New interpretations by the SEC of the Shareholder Proposal Rule (14a-8) in 2017 led to an increase in omissions of climate proposals last year. There is reason for concern that the number of omissions could increase further in 2019, depending on how the SEC applies its latest SEC Staff Legal Bulletin 14J, issued on October 23, 2018. Key elements include the following:
Micromanagement and board opinions: The bulletin last October elaborated on how the SEC staff will consider micromanagement claims, as well as board opinions regarding the significance of a proposal to a company, for purposes of ordinary business claims. The bulletin references the last full SEC 14a-8 rulemaking in 1998, saying it is bulletin is consistent with the definitions of “ordinary business” and “micromanagement” articulated 20 years ago. However, at that time, proponents expressed concern that the Commission intended to exclude all proposals addressing time frames or specific methods. In a preamble to the final 1998 rule, the SEC sought to dispel those concerns, saying:
Some commenters thought that the examples cited seemed to imply that all proposals seeking detail, or seeking to promote timeframes or methods, necessarily amount to ordinary business. . . . We did not intend such an implication. Timing questions, for instance, could involve significant policy where large differences are at stake, and proposals may seek a reasonable level of detail without running afoul of these considerations.
Yet, many companies are now going to great lengths in no-action requests to describe their complex policies and procedures, and to assert that the board, rather than the proponent and other shareowners, is better able to assess strategy, even on issues of impact to society that have long been appropriate for shareholder deliberation. For instance, will shareholders continue to have a say on whether the company should step up its responses to an environmental issue like climate change by setting goals or time frames for action?
Based on the Commission’s 1998 Release as well as the Bulletin, a key question (on “micromanagement” as well as on the significance of the issue to the company) is whether there is a large difference between actions taken by the company and what the proposal requests (referred to in the Bulletin as the “delta”). The proposal process has long played a pivotal role in allowing shareowners to encourage their companies to better address large and long- term strategy questions—issues that are becoming more transparent as environmental, social and governance (ESG) data demonstrate which companies are lagging their peers.
Compensation related proposals: The October Bulletin also noted that proposals relating to executive compensation may be excludable as ordinary business where the focus is on aspects of compensation that are available or apply to the general workforce as well as executives. This has come up with regard to proposals seeking ESG links to executive bonuses and in those about forced arbitration, as well. This is a new criterion of decision, and as with the micromanagement issue, has led to new challenges.
Staff rulings on these requests will shape the proxy statements of 2019. The Staff has a special challenge, since the government shutdown placed the staff weeks behind its usual schedule to review no action requests.