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SEC Staff Not Wearing the Green

The commission's bulletin is already bolstering corporate efforts to throw out shareholder proxy resolutions on environmental and public-health issues.
Marie Leone, CFO.com | US
February 28, 2006

Over the next few months, more and more senior executives and boards might find themselves pleasantly surprised by the responses they get from the Securities and Exchange Commission to their applications to jettison certain shareholder resolutions from proxy filings.

That's because an SEC clarification issued by the commission's Division of Corporate Finance last June could make it tougher for shareholders to get environmental and public-health issues on the ballot if the resolutions concern only internal corporate matters and make no mention of the public good.

The new guidance, Staff Legal Bulletin 14C, addresses "no-action" requests, which companies submit when they want to nix resolutions from their proxy statements. In the guidance, the SEC staff specifically addresses environmental and public-health resolutions that deal with matters "relating to a company's ordinary business operation."

In the bulletin, the SEC corporate finance staff says that it routinely concurs with company requests to throw out shareholder resolutions that focus only on asking for "an internal assessment of the risks or liabilities" a company encounters in its normal operations.

In other words, the resolutions can be shunned if shareholders are mainly asking companies to do what they do in the day-to-day course of business — that is, to assess economic risks, explains Meg Voorhees, director of the social issues service for proxy-solicitation firm Institutional Shareholder Services. Such requests, the SEC has held in previous directives, would be excessive micromanagement of a company's routine operations by shareholders.

In the new bulletin, the SEC staff has drawn a line between resolutions that ask for an assessment of a company's own economic hazards and ones that ask for an evaluation of companies' efforts to minimize or eliminate pollution or public-health risks to society in general. In the latter case, the SEC upholds the shareholders' right to enter their resolutions into the proxy statements. That's because, although such resolutions may still concern ordinary business matters, the proposal focuses on "sufficiently significant social policy issues ... [that] transcend the day-to-day business matters," according to the guidance.

The distinction may resemble an exercise in semantics. Yet while the guidance only represents the views of the corporate finance division and lacks the approval of the SEC, it could marks out a big difference from previous practice, shareholder activists fear.

Before the bulletin, shareholder requests that a company evaluate its own economic perils sailed through with a small language adjustment, according to Voorhees. Indeed, SLB 14C clarifies an earlier guidance that suggested that environmental and public health proposals could be rejected simply because the resolutions contained the word "risk," she said.

The thinking was that "risk assessment" or "risk mitigation" are by definition matters of ordinary business. But shareholders soon learned to shed the word "risk" from their resolutions. In its new guidance, however, the SEC's corporate-finance staff points out that any resolution that merely requests action having to do with ordinary business matters can be rejected.

But hybrids of the business and societal risk requests may be acceptable. The bulletin provides two real-world examples that reveal the subtle distinctions the commission can make. In a case taken from an April 1, 2003, filing by Xcel Energy Inc., shareholders asked that the board report on the "economic risks" associated with Xcel's past, present, and future emissions of air pollutants. At the same time, the shareholders asked the board to report on the "economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e. potential improvement in competitiveness and profitability)."

The SEC concurred with Xcel's no-action request. The shareholders, the commission apparently reasoned, were asking the company to report on how its operation affects its competitiveness and profitability. And those are standard business risks.

In another resolution, by contrast, Exxon Mobil Corp. shareholders asked for a report "on the potential environmental damage that would result from the company drilling for oil and gas" in certain protected areas. In a March 18, 2005, response, the commission sided with shareholders because they were focused on company matters that may affect society as a whole.

Most shareholder proxy resolutions are filed in time to be presented at annual meetings that usually take place between January 1 and June 30, notes ISS's Voorhees. And she expects this year's total number of social-issue resolutions to exceed last year's tally. So far, 307 resolutions related to social issues have been filed for the 2006 proxy season, which is on a pace to beat last year's final sum of 334, she says.

Fifty-seven of last year's social resolutions were omitted from proxy statements, and this year 20 have been already omitted, according to ISS. This year, some resolutions have already been rejected after boards cited SLB 14C.

Nevertheless, 103 of the social resolutions submitted in 2005 were withdrawn, which usually indicates that the shareholders' were satisfied with the company's response — and therefore never took the issue to a vote. Only 81 resolutions were withdrawn in 2004, and so far 32 resolutions related to social issues have been withdrawn this year.




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