Companies Still Winning Most Appeals to Exclude Shareholder Proposals

Proxy season is fast-upon us, and so too is the yearly battle between shareholder activists and companies over what shareholder resolutions should go to a vote and what can be left off the ballot.

In recent years, activist investors—individuals, powerful pension funds, and activist hedge funds—have used the shareholder proposal process to push companies to make changes on a vast range of governance issues, including executive compensation, political spending, sustainability and climate change, and many other topics.

Some proposals, however, fall well outside the mainstream or cover topics that corporate managers don't think shareholders should have a say on.

The Securities and Exchange Commission acts as referee in this process through no-action letters that tell companies that ask for a ruling what shareholder proposals they can ignore and what ones should go on the proxy for a vote.

One of the guiding principles for the SEC to rule that a company can exclude a shareholder resolution is known as the ordinary business exclusion—that is, if the proposal is on a topic related to the ordinary running of the business and not a governance issue, it can be left off the proxy. Companies can also appeal to the SEC on the grounds that they have already addressed the shareholder request, that the proposal is misleading, or that shareholders didn't follow the proper procedures when filing the proposal.

“The majority of exclusions are usually procedural,” explains Robert Peters, director of research at Intelligize, which has developed a system to track no-action letter requests and determinations. The ownership threshold required of an investor before they can place a proposal on the proxy, for example, is set at owning $2,000 in stock, or 1 percent of shares, whichever is lower. “You have to have held that stock continuously for a year, and still hold those shares through the time of the vote,” he says. Companies can exclude proposals from shareholders that don't meet these hurdles. Another requirement is that proponents most represent themselves, or appoint someone to present the proposal, at the annual shareholder meeting.

During last proxy season, about two-thirds of the requests to ignore a shareholder proposal were granted by the SEC through a no-action letter. According to Intelligize, 173 companies (66 percent) were granted exclusions during the 2013 proxy season, and 90 companies (34 percent) were denied the right to withdraw contested shareholder proposals. Another 68 requests for an SEC response were later withdrawn by companies.

So far during the current proxy season, companies have fared about as well in getting shareholder proposals excluded from the proxy, with 73 exclusions granted (63 percent) and 42 denials (37 percent).

That the number of times the SEC has sided with companies through no-action letters is on a similar track this season as it was last year, may put to rest speculation there would be a new approach under a new regime at the commission. Mary Schapiro was a staunch, vocal investor advocate during her time as chairman and Mary Jo White, throughout her confirmation process, said she would continue with that philosophy. That nearly twice as many shareholder proposals were tossed out compared to those left in under both chairmen shows that little has changed in overall approach. 

Of the no-action letter requests by companies so far this proxy season, 44 percent were granted on procedural exclusions, 11 percent fell into the ordinary business category, 10 percent were ruled to have been already implemented, and 8 percent each were decided to conflict with a company proposal or to have duplicated a previous proposal.

Companies monitor exclusions carefully for indications of changes in the SEC's approach. The interpretation of what constitutes ordinary business operations, for example, “is evolving,” Peters says.

Proxy Proposal Trends

This year, according to Craig Eastland, product operations specialist at Thomson Reuters which also tracks no-action letters, there is an apparent decline in no-action letter requests by companies on proposals from labor organizations and pension funds, a potential indication that companies are increasingly willing to work with them to settle disagreements.

Resolutions pertaining to climate change and a company's environmental policies have also steadily decreased over the past three years, Eastland says. Those that are still attempting have taken on a new strategy.

“They used to focus on very broad matters of environmental impact, and they have become narrower, focusing on singular issues like fracking” he says. “But they have to walk the line, because if they get too narrow, they start to look as though the ‘ordinary business' exemption will apply.

Climate change and environment shareholder proposals are often among the most controversial and the most difficult to judge whether the SEC will issue a no-action letter.

