SEC’s new guidance looks at climate change ‘micromanagement’ by investors

New Staff Legal Bulletin from US financial regulator

The Securities and Exchange Commission (SEC) has released guidance, in the form of a new Staff Legal Bulletin, to address concerns over its actions in excluding certain types of shareholder proposals during the 2018 proxy season – flagging up that some shareholder proposals on climate change could be excludable for being “micromanaging” companies.
SLBs, which are not legally binding, represent the views of the SEC’s staff.
SLB14J addresses three issues relating to exclusion under Rules 14a-8(i)(5) or 14a-8(i)(7): board analyses – those introduced by SLB14I almost a year ago – the scope and application of micromanagement in general, and more particularly as it relates to executive or director pay.
The SEC has received a lot of these board analyses from companies saying that issues raised in shareholder proposals were not significant and had, in any case, been fully considered by the board already.
The ones the SEC found most helpful were those that described “in sufficient detail the specific substantive factors” that the board looked at when concluding that an issue was not “significantly related to its business”.
These can include: relation to core business, quantitative data, company actions taken already, shareholder engagement or interest, and voting results on prior proposals relating to similar issues.
This last might be expected to be a sticking point if shareholder support for prior proposals was low, for example, but, in such a case, the SEC will consider whether any subsequent company actions or events have increased the issue’s significance to the company. Proposals on “substantive governance matters” are unlikely to be excluded.
The two considerations regarding micromanagement relate to the proposal’s subject matter and the degree it “micromanages” the company.
The second comes into play when it involves “intricate detail”, “specific time-frames” or “methods for implementing complex policies”.Thus the SEC said a proposal calling for a plan to reach net-zero greenhouse gas emissions by 2030 “which sought to impose specific timeframes or methods for implementing complex policies” was excludable on the basis of micromanagement.

Even a proposal asking for a report that calls for too much detail could be excluded. These are both somewhat of a departure from past practice where many such proposals were allowed onto the proxy.

“A proposal calling on net-zero emissions by 2030 was excludable on the basis of micromanagement.”

As regards executive pay, proposals that focus on “significant aspects of senior executive and/or director compensation generally are not excludable”. Those that have to do with general employee pay and benefits are; even where they attempt to focus on executive pay as well as a way of getting round that basis for exclusion. Even where proposals do focus exclusively on executive pay but, in the same way as other micromanagement exclusions, do so in “intricate detail” they will still be excluded.
Sanford Lewis of the Shareholder Rights Group recently met with the SEC’s general counsel to express shareholder views on the issue of micromanagement, seeking greater clarity.
Commenting on the most recent SLB, he told RI: “The Bulletin offers an expansive view of the potential contexts in which micromanagement may be found to exist. Although SLB14J may encourage more companies to claim that proposals micromanage, it also encourages shareholders whose proposals are excluded to redraft and refile them to be less prescriptive or detailed. The ability of shareholders to continue addressing critical governance, financial and ESG issues through proposals is dependent upon a continued, balanced implementation of Rule 14a-8 by the Staff.”