October 29, 2009
Activist Shareowners Celebrate SEC Reversal of Bush-Era Ruling
by Robert Kropp
New ruling from the Division of Corporation Finance would allow shareowner resolutions addressing
the financial risks of corporate activities in environmental and social areas.
Shareowners seeking to engage meaningfully with companies on matters of environmental, social, and
governance (ESG) criteria won an important victory this week, when the Division of Corporation
Finance at the Securities and Exchange Commission (SEC) issued Staff Legal Bulletin No. 14E. The ruling
effectively reversed an SEC decision enacted in 2005, under the Bush administration, which
disallowed shareowner resolutions that addressed questions of financial risk associated with
corporate activities on ESG issues.
The ruling arrives in time for the 2010 proxy
season, as many shareowner proposals for the new proxy season will be filed in November.
SocialFunds.com spoke with Sanford Lewis, an attorney in private practice whose clients include
the Investor Environmental Health Network (IEHN)
and other responsible investor organizations working for shareowner rights. He said, "I think the
Bush administration rule was politically motivated, and was never fully justified."
the Bush administration, the SEC made some staff decisions that started reasonably enough, by
addressing some efforts by investors to micromanage corporate activity," Lewis continued. "But they
reached more and more widely, culminating in the rule excluding resolutions asking for risk
Observing that "We have recently witnessed a marked increase in the number
of no-action requests in which companies seek to exclude proposals as relating to an evaluation of
risk," the SEC stated in its recent ruling that "our application of the analytical framework
discussed in SLB No. 14C
may have resulted in the unwarranted exclusion of proposals that relate to the evaluation of risk
but that focus on significant policy issues."
Going forward, the SEC said, "The fact that
a proposal would require an evaluation of risk will not be dispositive of whether the proposal may
"The SEC has reversed the question of evaluation of risk, in reversing the
prior staff bulletin," Lewis said. "The new ruling says, we're not going to look at evaluation of
risk but at whether the social policy issue addressed in the proposal is big enough for
Lewis shared some striking examples of shareowner resolutions disallowed
by the SEC in recent years.
"A Trillium Asset Management resolution on Internet privacy
addresses a huge public policy issue, but it was treated as if it wasn't big enough," Lewis said.
"And despite tense relationships between Western Union and the communities in which it operates,
the SEC found a NorthStar Asset
Management resolution on community reinvestment by Western Union to be not a big enough social
Anticipating the potential for change in the philosophy at the SEC
following the election of Barack Obama, a group of 60 institutional investors wrote to the
President-elect in December, 2008. The Letter to President-Elect Obama on Shareholder Rights to
Risk Evaluation Resolutions stated, "The adoption of this new bar on resolutions requesting
'risk evaluation' represented a significant departure—disregarding the reasonable and principled
approach that had governed at the SEC for decades, and replacing it with a radical interpretation
of the rules. The result has been to limit shareholder resolutions to questions about the impact
that companies are having on society in general, excluding vital questions about the impact that
any of these issues may have on the company’s future finances."
The letter went on to
request that the SEC "retract the staff-created prohibition on resolutions that ask companies to
evaluate the financial impacts of identified issues," asserting that "effective disclosure of these
issues through the proxy process can lead to better anticipatory action by corporations such as the
control of greenhouse gases and the development of safer alternative materials."
September 22, a group of shareowner representatives met with Meredith Cross, instated as Director
of the Division of Corporation Finance at the SEC in June. Recounting the meeting in a blog post, Lewis wrote, "Although no immediate changes were proffered by Cross or her staff
on these contentious issues, the staff does seem to be poised to make some modest modifications of
the no action letter process in the coming season."
"The mood among the investors
attending the meeting was restless, to say the least," Lewis wrote in his post.
SocialFunds.com, "We thought she really gets our concerns, but we only expected modest changes. I
think the meeting helped convince her."
"The December 2008 letter to Obama helped to pave
the way," Lewis continued. "At the meeting, I read from the letter and gave Meredith Cross a copy
The new SEC ruling also found that proposals relating to Board oversight of
corporate risk management can transcend ordinary day-to-day business, and cannot be summarily
excluded on that basis.
However, the ruling left undefined the question of what
constitutes a policy issue significant enough to merit allowance of shareowner resolutions. It
states, "In determining whether the subject matter raises significant policy issues and has a
sufficient nexus to the company…we will apply the same standards that we apply to other types of
Lewis said, "What constitutes a big issue is still a problem at the SEC. In
the meeting, we heard the criteria, and found them somewhat disturbing and arbitrary. The staff
makes judgments that might rule out such emerging issues as nanotechnology. Shareholders are among
the first to identify issues, and it's not at all inappropriate for them to discuss them in their
"It's not an open season on filing," Lewis continued. "There still are
impediments and legal thresholds." He advised filers to avoid resolutions that included
micromanagement and the issue of substantial implementation, in which companies contend that they
have already reported on the issue addressed in the resolution.
Lewis said, "I would
encourage filers to build the best case they can, by making the best case for social policy in the
resolution itself, instead of waiting until they have to defend the resolution. These are still
Regarding the question of what constitutes a major policy issue, Lewis
said, "We will continue to have dialogue with the SEC and monitor what happens this season. Maybe
the SEC will do a better job in avoiding second-guessing shareholder resolutions on social policy