As socially conscious investors continue to exert growing power over public companies, the fossil fuel industry offers a natural target for green governance proposals. However, a recent decision by the Securities and Exchange Commission involving an energy titan illustrates the challenges environmental reformers face when they push for change through proxy votes.
Earlier this month, the SEC backed Exxon Mobil’s request to nix a shareholder proposal that called on the Texas-based oil and gas corporation to “include disclosure of short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement.” The proposal noted that some of Exxon’s competitors have started to make similar disclosures.
The SEC sided with Exxon’s invocation of Exchange Act Rule 14a-8(i)(7), though, which allows issuers to exclude shareholder proposals that amount to “micromanagement.” “By imposing this requirement,” an SEC lawyer wrote in the no-action letter approving Exxon’s request, “the proposal would micromanage the company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” Exxon also requested relief under Exchange Rule 14a-8(i)(3), which allows for the exclusion of vague and misleading proposals, and Exchange Rule 14a-8(i)(10), which allows for excluding proposals that have already been substantially implemented.
The micromanagement standard makes a powerful weapon for issuers, in part because of how flexibly it can be read. Just how flexible are we talking? According to research using the Intelligize platform, when companies cite Rule 14a-8(i)(7) as one of multiple arguments for putting the kibosh on shareholder proposals, the SEC’s “concur letters” allow exclusion under that rule nearly 70 percent of the time. Additionally, since the Intelligize platform captures exclusionary rules requested, exclusionary rules allowed, and the underlying no-action letter precedents cited by companies in their requests, we can identify a linchpin in companies’ successful Rule 14a-8(i)(7) arguments against the inclusion of environmental shareholder proposals: Ford Motor Company (Mar. 2, 2004). Exxon built upon this body of precedent indicating:
Although the Staff has stated that a proposal generally will not be excludable under Rule 14a-8(i)(7) where it raises a significant policy issue (Staff Legal Bulletin 14E (October 27, 2009)), even if a proposal involves a significant policy issue, the proposal may nevertheless be excluded under Rule 14a-8(i)(7) if it seeks to micromanage the company by specifying in detail the manner in which the company should address the policy issue. […] See Ford Motor Company (March 2, 2004) (proposal requesting the preparation and publication of scientific report regarding the existence of global warming or cooling excludable “as relating to ordinary business operations” despite recognition that global warming is a significant policy issue).
Look for more analysis of excluded shareholder proxy proposals in an Intelligize report to be released next week.
So, Rule 14a-8(i)(7) gives companies such as Exxon latitude to ward off environmental shareholder proposals. But what if they’re acquiring a new set of problems in the process?
These companies may not be creating goodwill by pushing back against proposals designed to combat social concerns surrounding climate change. Exxon receiving the condemnation of an organization like the Church of England, which supported the Paris Agreement shareholder proposal, won’t go down as a public relations win. The Church’s endowment fund joined the New York State Common Retirement Fund in leading the charge on the proposal. If the comments New York State Comptroller Thomas DiNapoli made to CNN following the SEC ruling are any indication, Exxon will have to continue fighting similar efforts for the foreseeable future.
“We’re not going away,” DiNapoli said. “Don’t take a minor setback as defeat. It’s part of a longer process.”