Milbank Discusses SEC Guidance on Shareholder Proposals and the Way to Regulate Climate Change

As a result of the SEC’s most recent Staff Legal Bulletin[1] (“SLB”), shareholder proposals that focus on a “significant social policy” will not be excludable simply because the policy issue is not, in fact, “significant” to the company receiving the proposal. The SEC has decided it will no longer “focus on the nexus between a policy issue and the company.”  Previously, shareholder proposals that did not raise a “policy issue of significance for the company” were excludable under the “ordinary course of business” exception to Rule 14a-8.[2] The new Staff Legal Bulletin is a departure from past SEC practice, and led the SEC to simultaneously rescind three previous Staff Legal Bulletins on the same subject.

Leaving aside the issue of why the SEC – which is presumably dedicated to the regulation of securities – should be determining in the abstract which social issue are “significant,” it is clear from the new bulletin that climate change and human capital management are issues that will be considered “significant.” Beyond that specific guidance, the SEC promises only that “in making this determination [regarding significance], the staff will consider whether the proposal raises issues with a broad societal impact.” This is a standard that doesn’t exactly hem in the SEC or limit the imagination of activists and gadflies.[3]

Even within the two identified categories, human capital management issues could presumably encompass proposals regarding diversity, fair pay, unionization drives, mandatory arbitration, workplace safety, sexual harassment, pay ratios, and offshoring. Climate change issues could encompass emissions targets, energy efficiency, use of renewable energy, etc.  Beyond climate change and labor issues, one only needs to look to ISS guidelines to see the breadth of possible ESG proposals with a “broad societal impact” – ISS has guidelines on everything from lobbying and making political contributions to animal testing, fracking, use of GMOs, human rights, operating in high-risk areas, data security, and privacy.

Given the vast number of possible issues with a broad societal impact, one might question why the SEC thought it prudent to abandon the requirement that the proposed policy be significant for the company. Without a nexus to the company, the shareholder proposal process envisioned by the new SLB would seem to allow for endless opinion polls on socially significant topics that will not necessarily have a significant effect on the company funding the polls.

Some proposals, even if socially significant, might still be excludable under the “micromanagement” prong of the ordinary course of business exception – which is used to exclude proposals that “micromanage” the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”[4] However, the SLB rescinds previous guidance on “micromanagement,” on the theory that the previous guidance could be used to exclude any proposal that limited the company or board’s discretion.[5] Going forward, the SEC will “take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement . . . [the SEC 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.”

It may be worthwhile to focus for a minute on what is meant by “inappropriately” limiting the discretion of board or management. Votes on 14a-8 shareholder proposals are meant to be precatory, so that theoretically boards can ignore the results of any vote without consequence – in other words, there should be no limitation on the board’s discretion arising from a 14a-8 proposal, appropriate or otherwise. (This framework is consistent with Delaware corporate law, which provides that the board, not shareholders, shall manage the company.[6]) However, proxy solicitors have established an effective enforcement mechanism for 14a-8 proposals.  ISS and Glass Lewis will both recommend votes against individual directors or the full board if directors are deemed to be not sufficiently “responsive” to a shareholder proposal that has been approved (ISS) or simply that has received at least a 20% vote in favor (Glass Lewis). Accordingly, as the SEC implicitly recognizes, there is some bite to this nominally precatory vote –  by linking the directors’ continued employment to the shareholder proposal, the shareholder proposal can effectively influence the discretion of the board or management. It remains to be seen when the SEC will deem that such influence becomes “inappropriate,” though one suspects the micromanagement determination will be focused more on how intrusive and “granular” the actions set out in the non-binding proposal are, rather than on the actual limitations on management discretion resulting from the vote.

So, just what effect will this rule change have?  Clearly it will be harder to exclude shareholder proposals, so there will be more of them, and presumably at least some of them will not be of great significance to the targeted company.  Management will have to be prepared to react and defend their position on whatever proposal arises, lest ISS or Glass Lewis recommend voting the board out for not being sufficiently responsive. This will increase distraction for management and the board. But, is there an upside?

