As SEC reopens, shareholder proposals focus on materiality and standardised ESG disclosures

The SEC’s Division of Corporate Finance is back at work

Now that the SEC’s Division of Corporate Finance is back at work, there is some action on the no-action page of the SEC’s website. Apart from the TransDigm case where the New York City Funds prevailed and the company agreed in the face of a lawsuit to include the resolution – the first set of filings so far this year have pertained to proposals that were withdrawn by shareholders. Proposals were withdrawn at Citigroup, PepsiCo, Valero Energy and PACCAR.

‘No action’ describes a company request for a letter from the SEC staff to confirm that an action would not violate securities laws and therefore the regulator will take ‘no-action’. It is the phrase that shareholder proponents and corporations use to refer to the process whereby companies try to omit shareholder resolutions from their AGM agendas.

The proponent, represented by As You Sow, at truck maker PACCAR was seeking disclosures in line with SASB [Sustainability Accounting Standards Board] standards.

Materials sourcing disclosures by the company, parent of the iconic Kenworth and Peterbilt brands, that were filed after the proposal were in line with SASB standards, so the proponent withdrew the proposal, while encouraging the company to adopt a whole series of other SASB standards.

Ansked about the withdrawal, Andrew Behar, As You Sow’s CEO said: “They didn’t follow the SASB standard to the level we had in mind, but at least they had begun to implement some of them. What we are looking for is to be able to compare companies using standardised standards defining materiality. We also believe that some of the SASB standards could be stronger as we have negotiated deeper material disclosures at many companies.”

But this resolution is part of a wider drive to get companies to make standardised ESG disclosures using a new type of resolution. “These resolutions are all very new and we haven’t seen how the SEC is going to regard them,” said Behar, “so sometimes we have cited SASB itself, and sometimes we just cited the actual standard.

“We are testing the waters with these new resolutions on materiality definitions, and PACCAR took a pretty good first cut at it, that’s why we withdrew, but the others are still going to a vote so we’ll see how that plays out.”

There are other materiality resolutions listed on As You Sow’s resolution tracker site at car parts retailers Advance Auto Parts, O’Reilly Auto Parts and Car Max, as well as property manager Essex Property Trust and industrial supplies firm Fastenal. “Some of the companies are saying that the SASB standards don’t fit their business model,” continued Behar, “and they’d rather do their own thing. The point is for management to be willing to be held side by side with their peers so investors can have consistency.”

At Citigroup, a resolution filed by Harington Investments and Mercy Investment Services was withdrawn on the promise of “continued dialogue on the important issue of Human and Indigenous People’s Rights”, while Mercy Investments noted that it was “pleased with the discussion and time taken with us”.It added it was pleased with the work Citigroup has done to set policy for doing business with Indigenous communities. The resolution had called for the bank’s public affairs committee to have explicit fiduciary oversight on matters affecting human rights and was driven by the bank’s involvement in funding the Dakota Access Pipeline.

“These resolutions are all very new and we haven’t seen how the SEC is going to regard them”

A stockholder proposal asking for proper disclosure of political spending at Valero Energy by the Unitarian Universalist Association was also withdrawn because the petrochemical company agreed to discuss the issue with the Association as well as representatives of Center for Political Accountability. In a letter from early January, the company said that its “Government Relations team… has been preparing internally about how best to engage with you and talk about our disclosure practices. Thank you for agreeing to withdraw the shareholder proposal. We agree that direct dialogue is the preferred route.”

The history of the proposal at PepsiCo is a little muddier. Proponent William Fleming stated that he was withdrawing his proposal due to the recent changes in regulations pertaining to safe labeling of GMO food products that the food and beverage giant was going to be “proactively adopting’.

However, the only communications from the company and its lawyers point up certain procedural problems with the Fleming’s proof of ownership of shares in the company, so it is difficult to know whether there has been any other discussions with the company about disclosures.

I asked Behar what effect he thought the shutdown had had on the whole process. “We are concerned that given the government shutdown,” he replied, “the SEC is backlogged and may not be spending enough time on each resolution. We are having internal discussions on how to proceed because of this unprecedented situation. Some people feel that this situation will let more resolutions go to a vote, but others think the opposite. These are uncharted waters.

“For example, if the no-action is for substantial implementation, this requires the SEC to determine if a minimal disclosure on a company website satisfies what investors are asking for. The SEC may not have time to really delve into it and may see that the document has the right title, but misses the lack of material disclosure. This could lead to the SEC agreeing with the company to omit. The SEC is a bit of a black box in the best of times, no one knows exactly how they make their decisions.”

But what if the shutdown resumes? “If I were advising a company that had asked the SEC for permission to omit a resolution but there had been no ruling, I would include it in the proxy statement. Much less risk. Imagine that you printed your proxy statement without the resolution and the SEC comes back to work and rules that the resolution must be included, this would then incur huge costs; possibly reprinting the proxy statement and moving the AGM.

“My guess is that smart companies will print the proxy including the resolution but put a caveat indicating that it may not be voted on at the AGM depending on the SEC ruling. If the SEC is closed until after the annual meeting — it’s anybody’s guess. Bottom line, the company asked for permission to exclude and got silence — to not put it to a vote may be considered a fiduciary breach.”

Since the first crop of filings, the responses have diversified, although resolutions were withdrawn at Sempra Energy, Abbvie, PG&E and Verizon. Two exclusions, at Valero Energy and AT&T, were allowed because of ownership issues.Three, at Philip Morris, Verizon and AT&T, were clear micromanagement issues and were excluded, while at Pfizer an exclusion was allowed because the resolution asking for an independent chair was duplicative of one already on the proxy.

Finally, although the division would have allowed exclusions at Paycom Software and Kellogg of resolutions asking for the board to be declassified, it gave the proponents a couple of weeks to change the wording of the resolution so they would pass the test rather than fail.