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This story is co-published with The Daily Poster
In the investing world, spring is known as "proxy season." That's because most major companies hold their annual meetings between April and June, and at those events shareholders vote (often remotely, i.e. "by proxy") on the composition of executive boards and resolutions asking companies to take certain actions, such as limiting executive pay or increasing diversity in hiring.
As the national press corps and political groups focused almost exclusively on palace dramas in a gridlocked Congress, shareholder advocates turned the 2021 proxy season into a referendum on corporate social responsibility, along the way scoring big real-world victories even with the odds stacked against them. Activist investors won majority support for resolutions pushing General Electric to craft a carbon neutrality plan, asking American Express to conduct public-facing research on its diversity and inclusion efforts, and pushed forward other important matters.
"One thing that is somewhat remarkable about this proxy season is that votes in favor of environmental, social, and governance resolutions were higher than they've ever been," said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility (ICCR), a corporate responsibility advocacy organization.
Now shareholder advocates are going to court to overcome a major obstacle that looms for future proxy seasons: the enactment next year of Trump-era rule changes meant to crack down on exactly this sort of shareholder pressure. The changes were the fulfillment of a longtime objective from the U.S. Chamber of Commerce and other corporate lobbying groups, said Zinner.
"For years, the Chamber of Commerce and the big trade associations have been pushing to limit the filing of shareholder resolutions precisely because they have been such an effective tool in engaging with companies," said Zinner. "Under the Trump Administration, they finally got their alignment."
How shareholder resolutions work
For decades, activist shareholders, both individuals and organizations, have used such resolutions to push companies on environmental and social issues.
While shareholder resolutions are non-binding—shareholders can't compel the board of a company to make changes—they are taken seriously by boards, and are therefore seen by advocates as a way to compel otherwise unaccountable companies to change.
"When 98 percent of your shareholders want you to do something and you don't do it, next year, everybody will vote against the board," Andrew Behar, CEO of As You Sow, a shareholder advocacy nonprofit, told The Daily Poster. "When you get a high vote, companies are going to do something."
Shareholder advocates insist that they're not out to hurt the companies' bottom lines, since addressing issues like climate change and racial justice is in corporate behemoths' interests. "We're advocating for the company," said Behar. "We are shareholders who are working to reduce material risk and find solutions to these problems."
But many of the changes sought by shareholder advocates line up with broader goals of progressive movements, such as increased diversity, racial justice, political contribution disclosures, and most of all, climate action.
"More and more shareholders are understanding how fundamentally important environmental, social, and governance issues are to the sustainability of companies," said Zinner at the ICCR. "More investors are recognizing climate risk as material, and human capital and labor issues as material."
Demanding corporate transparency
Some of the major wins achieved by shareholder advocates this year were supported by the companies themselves. General Electric supported a resolution submitted by As You Sow demanding that the company lay out a plan for whether and how it would comply with the Paris Agreement climate treaty, which mandates net zero carbon emissions by 2050. The resolution passed with 98 percent support from shareholders, and As You Sow has a meeting scheduled with General Electric to discuss how the company plans to achieve this goal.
Other resolutions received overwhelming support, even in the face of opposition from management. Eighty-one percent of voting shareholders at DuPont supported a resolution asking for the company to track and clean up spills of plastic pellets, a major ocean pollutant. Behar said that DuPont's opposition means that management will likely attempt to stall taking action on the resolution, but the fact that it passed overwhelmingly means that action may only be a matter of time.
Resolutions demanding greater transparency around diversity and inclusion efforts received majority support at both American Express and Union Pacific, two companies that have poor diversity records, according to As You Sow.
In the wake of the votes, the companies reached out to As You Sow, asking to meet to discuss making a plan to increase diversity. "After a majority vote at both of those [companies], I think they're going to say 'Alright, how do we get on the path?'" Behar said, adding that if the companies refuse to act, As You Sow plans to escalate the campaign and perhaps run a more diverse slate of candidates for the companies' boards.
In another domain, resolutions demanding greater corporate transparency on campaign contributions and political spending—matters often shielded from public view—obtained majority support at several major companies this year, including United Airlines, the health care and cleaning-product conglomerate Chemed, and Netflix. These efforts were boosted by the January 6 insurrection at the U.S. Capitol and the Republican push to restrict voting rights, both of which have inspired shareholders to scrutinize the political uses of their investments.
