Last fall the Securities and Exchange Commission sent a clear signal it would be content to let shareholders propose more resolutions forcing companies to answer awkward questions about risk assessments or CEO succession.

Now shareholders are starting to send a signal back: message received.

Slowly but surely, shareholder activists are taking advantage of the SEC’s reinterpretation of Rule 14a-8(i)(7), which will now generally allow such resolutions onto the proxy statement rather than allow companies to keep them off. It is too early to put precise numbers on the upswing in resolutions, but few doubt that such proposals are on the rise.

Martin

“Shareholder proposals related to risk have been increasing in frequency over the years,” says David Martin, a former director of the SEC Division of Corporation Finance who now is a partner at the law firm Covington & Burling. SEC staff increasingly “found itself torn between viewing risk assessment as the topic of the proposal, versus the underlying area covered by the risk assessment”—which led to some “awkward line-drawing,” he says.

Historically, the SEC considered shareholder proposals that mentioned risk assessments or CEO succession as straying too close to the “ordinary business” of a corporation, which the company could omit from the proxy statement simply by asking the SEC for a no-action letter. That changed with Staff Legal Bulletin 14-E, issued by the SEC on Oct. 27. The Bulletin clarified that SEC staff will first determine whether the subject matter of the risk assessment relates to ordinary business, and grant an exclusion only then. Proposals related to CEO succession won’t be excludable unless they’re detailed enough to be considered micromanagement.

SEC spokesman John Nester says the SEC staff has already rejected some no-action requests this year under Rule 14a-8(i)(7) “where companies argued that a proposal could be excluded because the proposal would require the company to engage in an evaluation of risk.”

For example, the staff fired off a rejection letter to PPG Industries on Jan. 15, which sought to exclude a proposal that asks the board to prepare a report to shareholders on how the company ensures that it responsibly discloses its environmental impacts in all of the communities in which it operates.

“We are unable to concur in your view that PPG may exclude the proposal under rule 14a-8(i)(7) because it requires an assessment of risk,” the staff response states. “In our view, the proposal focuses primarily on the environmental impacts of PPG’s operations and does not seek to micromanage the company to such a degree that exclusion of the proposal would be appropriate.”

“There’s no question things are different this year. We’re reaching settlements with more companies.”

—Richard Metcalf,

Corp. Affairs Director,

Laborers’ International Union

Shareholder proposals seeking some sort of risk assessment often come up in the context of environmental and sustainability issues. The current focus on risk and risk assessment generally and the SEC’s new guidance on disclosure of climate change risk is only expected to increase focus on that topic.

“This will definitely be a notable year for these proposals,” says Carol Bowie, head of the Governance Institute at RiskMetrics Group. “It remains to be seen how much voting traction they will get from shareholders, but risk is certainly a hot topic this year.” Bowie says a handful of risk-related proposals have been filed in prior years, but they were no-actioned or withdrawn.

Talk It Out

de Wied

Warren de Wied, a partner in the law firm Wilson Sonsini Goodrich & Rosati, says the number of risk-related proposals submitted so far this season is small, and Corporate America probably won’t see the full force of the change until 2011. Still, for companies that receive such proposals, and assuming that there isn’t a legal basis to exclude the proposal, he recommends the standard advice of “dialogue and information sharing.”

“In an area like climate change risk, many companies have great disclosures on their Websites nowadays, and of course plenty of companies are actively working on the substance of the underlying issues,” he says. “Companies that follow a practice of constructive engagement with the proponent frequently succeed in getting proposals withdrawn. Risk-assessment proposals should not be any different.”

Bowie

RiskMetrics is tracking five risk-related shareholder proposals filed for 2010 meetings in the wake of the SEC’s new guidance. Five other shareholder proposals reference CEO succession planning, which is also now considered a long-term risk factor that the SEC allows, Bowie says.

COMPANY RESOLUTIONS

The following chart from RiskMetrics Group shows what some companies are planning in terms of succession (# sign indicates the company is seeking no-action relief):

Date

Company

Resolution

Proponent

05/26

Chevron

Report on climate change financial risks

Viederman, Steve

05/26

Exxon Mobil

Report on climate change financial risks

Conn. Retirement Plans

05/26

Exxon Mobil

Report on risk of lower fossil-fuel demand

Goodwin, Neva

05/19

Intel

Succession planning

UFE/Resp. Wealth

May

ConocoPhillips

Provide report on risk management oversight

Srs/Holy Names Jesus & Ma

May

ConocoPhillips

Report on climate change financial risk

Needmor

May

Verizon

Succession planning

Laborers

04/28

Bank of America

Succession planning

Laborers

04/26

American Express

Succession planning

Laborers

03/08

Whole Foods Market

Succession planning

Laborers

RiskMetrics Group (Feb. 2, 2010)

At least one shareholder proponent says he’s already seen a change as a result of the SEC guidance.

“There’s no question things are different this year,” says Richard Metcalf, corporate affairs director for Laborers’ International Union of North America, one of the groups that had been pushing the SEC for the changes to the ordinary business exclusion detailed in Bulletin 14-E. “We’re reaching settlements with more companies.”

LIUNA filed a handful of succession planning proposals during the 2008 and 2009 proxy seasons, and all were vetoed by the SEC as relating to ordinary business. It filed 14 such proposals this year in anticipation of the change. At least one of those proposals will go to a vote on March 8 at the annual meeting of Whole Foods, after the company’s no-action request was rejected by SEC staff.

Still, Metcalf says he expects to see “more settlements than proposals on the ballot.” Companies have been more responsive “as it’s started to sink in that these proposals can get through and get voted on,” he says. For example, LIUNA withdrew a succession-planning proposal at Wells Fargo. LIUNA also filed a succession-planning proposal with Bank of America; the bank has sought a no-action letter from the SEC, but staff haven’t made a final ruling yet.

The International Brotherhood of Teamsters, meanwhile, is awaiting SEC rulings on shareholder resolutions it filed calling on some airlines to disclose the operational and oversight standards that apply to aircraft maintenance outsourced to contract repair services. Thomas Keegel, the Teamsters’ general secretary-treasurer, says some of the airlines are seeking no-action relief to exclude the proposals as relating to ordinary business.

“We’re currently responding to those requests and are eager to see if the SEC will allow shareholders to vote on bringing transparency and accountability to this critically important issue,” Keegel says.