Shareholder Activists Win Important Victory at SEC

Jonas Kron
What a difference a change in Administration makes. Champagne corks popped in the offices of socially concerned shareholders all throughout the land in October, when, with a few strokes of the pen, the Security and Exchange Commission (SEC) restored a necessary dose of common sense to the shareholder resolution process that lacking in the Bush years.
To appreciate the change, a little background is necessary. When filers of shareholder resolutions send off a resolution to a company, said company will typically scrutinize it to see if it conforms to rules governing such proposals, rules that are enforced by the SEC. If it believes that it does not conform those rules, it can appeal to the SEC for permission to exclude the resolution from its proxy statement (the annual ballot sent to shareholders that allows them to vote on both shareholder and management resolutions). The SEC then weighs the company’s and the shareholders’ arguments and makes a decision in advance of the annual stockholder meeting.
You don’t need a law degree to see that everything depends on how the SEC interprets the rules. It may come as no surprise that under the previous administration, the agency took a sweeping view that the risks associated with such topics as climate change, subprime lending, toxic chemicals, rising healthcare costs and other pressing issues were not a suitable subject for shareholder proposals.
This so-called “risk evaluation exclusion” severely cramped the ability of shareholders to hold corporations fully accountable for the financial, environmental and social implications of their policies in these high profile issue areas. Socially concerned shareholders universally saw it as a major impediment to meaningful activism.
For example, two years ago the SEC gave Lehman Brothers and Washington Mutual permission to exclude proposals that asked for “a report discussing the company’s potential financial exposure as a result of the mortgage securities crisis,” because they did not raise a “significant public policy issue.” This was just months before Washington Mutual went into receivership and Lehman had to file for bankruptcy because of their mortgage related risk exposure.
A year later, the SEC gave the thumbs-down to proposals filed with several coal companies that requested reports on greenhouse gas emissions. All three proposals were excluded because they focused on the “day-to-day affairs” of the company. However, identical proposals went to a vote at a couple of other companies that declined to challenge them, where they received over 40% of the vote. Clearly in the opinion of the shareholders, the issue of greenhouse gas emissions was anything but a “day-to-day affair” for coal companies. It should also have been abundantly clear to the SEC that climate change was a significant policy issue, given the legislation before Congress and vigorous public debate on how best to reduce greenhouse gases.
The SEC explained that these proposals were inappropriate for shareholder consideration because they sought an “evaluation of risk.” This was the reasoning formalized in an SEC legal bulletin in 2005 that laid the foundation for what became an ever expanding barrier to effective shareholder engagement with management, directors and fellow shareholders.
Shareholder advocates like ourselves found that explanation untenable. Understanding risk is a critical component to any investment strategy. So prohibiting questions about risk, at best, seemed inconsistent with the SEC’s mandate to protect investors and at least lacking in common sense. The timing of these new policies also smelled of politics, emerging after the 2004 Presidential election and the further entrenchment of Bush era staff appointments.
Following years of organizing to push the SEC and Congress to address our concerns, Trillium took a leadership role to fix the situation. In November 2008, Trillium helped draft a letter from 60 prominent shareholders to then president-elect Obama calling for the retraction of the 2005 legal bulletin. With pressure growing on the SEC, in September 2009, the agency  held an invitational meeting at the Commission’s headquarters to discuss these issues. At the meeting, I argued vigorously for a rational approach that respected shareholder legitimate concerns about both the economic, social and environmental performance of companies and how these issues impact portfolio company performance.
Hence our profound relief and gratification when the SEC quickly responded and reversed the previous policy just in time for the 2010 shareholder season. This change is compelling confirmation that the SEC is taking positive steps to bring its actions in line with its mission to protect investors and serve the public good. Over the next year we will continue our advocacy at the SEC so that it facilitates meaningful shareholder engagement on the important social and environmental issues confronting companies.