Last month, for example, Spectra Energy failed to convince the SEC that a shareholder request by socially minded investment fund Trillium Asset Management for providing “reduction targets for methane emissions” amounted to an attempt to micromanage the company's business and interfere with day-to-day operations.

Trillium sought to insert into Spectra Energy's proxy a vote on a demand for a formal report on how it would measure and mitigate methane emissions.” Spectra fought back, with a “laundry list of objections,” Eastland says. Among them that the proposal had already been substantially implemented, inappropriately affected R&D decisions, and sought to involve shareholders in the company's ordinary business operations.

Ultimately, however, the SEC rejected the company's argument and allowed the proposal. That win builds upon other Trillium successes regarding methane emissions. The firm also succeeded in getting methane emission disclosure proposals before shareholders of Range Resources and Oneok.

“The no-action process is not the only method by which a company can seek to exclude a proposal. They can also choose to go to court.”

—Robert Peters,

Research Director,

Intelligize

Just because the proposal makes it onto the proxy, is no guarantee that it will garner much support from shareholders when it does go to a vote. As is often the case with environmental issue votes, shareholders at all three companies rejected the proposals.

According to research by the Manhattan Institute's Proxy Monitor database, of 24 shareholder proposals on climate change put to a shareholder vote between 2011 and 2013, none received more than 32 percent support. The average support level was just above 16 percent.

According to Eastman, these failed efforts beg the question, “If everyone knows these proposals won't be adopted, why do activist investors keep proposing them?”

The answer, he says, is that even lacking adoption there is a belief they can still shape company policy. Strong minority support for a proposal, combined with competitors' decisions, possible damage to reputation, and other factors, form what Jonas Kron, Trillium's director of shareholder advocacy, described as “silver buckshot,” rather than a silver bullet. Targeted attacks no longer succeed as well as multifaceted ones do.

For this proxy season, no-action letter requests involving mandatory auditor rotation have also, surprisingly, decreased. “That has really gone away,” says Peters. “I don't see any this year.”

HOW THE SEC DECIDES

The following data, compiled by the firm Intelligize, looks at the most common exclusions to shareholder proposals offered by the Securities and Exchange Commission during the past two proxy seasons.

2013

Procedural 28%

Conflicted with a company proposal 18%

Ordinary business 18%

Proposal was vague, false, and misleading 14%

Company substantially implemented proposal 10%

2014

Procedural 44%

Ordinary business 11%

Company substantially implemented proposal 10%

Conflicted with company proposal 8%

Duplicates previously submitted proposal 8%

Source: Intelligize.

Eastland cites Trillium's recently withdrawn proposal demanding that Verizon disclose government requests for customer data. Even though it was withdrawn, resulting public pressure led both it and rival AT&T to do exactly what was asked of them.

Eastland says nearly 30 percent of challenged shareholder proposals trace back to the small group of activist investors working with, or inspired by, independent shareholder activist John Chevedden. For the 2013 to 2014 proxy season, as of Jan. 20, he was cited in 64 no-action letter requests. While companies are increasingly willing to negotiate with powerful pension funds, they are often less likely to do so for individual shareholders like Chevedden. “It's a bit of a macho thing perhaps for some companies,” he says. “They may be victims of their own success.”

Eastland notes that in addition to well-known activists, there is an emerging class of activist proponents, often signatories of the UN-sponsored Principles of Responsible Investing.

Qube Investment Management, one of 716 investment managers to have signed onto those guidelines and pushing for greater corporate social responsibility, has been a very active new face in the past and current proxy season, second only to Chevedden. It has been mentioned in 15 no-action letter requests thus far this proxy season; last year the SEC failed to side with Qube in all 13 challenges.

Just as activists have moved away from a focus on singular issues, companies have also broadened their defenses. “Sometimes companies will take a shotgun approach,” Roberts says. “They may cite five or six different exclusions and ask the SEC that, if they don't agree with one, would they consider another one of the cited exclusionary rules.”