Let’s assume that the goal of the SLB is to advance ESG causes (or at least climate change and human capital management causes) by making these proposals the focus of discussion at more public companies.[7] Viewed optimistically, if some of these proposals advance, the discussion it fosters could lead to the development of industry-wide policies on climate change and human capital management issues.

But it is an odd way to regulate. Instead of having a legislature or regulatory body thoughtfully design policies and apply them mandatorily and uniformly, the process starts with a proposal from a shareholder of a public company – typically someone with minimal shareholdings and a particular point of view. The proposal is limited to 500 words, which is unlikely to result in much nuance being conveyed. The proposal is then subject to approval by shareholders, mainly large institutional shareholders (which represent millions of individual investors who may have their own views on climate change and human capital management) and a smattering of retail investors (who are less likely to vote). Management may object to the proposal, but if approved by the shareholders of the company, management will presumably implement the proposal to some extent. If management is not sufficiently “responsive,” the terms of the proposal will be enforced at annual meetings by shareholders (guided by proxy advisors) voting against directors.

One has to expect that the implementation of this “regulation by shareholder proposal” will be wildly uneven at each step – there should be no expectation of uniformity with respect to which companies receive shareholder proposals, what the shareholders will demand, how the vote will turn out, how management will respond, whether that response will be sufficient to trigger a negative recommendation on the election of directors, etc.  And the uneven application of this type of regulation will of course burden the more “responsive” public companies more greatly than the less responsive public companies (and will burden private companies not at all), with the more responsive companies “internalizing” externalities that their competitors may continue to exploit. Even more likely is that companies subject to these proposals will not make any changes that would be particularly difficult or expensive.  Some low-hanging fruit might be harvested, but it seems unlikely that managers will support, or shareholders will vote to implement, proposals that will measurably damage returns. So the upside – harvesting low-hanging fruit and promoting a discussion – can be weighed against the shambolic approach to regulation and the possibility that engaging in an extended public conversation about the best way to harvest low-hanging fruit will bleed urgency from more traditional regulatory efforts.[8]


[1] Shareholder Proposals: Staff Legal Bulletin No. 14L (CF), November 3, 2021.

[2] For completeness, the SEC also made clear that shareholder proposals focusing on a significant social policy will also not be excludable under the “economic relevance” exception, which previously allowed a company to exclude proposals that did not relate to operations accounting for less than 5% of the company’s assets, earnings or sales.

[3] Two commissioners, in a dissenting statement released concurrent with the SLB, have asked “What criteria, time frame, or proof support a finding that a topic is socially significant or has a broad societal impact? The new bulletin does not say.” Statement on Shareholder Proposals: Staff Legal Bulletin No. 14L, November 3, 2021.

[4] Release No. 34-40018 (May 21, 1998).

[5] The two commissioners note in their dissenting statement that only 4 climate change proposals were excluded on micromanagement grounds in 2020, and none were excluded on micromanagement grounds in 2021. Statement on Shareholder Proposals: Staff Legal Bulletin No. 14L, November 3, 2021.

[6] “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” Delaware General Corporation Law Section141(a). In contrast, the latest Staff Legal Bulletin recognizes only “the board’s authority over most day-to-day business matters.” It is unclear by what authority the SEC would be permitted to pre-empt state law by granting shareholders of public companies powers that Delaware law reserves for the board.

[7] To be clear, this is truly just an assumption.  The two commissioners noted in their dissenting statement that “[t]he rationale for today’s action is a bit of a mystery.” Statement on Shareholder Proposals: Staff Legal Bulletin No. 14L, November 3, 2021.

[8] See, e.g., Big Business and COP26: are the ‘net zero’ plans credible?, Financial Times, November 10, 2021, citing lobbying efforts to fend off climate change regulation by the same corporations making climate change pledges, and noting the view of some that the “focus on voluntary corporate action risks weakening the drive for  badly needed governmental policy interventions.”

This post comes to us from Milbank LLP. It is based on the firm’s blog post, “SEC Guidance on Shareholder Proposals – Staff Legal Bulletin 14L – Is This the Way to Regulate Climate Change?” available here.