The ESG Advisor
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The ESG Advisor

End of Week Notes

Democrats to kill SEC rule limiting shareholder democracy

And a look at this year’s proxy season

It looks like the Trump-era SEC rule limiting shareholder democracy is headed for the dustbin of history. Senate Banking Committee Chair Sherrod Brown (D-OH) introducted a joint resolution to rescind the rule today and, assuming Democrats hold together, the previous standards for proposing and resubmitting shareholder resolutions at company meetings will soon be restored. The joint resolution cannot be filibustered.

Last year, in a controversial and partisan 3–2 vote, the SEC raised the submission ownership threshold — the amount of stock a shareholder has to own to be eligible to propose a resolution — and raised resubmission thresholds — the needed percentage of shareholder votes in favor that allow a proposal to appear on proxy ballots in subsequent years.

While the SEC claimed it was simply modernizing the rules, it was an obvious attempt to put the genie — increasing numbers of ESG-related shareholder resolutions and increasing levels of shares voted in favor of them — back into the bottle. It was supported by business trade groups tied to the fossil-fuel industry, which also created a completely fake grass-roots “astroturf” group called “Main Street Investors Coalition” to make it appear that everyday shareholders supported the idea, which was, in reality, overwhelmingly opposed by investors.

Now, congressional Democrats are invoking the Congressional Review Act to undo the rule. The CRA allows Congress to pass a joint reolution disapproving of an agency’s final rule, which requires only a simple majority of both chambers to pass, along with the president’s signature. Congress must invoke the CRA within 60 days of a finalized rule. For rules that go final within 60 legislative days of the end of one Congress, the new Congress gets a new 60-day period to invoke the CRA.

Once the joint resolution is signed, the shareholder rule will not only be rescinded, the SEC will be prohibited from reissuing the same or a substantially similar regulation in the future, unless authorized by Congress to do so.

That means the SEC will revert back to the status quo ante, which required only that a shareholder needed to hold $2,000 worth of a company’s stock for 12 months in order to propose a resolution. To be eligible for resubmission a resolution must receive 3% of the vote the first time it appears on a ballot, 6% the second time, and 10% thereafter.

A look at this year’s proxy season

While the SEC rule was finalized in late 2020, it was not scheduled to go into effect until 2022, so it wouldn’t have impacted this year’s proxy season, which is about to kick off. Thousands of companies will announce the date of their Annual General Meetings in the coming weeks. According to this year’s Proxy Preview, published last week, as of mid-February, shareholders had filed at least 435 proposals on sustainability issues.

Here is a good schematic from my colleagues at Morningstar showing how shareholder resolutions get to a vote, and the other possible outcomes:

Source: Morningstar

Once a resolution is filed, a company may respond in three ways. One is to ask the SEC for a “no-action” letter that essentially allows the company to omit the proposal on the grounds that it involves a policy issue not pertinant to the business or is an out-of-the-ordinary attempt to micromanage the business.

The other is to engage with proponents on the substance of the proposal. Engagements are often at least somewhat successful and thus lead to the withdrawal of many proposals prior to voting.

Finally, the company may simply place the proposal on the proxy ballot (and it must do so if engagement isn’t successful or if a no-action letter is not granted).

According to this year’s Proxy Preview, 90 proposals have already been withdrawn this year, more than in either of the last two years. That’s a good thing, because it indicates that companies are more willing to engage on issues of concern to sustainable investors.

Overall, more than 300 shareholder proposals are currently pending for this year’s proxy season. Of those, 66 are about climate change, including several that propose a new “Say on Climate” concept that would have companies issue climate transition assessments for investors to approve in annual advisory votes.

Another 78 proposals are pending on corporate political activity. These reflect longstanding concerns that have been heightened this year after the Jan. 6 insurrection at the Capitol, as companies face scrutiny over their contributions to politicans who cast doubt on the integrity of the election.

But investors are also concerned about expenditures that go to politicians or lobbying activities that are not aligned with the goals of the Paris Climate Agreement, particularly from companies that claim to be aligned with those goals.

Shareholders have responded to the racial justice movement by proposing 69 resolutions asking for disclosure on workplace diversity and on policies on hiring and “rooting out racism.”

According to Proxy Preview, these are hot topics for engagements and so many of the resolutions may not come to votes:

While not many have been withdrawn so far, the final tally of resolutions to be voted on is likely to shrink significantly because of the pressure companies face to prove their commitments have teeth. All but two of the companies facing these proposals are doing so for the first time.

Here’s a link to this year’s report:

How are your funds voting?

Mutual funds collectively command large positions in nearly every public company and have a responsibility to cast informed votes at company meetings, including on shareholder resolutions. Gone are the days when mutual funds could just routinely vote against shareholder proposals. The fact that more are supporting sustainability-related proposals is significant, according to Proxy Preview:

The huge mutual funds that have influential stakes in nearly every corner of the American financial markets continue to pay more attention to proxy voting on environmental, social and sustainability issues, which has pushed the overall support levels ever higher, with 21 majority votes in 2020. But critics continue to press these market movers to vote for more shareholder resolutions and make their environmental, social and governance (ESG) policies consistent with investment management practices.

Mutual funds are required to report their proxy votes to the SEC, but only after the proxy season is over, so it is difficult to monitor how your funds vote. We collect the data in-house at Morningstar, but it would be better if the SEC would take steps to make reporting more transparent — by requiring quarterly filings, for example, and by making it easier to compare how funds voted.

To that end, acting SEC chair Allison Herron Lee has directed staff to consider overhauling the way funds disclose their votes and to submit them more often than once per year. This would make it easier for investors to access the information in a decision-useful way.

As my colleague Jackie Cook writes:

We see this as a key measure in advancing shareholder democracy by connecting fund investors to the votes cast on their behalf.

For more on Acting Chair Lee’s thoughts on proxy voting and shareholder democracy, here is a transcript of her remarks at the ICI conference last week:

By the way, we have been monitoring how funds vote and, in many cases, it ain’t very pretty when it comes to supporting sustainability matters:

Even among ESG funds, support for sustainability via proxy voting spans a range literally from 0 to 100%. This downloadable report details how ESG funds voted on key ESG-related resolutions last year:

Follow me on Twitter: @Jon_F_Hale



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Jon Hale

Jon Hale

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.