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New SEC guidance emboldens shareholder activists as 2022 proxy season ramps up


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New SEC guidance emboldens shareholder activists as 2022 proxy season ramps up

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The U.S. Securities and Exchange Commission building in Washington, D.C. The agency has been loosening restrictions on shareholder resolutions under U.S. President Joe Biden.
Source: Chip Somodevilla/Getty Images News via Getty Images

With the 2022 proxy season ramping up, a recent decision by U.S. Securities and Exchange Commission staff to return more influence to investors has already yielded some early shareholder successes.

The SEC issued a legal bulletin Nov. 3 that rescinded restrictions the Trump administration imposed on shareholder resolutions. Over the course of three years, the SEC under Trump made it gradually harder to challenge corporate strategies on climate change, diversity, lobbying and other issues of keen interest to many investors today.

Within two days, retail giant Costco Wholesale Corp. told the SEC that "in light of recent relevant guidance from the Staff" it would withdraw its challenge to a proposal by Green Century Funds that Costco adopt short-, medium- and long-term greenhouse gas emission targets. As a result, the proposal will go to a vote at the company's annual shareholder meeting in January.

"This is really a victory for the proponents " Heidi Welsh, executive director of the Sustainable Investments Institute, said of the recent SEC staff decision. "It means companies have less ground for objection to shareholder proposals. In the past under the SEC, 2018 and onward, asking for specific greenhouse gas goals was unacceptable."

It is still too early to say whether more proposals will be filed or what topics will dominate during the 2022 proxy season, but the general sense is that recently emboldened shareholders will not pass up the opportunity.

"We would not be surprised to see more proposals this season," Michael O'Leary, managing director of activist investment firm Engine No. 1, wrote in an email. "Shareholder voting is an important way for investors to hold companies accountable — and investors shouldn't waste the power of their votes."

Engine No. 1 scored a major win in May when its shareholders elected three of four directors it had nominated to Exxon Mobil Corp.'s board of directors.

Shareholders faced barriers

Under former President Donald Trump, the SEC tightened rules for what shareholders could ask for. If too detailed, proposals would be more easily classified as "micro-management." Proposals had to relate specifically to a company's business rather than to broader business conditions. Shareholders also had put a dollar figure on how their demands would affect a company's bottom line.

"What that did was make it very difficult to bring reasonable proposals and to address issues of concern, like climate change, in a way that really moved the issue forward," said Danielle Fugere, president and chief counsel of As You Sow, a shareholder advocacy group. "There's definitely the sense now that we can go back to more of a normal shareholder process."

Going forward, SEC staff will change how it views "ordinary business" when it considers corporate challenges to shareholder proposals, the Nov. 3 bulletin said.

"Staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal," the SEC staff wrote. "In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact."

As far as shareholders micro-managing corporations, shareholders will now be allowed to request details on how a company is making progress toward certain goals of specifically how it assesses risk, for example.

An early test case of the new direction set by the Biden administration came in March when the SEC refused to block a shareholder resolution asking ConocoPhillips to account for so-called Scope 3 greenhouse gas emissions generated by consumers of the company's fuel. The resolution passed with a 58% majority vote at the company's shareholder meeting two months later.

The SEC staff concluded that shareholders did not micromanage the oil company's business since their resolution only asked ConocoPhillips to set emission reduction targets without specifying what methods it should use for reaching those goals.

Companies will test new ground

With many shareholder meetings just weeks away, a number of proposals have already been filed under the guidance implemented by the Trump administration. That means the real impact of the new SEC approach may not be felt until 2023, noted Laura Richman, an attorney at Mayer Brown who focuses on corporate governance and public disclosure issues.

"We'll still see no-action requests going in," Richman said, referring to appeals companies make to the SEC to try to block shareholder resolutions. "People will analyze to see what other grounds they might have and whether there are any arguments they can make under any of these ordinary business, micromanagement and economic relevance exceptions."

Even so, corporations trying to stave off shareholder activism face a tougher road ahead. There was a significant drop in SEC support for company efforts to exclude resolutions focused on environmental, social and governance policies in the spring — a trend that will likely continue, observers say.

If the last proxy season was any indication, climate change along with workforce diversity and equal pay issues are expected to continue to rank high as investors test their news wings.

"Shareholders will now have the opportunity to directly ask Costco to set emissions targets that meet the scale and urgency of the climate crisis," Green Century President Leslie Samuelrich said in a statement after the retailer withdrew its challenge this month. "This will be the first of many opportunities for investors to vote on proposals directly requesting these ambitious targets."