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US Shareholders Better Able to Push Social, Environmental Scrutiny

SEC has restored the “balance of investor protection”, says ICCR CEO.

The removal of rules limiting US shareholders’ ability to file social and environmental resolutions will introduce “a more favourable climate” for investors to hold companies accountable, according to Josh Zinner, CEO of the Interfaith Center of Corporate Responsibility (ICCR).

Last week, the US Securities and Exchange Commission’s (SEC) Division of Corporation Finance rescinded three bulletins released under the Trump administration which expanded the prohibition of shareholder micromanagement. The bulletins allowed proposals containing any specific request relating to timeline or actions to be excluded, making it harder for shareholders to propose measures to track social or environmental performance at annual general meetings (AGMs).

“Over the past four years, the interpretative guidance opened more avenues for companies to exclude shareholder proposals from the proxy. It was frankly confusing to proponents which stymied shareholders’ ability to get critical proposals on ESG risks on the proxy and up for a vote,” Zinner told ESG Investor.

Shareholder advocacy non-profit As You Sow also welcomed the change, with the organisation’s President, Danielle Fugere, calling it a “timely and necessary” move which would help shareholders play a “critical role in ensuring companies are addressing issues that create risk and opportunity and can affect shareholder value”.

US SEC Commissioners Hester Peirce and Elad Roisman opposed the decision. In a reaction statement, they said the change is in line with the Commission’s “flavour-of-the-day regulatory approach” and “does not fill the void left by their repeal”.

The bulletins were originally introduced to help issuers determine whether a proposal put forward to a company is excludable due to the fact the policy issue raised transcends day-to-day business matters, they said.

“With these bulletins now rescinded, how should these proposals be analysed?” the Commissioners have asked.

Peirce and Roison highlighted that, during the US 2021 proxy season, no climate change proposals were excluded based on micromanagement arguments, and only four were rejected on these grounds in 2020.

Degrees of Micromanagement 

The SEC noted that future proposals will still be assessed on whether or not shareholders are micromanaging companies.

For example, SEC staff said that a proposal can now ask a company to set a greenhouse gas (GHG) emissions target that aligns with the goals of the Paris Agreement. However, it cannot impose specific criteria for how the company should go about developing its target or implementing it.

“The [SEC] staff will take a measured approach to evaluating companies’ micromanagement arguments – recognising that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement,” the SEC noted. It will “focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management”.

“We would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input,” the agency added.

The changes have ensured that investors are once again on more equal footing with companies, Zinner said.

“As the SEC is intended to advocate for investors, rescinding the new rules makes total sense, because it restores the balance of investor protection,” he noted.

The ICCR leads a coalition of over 300 global institutional investors managing more than US$4 trillion in assets. Members regularly engage corporate management to identify and mitigate social and environmental risks caused by corporate operations and policies.

This follows SEC Chair Gary Gensler’s decision not to enforce new rules for proxy voting advisory firms, which would have required firms, such as Institutional Shareholder Services (ISS) and Glass Lewis, to provide companies with the information underpinning their voting recommendations to shareholders prior to AGM votes.

The SEC has also proposed new rules which would require institutional investment managers to disclose how they voted on executive pay at AGMs.

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