This proxy season, two narratives are taking shape around shareholder proposals – one of them favoring activist shareholders, the other favoring management. The origins of both stories stretch back to last year. And now, like sequels hitting the box office for the summer, they’re back again.
In the first story, a scrappy band of activists seizes control over the direction of large companies through persistent concern over so-called ESG (Environmental, Social and Governance) issues. Many of these actors are religiously motivated, pushing corporations to adopt conscientious policies on the environment, executive pay and other issues. Last year, they scored a series of unlikely but emphatic victories. For instance, in a “stunning reversal” of prior votes, a climate change proposal put forward by a nun won 62 percent of the vote among Exxon shareholders, despite management’s opposition. That victory and others occurred in part because massive shareholders like BlackRock and Vanguard had come around to the activists’ way of thinking.
This year, BlackRock went even further. In an open letter, CEO Laurence Rink called for public company CEOs to ensure that their companies contribute positively to society, and released proxy voting guidelines that were more aggressive than ever on ESG issues. The activists, it seemed, had won.
But there’s a second movie to watch, and in this one, management strikes back. This story, too, starts last year. After the rebellion notched its victories, the SEC quietly updated its guidance on shareholder proposals. Acquiescing to demands by business groups, the SEC revisited its interpretation of two rules that issuers can cite to avoid putting proposals to a vote. One requires that the proposal be “economically relevant” to the business, and the other gives management exclusive domain over “ordinary business problems.” In both instances, the SEC’s updated readings favored management.
This new weapon had gone largely untested until this proxy season. But now, management is wielding it with some success. Five different times, the SEC has endorsed issuers’ refusal to put proposals up for a vote. Dunkin Brands Group (the holding company for Dunkin Donuts and Baskin-Robbins), for instance, successfully used the “economic relevance” rule to reject a proposal that would have required the board to “assess the environmental impact of the company’s use of K-Cup Pods packaging.”
The victories by management may even be reversing the gains made by activists last year. EOG Resources was allowed to reject a proposal dealing with carbon emissions (based on the “ordinary business” standard), even though its sponsor, Trillium Asset Management, maintains that it is similar to those voted on at other companies. Apple, for its part, was allowed to dodge an environmental proposal but was required to undergo a vote on human rights issues. Such rulings have critics claiming the SEC is being inconsistent.
Perhaps that’s the natural result of two powerful narratives opposing each other. We may have to wait for the end of the trilogy to see who comes out on top.