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Aug 2, 2022 Sam Mellins

Biden Gives Activist Shareholders A Leg Up

Proposed new SEC rules could give activist shareholders more power than ever before — but will it be enough to shift corporate behavior?
Biden Gives Activist Shareholders A Leg Up
(AP Photo/Mark Lennihan)

A new set of rules proposed by the Securities and Exchange Commission (SEC), which regulates the stock market and other financial arenas, would make it easier for company shareholders to bring resolutions to a vote. That could potentially open the floodgates to a wave of new socially responsible measures, such as curbing emissions and boosting diversity efforts.

This development suggests President Joe Biden’s financial regulators aren’t just focused on reversing the havoc of the Trump administration, but are now aiming to push further on corporate responsibility than any administration before them. Still, whether such efforts will be enough to shift corporate behavior in the long run is an open question.

“These may appear like obscure, arcane rules to most,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility. “But their actual impact is significant, because companies are using these rules to stifle investor conversation about critical long-term risks like climate change.”

The rules would make it harder for companies to block shareholder resolutions, which are requests that people or groups who own stock in companies can put to a vote of all shareholders at a company’s annual meeting, by removing several of the justifications that companies can currently use to block resolutions from coming to a vote. While they’re not binding, resolutions that win majority support are generally taken seriously by corporate boards, since the shareholders that vote for resolutions can also vote to replace board members if they don’t take action.

The practice of using resolutions to prod companies into taking steps to advance environmental and social goals has spiked in recent years — and while the Trump administration repeatedly took action to make it more difficult to get resolutions to a vote, shareholders were still able to score significant victories on climate, political spending, and diversity-related resolutions.

Now, with the current political gridlock foreclosing most major legislation by the federal government to address environmental and social goals, such resolutions are one of the few tools available to promote corporate responsibility.

“The regular political process for dealing with a whole range of issues is not working,” said Heidi Welsh, founding executive director of the Sustainable Investments Institute. “And so investors who want action on this are going directly to companies.”

Cleaning Up The Rules

Biden’s SEC has been pushing to expand the ability of shareholders to bring resolutions before companies since last year. In November, the SEC rescinded a Trump Administration move that had made it easier for companies to reject shareholder proposals by arguing that they were either too broad or too narrow.

Under the Trump regulations, companies were allowed to reject “narrow” proposals, such as a request to prepare a report on achieving zero-carbon emissions, on the grounds that they were attempts by shareholders to “micromanage” the company.

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Companies were also allowed to reject broad proposals if they could plausibly claim that they had already “substantially implemented” the proposal — by taking any action related to the proposal’s subject, whether or not it was the action that shareholders were seeking, said Danielle Fugere, president of shareholder advocacy group As You Sow.

This exception was a particular favorite of companies seeking to avoid disclosing information related to efforts to curb emissions or otherwise fight climate change, and made it harder to get climate change-related resolutions to a vote, Welsh said.

In 2020, the retail giant Amazon employed this rationale to block company shareholders from voting on a resolution that would have required the company to commit to a detailed plan for “ensuring safe and healthy workplaces” and “affirming the right of workers to form and join trade unions and bargain collectively.” Amazon argued that it had already “substantially implemented” the proposal by publishing a statement about “Human Rights Principles” on its website.

Finding the sweet spot between proposals that weren’t too narrow to count as micromanaging, but weren’t too broad that companies could claim to have already implemented them was a difficult task that led to more proposals being rejected, said Fugere — and that may have been exactly the point.

“If we put those specific concerns into a proposal, it was called micromanagement, but if we didn’t, we were blocked by the substantial implementation rule,” Fugere said.

In 2021, when the Trump regulations were still in effect, 10 of the 86 proposals that As You Sow submitted were rejected by the SEC. In this year’s proxy season, with the Trump regulations in the rearview, only one of As You Sow’s 92 proposals was rejected.

Now that it’s junked the Trump regulations, the Biden administration hopes to use the new rules to make it harder for companies to claim that they’ve substantially implemented a request. One thing the proposed rules say is that a company has to have put into place the specific elements of a resolution in order to claim substantial implementation, even if it has taken related action.

“Certainly fewer proposals will be blocked” once this rule takes effect, Zinner said. “Companies are always trying to find multiple bases for blocking resolutions, and this was often a grounds that companies were asserting.”

The Trump-era regulations also made it easier for companies to block resolutions if they were similar to other resolutions pending before them. Officially, the rules blocked “duplicate” resolutions from both going to a vote. But what this regulation meant in practice was that companies would try, often successfully, to block any two resolutions on the same subject, such as publicly reporting emissions, whether or not they were seeking the same goals.

Under the new proposed rules, a “duplicate” resolution could only be blocked “if it addresses the same subject matter and seeks the same solution by the same means,” Fugere said.

The third major change planned under the new rules concerns resubmitting resolutions over multiple years. Resolutions often pass after being filed several years in a row, and building support each year, but to prevent companies from being flooded with unpopular resolutions, if a proposal gets below a certain percentage of the vote in any year, it can’t be refiled.

When the Trump SEC regulations were in effect, companies would try to use this rule to block advocates from filing resolutions on any subject where another proposal had previously failed, whether or not the request for action was the same. Like the change to the duplication rule, the new resubmission rule would state that even if a proposal is on the same subject as one that previously failed, it can only be blocked if it requests the same action from the company.

If and when these new rules take effect, shareholder activists could take another shot at getting resolutions to a vote that were blocked during the Trump administration, like resolutions that would force companies to report on whether they plan to adhere to the emissions targets set out at the Paris climate agreement, require shareholders to vote on whether to approve particularly large severance packages for executives, or demand that companies commission independent racial impact studies.

Regulatory Ping-Pong

While these measures from the Biden administration will help to even the playing field between shareholders and corporations, they may not last long after the next time that Republicans win control of the White House.

In truth, once a federal agency creates a rule, it’s hard to change. The SEC was able to quickly overturn the Trump regulations in this area precisely because they weren’t rules, but were rather “guidances,” which can be immediately rescinded by an agency head at any point. By crafting this set of rules, the SEC is likely hoping to “insulate” the changes it’s implementing from being rolled back, Welsh said. Changing a rule requires a months-long process that includes gathering and considering public comment, and sharing multiple drafts of the rule with several federal agencies for review.

The difficulty of changing federal rules is likely the reason why Trump-era rules designed to make it harder for shareholders to file resolutions are still in effect, even a year and a half into the Biden administration.

Even so, rules do change, and when control of the presidency changes hands, the new executive often targets rules issued by the previous administration.

“There’s no reason at all to think that the next Republican administration won’t just repeal all these changes,” Fugere said. The whiplash between opposing administrations has become more severe in recent years, she noted, even though Democrats and Republicans have long had different ideas about the proper scope of regulation.

And as the court system, led by a hyper-conservative Supreme Court, moves to restrict the ability of federal agencies to regulate anything, it’s unclear if, in the long term, federal regulations can be an effective tool for achieving progressive policy goals.

“Regulations can and should be changed, but the system is being abused by this back and forth ping-ponging and just changing regulations at a whim,” Fugere said. “It seems like the system is breaking down.”


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