House ESG Working Group Takes on Shareholder Proposal Process

Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

“ESG month” may not be exactly what you think. It’s the moniker, according to Politico, ascribed to the plan of the House Financial Services Committee, reflected in this interim report from its ESG Working Group, “to spend the next few weeks holding hearings and voting on bills designed to send a clear signal: Corporations, in particular big investment managers, should think twice about integrating climate and social goals into their business plans.”  But this is not just another generic offensive in the culture wars; according to Politico, this effort is more targeted—aimed not at major brands of beer or amusement parks, but rather at the processes that some argue activists use to pressure companies to address ESG concerns, as well as the “firms that play big roles in ESG investing.”   At the first of six hearings on July 12, Committee Chair Patrick McHenry maintained that the series of hearings and related proposed legislation was not about “delivering a message,” but was rather about protecting investors and keeping the markets robust and competitive. First item up? Reforms to the proxy process to prevent activists from diverting attention from core issues; while he supported shareholder democracy, he believed that democracy should reflect the say of the shareholders, not external parties that, in his view, exploit the existing process to impose their beliefs. The Working Group appears to have identified the shareholder proposal process as instrumental in promoting ESG concerns. Will this spotlight have any impact?

What is the ESG Working Group? The report tells us right upfront:  “The Environmental, Social, and Governance (ESG) Working Group was created at the beginning of this Congress for the specific purpose of developing a policy agenda designed to protect the financial interest of everyday investors from progressive activists who are using our institutions to force far-left ideology on Americans.”  The report identifies a number of priorities, including reforming the proxy system, ensuring the accountability of the proxy advisory firms, enhancing the alignment of voting decisions with retail investors’ best interests (also involves proxy advisors), increasing transparency and oversight of large asset managers “to ensure their practices reflect the pecuniary interest of retail investors,” improving ESG rating agency accountability and transparency, and protecting U.S. companies from burdensome EU regulations. In addition, in light of the “politicization of the SEC”—as the Working Group sees it—another priority is to “strengthen oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy,” and to “demand transparency, responsibility, and adherence to statutory limits from financial and consumer regulatory agencies.”  I counted at least 18 bills that the Committee is proposing to address these issues.

At least six of those bills related to the shareholder proposal process, including one to authorize the exclusion of shareholder proposals from proxy materials if the subject matter is environmental, social or political; one to clarify that an issuer may exclude a shareholder proposal under Rule 14a-8(i) without regard to whether it relates to a significant social policy issue; and one to amend the Exchange Act to prohibit the SEC from compelling the inclusion of shareholder proposals or any discussion related to a shareholder proposal in proxy materials altogether.  (Of course, it’s unlikely that any of these bills would be viable in the Senate or signed by the President.)

That one-third of the bills proposed were related to the shareholder proposal process seems to be no accident—the Working Group appears to view the shareholder proposal process as a critical mechanism used by activists to impose their agendas on companies, as evidenced by the volume of ESG-related shareholder proposals submitted this proxy season. The “recent surge in ESG-related proposals,” the Working Group contended, “adds unnecessary pressure on corporate boards, wastes corporate resources, and hinders informed decision-making by retail investors, who must spend valuable time reading and evaluating these proposals.”  In the Working Group’s view, the “no-action letter process has become a mechanism for SEC staff to project its views about the ‘significance’ of non-securities issues, rather than a process for ensuring shareholder proponents’ interests are aligned with those of their fellow shareholders.”

According to the report, the increase in shareholder proposals resulted from changes in rule interpretations by the SEC “that made it easier for politically motivated proposals to be included in annual proxy statements. This resulted in a 51 percent rise in environmental proposals and a 20 percent increase in social proposals. Chair Gensler’s use of the SEC as a political tool is deeply concerning, as it puts the investments of hard-working Americans at risk and sets a dangerous precedent of weaponizing the agency for progressive purposes.” The report is referring to Corp Fin’s SLB 14L, the effect of which was to relax some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under three Clayton-era SLBs, which were rescinded, making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies.  SLB 14L presented its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. (See this PubCo post.)


