When the Director of the Securities and Exchange Commission’s (SEC) Division of Corporate Finance, William Hinman, stepped down at the end of last year, the Wall Street Journal described his boss, former SEC Chair Jay Clayton, as “a political independent [who] has won praise for maintaining the Commission’s tradition of non-partisanship”. And it quoted another former Director of Corporate Finance as saying that both Hinman and Clayton: “should get credit for being really effective stewards of the capital markets and doing things that help to facilitate capital formation without sacrificing investor protection”.
I’m not sure what universe those commentators were operating in, but it’s not the same as mine.
Most of the shareholders I have spoken to regard the SEC under Clayton’s chairmanship as having undermined shareholder rights and the ability of their shareholder advisers to function effectively. They say he didn’t fix any of the problems that shareholders were actually concerned about.
A letter to the transition team of newly-inaugurated President Joe Biden from the Shareholder Rights Group (SRG) and the Interfaith Center on Corporate Responsibility (ICCR) backs that up: “SEC staff rulings of the last four years have systematically undermined shareholder rights, and threatened to disrupt long-standing, productive relationships between investors and companies on environmental and social issues, and between small and large investors on corporate governance. The new administration should reverse the distorted interpretations of micromanagement contained in no-action decisions and should revoke the relevant parts of Staff Legal Bulletins 14I, 14J and 14K.”
No-action decisions by the SEC refer to the process whereby corporations ask the SEC to exclude a shareholder resolution from their proxy statement. We have written extensively about the Staff Legal Bulletins, as well.
The Bulletins, which are not regulations – just indications of SEC staff thinking on certain issues – cover a range of issues. They include new requirements that boards say whether the subject of a shareholder proposal is significant, seeks to micromanage a company’s ordinary business, or conflicts with other proposals on the same issue.
As the SRG/ICCR letter says, SEC staff under Hinman’s guidance radically altered long-held SEC interpretations. This lead to the blocking of many shareholder proposals; for example: those asking a company to step up its responses to climate change in alignment with the Paris Agreement, or establish a board committee to address a major shareholder concern, or to encourage a company to screen its clients to prevent financial support for genocide.
The letter adds that new interpretations on ‘micromanagement’ imply that any proposal that seeks a specific outcome may potentially be characterised as “overstepping board and management discretion”.
This has resulted, says the letter, in “an expansive opportunity to curtail shareholder rights”, which it says is so open-ended that it encourages unelected SEC staff to make arbitrary determinations to overturn long-standing precedents.
Other Hinman-inspired moves criticised in the letter include the imposition of a new requirement for boards to contribute their own findings regarding shareholder proposals. This, it says, alters the rules regarding the test for whether a proposal is economically relevant to a company.
The disastrous effects of these policy changes and their break with accepted SEC past practices are detailed closely in the letter.
The reason it has been sent to the Biden transition team is that the SRG and the ICCR believe that the correction of these issues merits “priority attention” from the incoming administration. The investors say the shareholder proposals being blocked address the incoming Biden administration’s four priority goals of pandemic recovery, economic recovery, racial equity and climate change.
The shareholders say their efforts are crucial to the process long promoted by the SEC of ‘private ordering’: the process of adjusting social norms by private parties. Shareholder proposals have long been involved in improving corporate management of public health, economic progress and equity, racial justice, and climate change.
The letter then rehearses exactly how shareholder proposals, even those that do not win majority support, have “moved the needle” on corporate actions regarding climate risk. It notes that the most resilient companies during the recession were those most focused on ESG, and that shareholder proposals help those that do not have such a focus gain one.
On racial equity – another Biden focus – they say: “Long-standing shareholder proposals have scrutinised predatory lending, worker health and safety, board and workforce diversity, racial biases in facial recognition software, prison labour, and gender and racial pay gaps.”
Shareholder proposals, they note, have also been effective at forcing companies to adopt diversity and inclusion targets for their workforces.
On the pandemic and worker health and safety, shareholder proposals revealed problems even before COVID-19, with a late 2019 proposal at US meatpacker Tyson Foods warning that the company’s practices were adversely affecting the health and safety of its workers; largely people of colour and immigrants.
Explaining the difference between objections to proposals that seek to manage the ordinary business of the company and objections that ‘micromanage’, the letter says ordinary business includes actions reserved to the board and management, except where they are “transcendent policy issues… those large and widely debated issues facing society that also relate significantly to the company or its business” such as climate change and board and employee diversity. But even where a proposal deals with transcendent policy issues, the letter notes that it can still be excluded by management if it seeks to do so in a way that micromanages them.
The SEC has written little about how it determines micromanagement. But in 1998, well before either Clayton or Hinman were in charge, the full Commission, not just the staff through a legal Bulletin, made it very clear that including “intricate detail or seek[ing] to impose specific time-frames or to impose specific methods for implementing complex policies” did not automatically disqualify a shareholder proposal as micromanaging.
In changing the rules by which proposals could be accused of micromanaging, Hinman allowed corporations to narrow the gap between a proposal imposing “a specific strategy, method, action, outcome or timeline” and stating “as clearly as possible the course of action that [it] believe[s] the company should follow”. This meant that there was no gap at all, and everything became either micromanaging or too vague to implement.
Let’s hope the new SEC acting chair, Allison Herren Lee, sees a copy of this letter.
Biden issued an executive order on Inauguration Day on climate change, which asked all US government agencies to submit climate action plans within 30 days, including correcting policy impediments to climate change responsiveness erected in the last four years. This would be a good time for the SEC to start adjusting its response to shareholder proposals on the same topic.