SEC Reverses Position on Social Policy Proxy Proposals
Commentary by Steven Lofchie
In a new Staff Legal Bulletin ("SLB"), the SEC Division of Corporation Finance rescinded prior guidance and made it easier for corporate issuers to exclude shareholder proposals under the "ordinary business" exception. The Division also provided a compliance and disclosure update on beneficial ownership reporting (under Exchange Act Sections 13(d) and 13(g)).
Under SLB No. 14M, the SEC reaffirmed that issuers may exclude proposals that deal with matters of "ordinary business" under Rule 14a-8 ("Shareholder Proposals") unless they both (i) transcend day-to-day management and (ii) are significant to the company's business. The new SLB reverses the prior approach under SLB No. 14L which had effectively expanded the ability of shareholders with limited shares and voting power to put forward proxy proposals relating to matters considered to be of social policy importance.
By rescinding SLB 14L, the Division returned to a company- and issue- specific analysis in determining whether a proposal is excludable. Previously, proposals related to climate change, human capital management and similar policy issues were generally deemed non-excludable. Under SLB 14M, companies may again argue for exclusion by demonstrating that a proposal, even if addressing a significant social policy, does not meet the threshold of company-specific significance.
In a statement, Commissioner Caroline A. Crenshaw criticized the SEC's decision, asserting that the move "creates undue costs and uncertainty for investors and corporations alike." She stated that shifting policy "smack dab in the middle of this year's shareholder proposal process" serves only to "undercut capital formation, not facilitate it." She further argued that the rescission is part of a broader effort in which the shareholder proposal process has become "the target of politicized messaging and a preferred punching bag of those who wish to diminish corporate democracy." Despite existing mechanisms to limit proxy ballot access, she asserted, this action "drowns out investor voices and facilitates corporate monologues instead."
Commentary
Commissioner Crenshaw's claim that this SEC rule change is a blow to democracy is flawed on several bases.
First, democracies generally set the rules by which they are governed. In the case of the proxy rules, the rescinded interpretation was imposed by the federal government, albeit an elected federal government. The new interpretation is also being imposed by an elected federal government. So both the rescinded and the new interpretation are equally "democratic."
Second, living in a democracy does not mean every voter is entitled to the right to put forward every proposal for a vote. Generally, governmental entities have very burdensome rules requiring the collection of numerous signatures before a voter proposal can be put on the ballot. For example, only 20 states allow a petition to recall a governor, and of those that do, many require signatures from up to 25% of the votes cast in the last election, a very tough standard.
Beyond that, it is an inherent premise of an election that the voters share some common goal, to advance the interest of the entity. As a practical matter, when a small number of voters can force an election on a matter, their interests are often either indifferent to—or antagonistic to—the entity and to the other entity's participants. The use of social pressure to force the entity to advance a position that supports individual interests, not those of the group, is generally costly for the relevant entity. In the business world, it does not help a company to be forced to take a public stand on an issue that is both controversial and largely immaterial to the activities. Regulatory interpretations that require it to do so result in the entity offending those of its customers or business partners on the other side of the controversial issue, for no benefit.
Finally, issues of social policy are front and center in US elections. It seems, therefore, needless and unwise to turn every corporate proxy into a further fight about those same issues, particularly when they are not relevant to the individual corporation. As a country, we don't need to argue about every issue all the time on every battlefield. We can save those arguments for governmental elections and family holiday dinners.
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