According to a report from Morrow Sodali, a provider of strategic advice and shareholder services, while the number of proposals submitted for the most recent proxy season increased overall, the number of challenges brought by companies to exclude proposals declined to 184 challenges this season compared with 241 last season, a decrease of 24 percent. The company also attributed the decrease in the number of challenges to SLB 14L, which, as noted above, made it more difficult for companies to seek no-action positions from Corp Fin to exclude shareholder proposals.  Of those efforts to obtain no-action relief, the SEC allowed exclusions at a higher rate (46 percent) this season than last (28 percent). Morrow Sodali also found that, as a percentage of all exclusions, the number of procedural exclusions increased (46 percent) compared to last season (35 percent). Successful reliance on the exclusion for “ordinary business” under Rule 14a-8(i)(7), one of the most frequently used exclusions, increased as a percentage of all exclusions (35 percent) relative to last season (29 percent), but the percentage of proposals withdrawn stayed relatively constant.

Morrow Sodali also highlighted several proposals from The National Center for Public Policy Research (NCPPR) that were permitted to be excluded last season because the proposals did not “transcend ordinary business matters” under Rule 14a-8(i)(7).  (Morrow Sodali observed that the “NCPPR is known for submitting ‘anti-ESG’ proposals that typically get low voting support.”) The NCPPR requested reconsideration from the SEC, claiming unconstitutional “viewpoint discrimination,” and, in at least one case, petitioned the Fifth Circuit for review. The National Association of Manufacturers intervened in that case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” (See this PubCo post.)

The Working Group also took issue with the current ownership thresholds for submission of shareholder proposals, under which relatively small shareholders can submit proposals. In the Working Group’s view, these thresholds allow the process to be “overwhelmingly exploited by activists driven by social or political agendas, leading to an increasing number of ESG-related shareholder proposals. Moreover, given the significant influence of proxy advisors, companies are unable to exclude repeat ESG-related proposals, regardless of whether shareholders have previously rejected them. As a favorable recommendation from a proxy advisor firm can easily garner 25 investor percent support, shareholder proposals backed by proxy advisors can be resubmitted indefinitely, even if they don’t necessarily serve the long-term interests of companies and retail investors.” The report advocated that the SEC raise the thresholds for submission and and resubmission of shareholder proposals.

The SEC’s proposed amendments to Rule 14a-8 were another concern raised by the Working Group, particularly the proposed amendment to Rule 14a-8(i)(12), the resubmission exclusion, which would provide that a shareholder proposal would constitute a “resubmission”—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it “substantially duplicates” a prior proposal by “address[ing] the same subject matter and seek[ing] the same objective by the same means.” The Working Group contends that these “proposed changes will result in significant abuse and circumvention of the rule, allowing activists to resubmit previously rejected proposals by making minor modifications to the text of the proposals,” and “will only serve to encourage more activism, placing additional strain on companies’ and investors’ time and resources.”

The report concluded by advocating “sensible reforms to the SEC’s no-action letter process” as well as greater autonomy for companies “in developing their own shareholder proposal procedures. By recognizing that corporate governance is primarily the responsibility of the company and its shareholders, decision-making should remain in the hands of those directly impacted.”


In remarks to the Society for Corporate Governance 2023 National Conference in June, SEC Commissioner Mark Uyeda also took aim at the shareholder proposal process, seemingly in sync with the suggestion in the report that companies have more autonomy in developing their own shareholder proposal procedures. Among other approaches to addressing problems he identified in the shareholder proposal process, Uyeda advocated the use, under state law authority, by companies of “private ordering” of the shareholder proposal process. Essentially, Uyeda suggests, take the federal regulators out of it. According to Uyeda, “rule 14a-8’s procedural bases for exclusion—contained in paragraphs (b) through (e)—should be viewed as default standards that apply only if companies decline to establish their own standards in their governing documents. If a company established its own standards, then neither the Commission nor its staff should be involved in determining whether the proponent satisfied those standards under state law; instead, any disagreement between the proponent and the company should be treated like any other dispute over an interpretation of a company’s governing documents and resolved in state court.” Private ordering, Uyeda suggested, would offer companies the benefits of “certainty that the procedural standards will not change based on who is leading the Commission,” the opportunity to tailor the proposal regime to companies’ needs, and the ability to more quickly revise their shareholder proposal procedures as circumstances and trends evolve. What’s more, exploration of possible private ordering for shareholder proposal requirements, Uyeda concluded, “may not require any legislative or regulatory action.” He held up proxy access as an example of the successful use of private ordering.   (Of course, proxy access is rarely used.)  (See this PubCo post.)

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