US Shareholders Fight Back Against “Coordinated Attack”

Industry experts highly concerned over SEC rule changes, as investor-led report looks to galvanise pushback on infringed rights.

Proposals from sustainability-focused shareholders are increasingly under pressure, as US policymakers and anti-ESG proponents accelerate efforts to erode their ability to hold companies to account.

Rule changes announced by the US Securities and Exchange Commission (SEC) earlier this month are widely seen as an attempt to dissuade investors from using their voting power to put pressure on portfolio companies to meet their expectations on sustainability issues, as well as giving firms more scope to exclude shareholder resolutions.

Last week, a coalition of institutional investors, including the Interfaith Center on Corporate Responsibility (ICCR) and investor association the Shareholder Rights Group, urged the SEC not to replace Staff Legal Bulletin (SLB) 14L, which had restricted companies’ ability to exclude shareholder resolutions, with new guidance in SLB 14M retrospectively applying to proposals filed before the rule was introduced.

ICCR and the Shareholder Rights Group have also published a new report on the importance of shareholder proposals, in collaboration with the US Sustainable Investment Forum (SIF).

The SEC issued seperate guidance warning shareholders against asserting their intention to vote against management to influence decision-making.

“It’s clear that this is part of a coordinated and accelerated attack against investors’ freedom to manage their investments as owners and as fiduciaries, particularly concerning environmental and social risks such as climate change or human capital management,” Josh Zinner, CEO at ICCR, told ESG Investor.

“Rules are being changed in the middle of proxy season, putting investors at a strong disadvantage,” he added. “The attacks on shareholder rights are only going to escalate given the political environment of hostility toward corporate accountability mechanisms.”

Easing proposal exclusion

The new SLB 14M guidance reinstates prior staff guidance on micromanagement that had been rescinded by SLB 14L, allowing shareholder proposals to be excluded more easily.

The guidance also means shareholders must tie proposals on social or ethical issues to a significant effect on the company’s business. In addition, the guidance confirms that SEC staff do not expect analysis from a company’s board on whether a policy issue is significant to the firm when arguing for exclusion of a shareholder proposal.

“SLB 14M clearly makes it harder for investors and gives companies more latitude to exclude shareholder proposals,” said Bryan McGannon, Managing Director at US SIF. “The practical reality is that investors are going to have to reshape how they draft their proposal and will have to be broader in their asks, and a broader ask will mean a broader answer which is not advantageous to investors.

“Companies benefit from hearing from their investors, and the worry should be that if we continue down this path of eroding shareholder rights it will lead to more severe and draconian actions by investors, like books and records requests, voting against directors, and lawsuits,” he added. “This is not beneficial to companies, and the obvious solution is to have more dialogue and engagement.”

The changes from the SEC are likely to make the proxy season more challenging for asset managers to navigate. Last week, BlackRock temporarily paused investment stewardship meetings with companies, as has fellow asset manager Vanguard, in response to the SEC’s revised rules.

According to ShareAction analysis published last week, the US’s largest four asset managers only voted for 7% of 279 environmental or social-related resolutions last year, a trend which could worsen this year.

Jonas Kron, Chief Advocacy Officer at Trillium Asset Management, a Boston-based specialist ESG investment manager with more than US$5 billion in AUM, said that it was “clear that the intention of these changes is to dumb down the conversation and close off flows of useful information”.

“Changing the rules midstream means we can’t change how we’re drafting shareholder proposals as we’ve already drafted them, so we’re going to have to live with the consequences of 14M,” he added. “There’ll be a period of time where ‘off-season’ companies that have annual meetings in the late summer, fall and early winter – which have filing deadlines coming up the next few months – where we’ll likely see some experimentation in proposals to see if we can better understand what the contours of the new SEC guidance is.”

Pushing back on policymakers

The new report from ICCR, US SIF and the Shareholder Rights Group, which McGannon said has been in the works for several months, identified changing SEC staff interpretations of the commission’s Rule 14a-8, which indicates when a company must include a shareholder’s proposal in its proxy statement, as an attempt to infringe on shareholder rights.

The report stated that recent legislation passed by the House of Representatives also undermined shareholders’ rights, by giving companies sole discretion as to whether to exclude investor proposals from the proxy statement. It also pointed to a letter from US state attorneys general, which sought to further weaken shareholder influence by suggesting that major asset managers and banks would be violating fiduciary duties simply by considering climate and other social issues in proxy votes.

“The report will arm institutional investors and individual investors alike with facts to be able to push back on policymakers or other market actors who are trying to minimise the impact of shareholder input in the proxy process,” said McGannon.

“The attacks are ramping up and coming from multiple avenues,” said Cynthia Simon, Policy Director at the Shareholder Rights Group and co-author of the report. “Investors will be severely restricted in their ability to manage ESG risks to company and portfolio value.

“We felt that policymakers in particular were not informed as to the importance of this process to the functioning of the capital markets and the ability of smaller investors to have their voices heard, and were not aware of the benefits that have accrued to the American public,” she added. “The debate has been very one-sided, and we felt a need to set the record straight.”

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