Shareholder advocacy wasn't directly responsible for the recent headline-grabbing shakeups on the ExxonMobil board, in which three renewable energy advocates were voted on to the board against the company's wishes. But Behar argued that grassroots investor efforts laid the groundwork for the restructuring.
For a decade before the shakeup, shareholder advocates had been building support for dozens of sustainability resolutions at ExxonMobil, but faced stonewalling from company executives. A turning point came In 2017, when a resolution in support of increasing public disclosures of climate change risks, sponsored by the Church of England and New York State, scored 62 percent of votes at the company's annual meeting. Still, the board did nothing.
"After that majority vote, people said, 'Wait a minute. We just got a majority vote and the company still isn't doing anything. We're going to have to replace the board,'" said Behar.
A 2019 attempt to get shareholders to vote "no confidence" in the board foundered, and efforts in 2020 fell by the wayside due to the onset of the pandemic. But in 2021, activist investors elected the three renewable advocates, in what the New York Times called a "stunning defeat" for ExxonMobil.
Next battle: the Trump Rules
Due to last-minute efforts by President Donald Trump, such victories may soon become heavier lifts. Several rule amendments adopted by the Trump-era Securities and Exchange Commission (SEC) in September 2020 and set to be implemented next year could drastically curtail shareholder advocacy.
"The irony is that at the very time you're seeing record support for environmental, social, and governance resolutions, you have these new rule changes going into effect," said Zinner.
The amendments raised the amount of stock that investors are required to own in order to file a resolution from $2,000 to $25,000, prohibited investors from filing multiple resolutions in a single year, and made it more difficult for advocacy groups to file resolutions on behalf of shareholders, among other modifications.
One of the most important changes raised the percentage of votes that a proposed resolution was required to win in order to be refiled the following year. Before the change, the amount of support necessary to refile a resolution had stood at 3 percent the first year, 6 percent the second, and 10 percent the third. The Trump SEC's rule raised those numbers to 5 percent, 10 percent, and 25 percent, respectively.
The higher thresholds present a serious obstacle to many accountability resolutions, which often gain support over successive filings as investors become more educated about the issues in question, explained Zinner.
"A lot of these resolutions start with a low vote. Most of them that were filed about climate risk initially started with low votes," he said. "Being able to resubmit resolutions is a very important part of the process."
Senate Democrats, including Banking Committee Chair Sherrod Brown of Ohio, have moved to repeal the rule changes.
But in case Congress doesn't act, on June 15 ICCR and As You Sow filed a lawsuit against the SEC in federal court in Washington, D.C., asking the court to overturn the rule changes. In its filing, ICCR argued that the implementation of the rule violated the Administrative Procedure Act, a law that governs the process for federal agencies enacting new rules.
"If we do have to comply with the new rule changes for the coming proxy season, it will significantly limit the resolutions that our members are able to file," said Zinner. "Our hope is that there's some way to stay implementation of the rules until this case can be resolved."While ICCR is hopeful that the rule changes will be overturned in court, Zinner also expressed worry that the new regulations could still be in place in the fall of 2021, when the deadlines to file shareholder resolutions for meetings in spring 2022 occur.
According to Zinner, the ICCR has not yet decided whether or not to seek a preliminary injunction blocking the rule from taking effect while the case is pending.
In addition to looking to the courts to potentially overturn the Trump-era SEC moves, shareholder advocates hope that the Biden Administration will soon go further in expanding investor rights.
One potential change would be mandating public disclosure of specific information related to a company's emissions targets and climate change mitigation efforts. Such a change would enable outside audits of companies' climate change policies and facilitate industry-wide sustainability comparisons that can't be made under current standards, since there is currently wide variation in the quantity and kind of climate data that companies choose to disclose.
"Right now [sustainability comparisons] are all over the map because the data that's coming out of the companies is all over the map," said Behar. "We need companies to be comparable." Mandating disclosure of such data would enable those comparisons, Behar added.
The SEC also seems to be moving towards requiring greater disclosures on companies' responses to climate change, and may issue a proposal for a rule on the matter in October, The Wall Street Journal reported on June 21.
"My view is there's comparatively little climate disclosure in periodic reports," said Democratic SEC Commissioner Allison Herren Lee. "We need to get something mandatory in place but provide enough flexibility to give businesses an opportunity to learn how to get it right."
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