compared to 167 (135 excluding withdrawals) as of the same date in the prior year. This year, the staff has granted no-action relief related to 139 proposals compared with 76 last year.

This season, the article observes, “micromanagement” appears to be a frequent argument that has been successfully used in favor of excluding proposals regarding both climate and social topics.

SideBar

You probably recall that, in 2021, Corp Fin issued Staff Legal Bulletin 14L, which outlined Corp Fin’s most recent interpretations of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception, and rescinded SLBs 14I, 14J and 14K. Among other things, SLB 14L reversed some of the interpretations of “micromanagement” imposed under the rescinded SLBs. It was widely anticipated that the changes in SLB 14L would make exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies.

The “ordinary business” exclusion permits a company to omit a proposal that “deals with a matter relating to the company’s ordinary business operations.” One of the two considerations under the ordinary business exclusion is the extent to which the proposal seeks to “micromanage” the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” Under the micromanagement exclusion, the staff does not look at the subject matter, but rather only at the manner in which a proposal seeks to address the subject matter, i.e., how prescriptive is the proposal?

In SLB 14L, the staff indicated that it had determined that the staff’s recent application of the micromanagement concept in SLB 14J and SLB 14K “expanded the concept of micromanagement beyond the Commission’s policy directives. Specifically, we believe that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement.” Under SLB 14L, the staff said that it would

“take a measured approach to evaluating companies’ micromanagement arguments—recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement. Instead, we will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management. We would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.” (See this PubCo post.)

After the issuance of SLB 14L, a number of institutional investors reacted unfavorably to many of the proposals that were ultimately submitted for votes, viewing them as “too prescriptive.” Indeed, the prescriptive nature of many of the proposals, especially climate-related proposals, prompted some major asset managers to vote against these proposals.

For example, in this commentary, BlackRock Investment Stewardship—BlackRock is reportedly the largest asset manager worldwide—provided their perspective on climate-related shareholder proposals that were coming up for votes during the 2022 proxy season. In 2021, BIS said, they “supported 47% of environmental and social shareholder proposals,” but, BIS predicted, the results in 2022 were expected to fall well short of that level. Why is that? According to BIS, climate-related shareholder proposals submitted in 2021 focused on “material business risks” or requested reports providing information that would be useful to investors to help them assess a company’s “ability to generate durable long-term value.” BIS considered these proposals “to be consistent with long-term value creation” and not undue constraints on management’s strategic efforts to create shareholder value. In the view of BIS, however, “many of the climate-related shareholder proposals coming to a vote in 2022 are more prescriptive or constraining on companies and may not promote long-term shareholder value.” BIS attributed the change to SLB 14L, which BIS maintained, led to “a marked increase in environmental and social shareholder proposals of varying quality coming to a vote.” In this subsequent BIS voting spotlight, BIS reported that, in the 2022 proxy season, of 460 U.S. E&S proposals, only 31 were omitted (i.e., the staff issued no-action relief), reflecting a decline of 61% over the prior year, 184 withdrawn and 245 voted on. BIS advised that, in voting on behalf of their clients, BIS supported 24% of E&S shareholder proposals in the U.S. in the 2022 proxy season, a decline from 43% in the prior year, “reflecting how these factors made these proposals less supportable in the 2021-22 proxy year.” (See this PubCo post.)

To illustrate, the article identified two categories of climate proposal where a micromanagement argument was persuasive to the staff in determining no-action relief: proposals seeking a breakdown of greenhouse gas emissions by category of product sold, and proposals seeking “disclosure of the proportion of sector emissions attributable to clients not aligned with a credible Net Zero pathway.” According to the article, the proponents of these proposals contended that the disclosures would reveal “material shortcomings of the companies’ climate transition plans,” a topic of concern to many mainstream investors. However, the staff viewed the proposals to be micromanaging by requesting information that was too granular.

A social proposal identified in the article relating to “union suppression” activities requested disclosure of “both internal and external expenditures made for union suppression,” as well as various details surrounding unionization and collective bargaining activities. The staff issued a no-action letter stating that there was some basis to agree that the proposal involved micromanagement. With regard to social proposals related to a “living wage,” whether the staff issued a no-action response depended largely on how the proposal was framed. In one instance described in the article, a proposal regarding compliance with human rights standards and income inequality concerns asked for data regarding the number of workers “paid less than a living wage, broken down by full-time employees, part-time employees, and contingent workers with additional analytics on how much the aggregate compensation falls short of living wage.” The staff issued no-action relief on the basis of micromanagement. However, in other proposals requesting that the board “exercise its fiduciary duty to provide employees with a living wage,” the staff declined to issue no-action relief; according to the article, the proponent framed the proposal as an important social issue—the “impact on the whole economy due to failure to pay employees a living wage, placing additional burden on taxpayer funded social support programs.”

The article concludes that issuers and other market participants should be relieved that the staff has apparently heard and responded to their concerns about overly granular shareholder proposals: the results for this proxy season “should demonstrate that the SEC staff takes feedback from the market in its exclusion decision-making, and that the process remains a functional system for screening proposals.” However, the article makes a plea for companies not to seek exclusion of proposals on important issues: “many of the proponents whose proposals were excluded had provided evidence that the proposal targeted a material issue for the receiving companies; exclusion of proposals often represents a serious setback for investors seeking to voice or vote upon critical matters of risk management or governance. Companies wishing to remain dynamic and responsive to their investors should consider the critical feedback and monitoring of potentially costly strategic shortcomings that is lost when a shareholder proposal is excluded.”

SideBar

As a result of its review of proposals submitted for Russell 3000 company annual shareholder meetings held between January 1 and May 31, 2024, ISS observed the following regarding shareholder proposals this season:

“The volume of shareholder proposals submitted for annual meetings held between Jan. 1 through May 31 increased to 739 proposals with 273 voted thus far and 249 still pending.

The median support level of all shareholder proposal[s] is largely unchanged at 20.6% for 2024, but those receiving majority support is ticking up.

Governance and compensation proposals are regaining focus and interest from investors, with 268 such proposals submitted for the first five months of 2024. The median support surged to 34.9%, a level unseen in the past five years.

The volume of environmental proposals decreased to 130 proposals and social proposal volume remained mostly flat. However, support on both environmental and social proposals are up slightly, reversing the two-year consecutive decline in support since 2021.

Anti-ESG proposals continue to increase in number, but the support remains low.

Top 5 most prevalent proposals on ballot represent a broad range of topics, including shareholder rights, board accountability, executive pay, GHG emissions, and political spending.”

ISS concluded that both the volume and support of governance-related proposals was “gaining steam. Environmental and social proposals are showing a sign of reversing trend of declining support from the 2021 peak, while anti-ESG proposals are gaining volume but not support.” Has the exclusion of more proposals led to somewhat higher support for proposals that are ultimately submitted for a vote?

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