July 18, 2019

Shareholder Proposals: “Micromanagement” Continues to be Hot

At the recent Society conference, shareholder proposals – in particular, exclusions based on “micromanagement” – were a hot topic. I’ve blogged that last year’s Staff Legal Bulletin No. 14J revived that prong of Rule 14a-8(i)(7)’s “ordinary business” test.

Corp Fin Staffers have explained that proposals may be excludable due to “micromanagement” if they unduly limit management’s discretion – e.g. by advocating for specific methods or policies rather than deferring to the company to determine how to address a topic. They’ve also said that the complexity of the underlying subject matter doesn’t impact the analysis. And this 46-page Sullivan & Cromwell memo about trends in shareholder proposals looks at how “micromanagement” has been applied in some recent no-action letters.

Not everyone agrees with how things are playing out. For example, the Council of Institutional Investors recently submitted a comment letter to Corp Fin that frames the Staff’s approach as an arbitrary “too complex for shareholders” test – and requests that the Staff again revisit its approach to the rule. Specifically, CII takes issue with the Staff’s no-action relief for proposals relating to the use of non-GAAP adjustments in incentive plans (the topic of a rulemaking petition that CII filed with the SEC in April) – as well as requests for companies to report on greenhouse gas emissions. Here’s an excerpt:

With regard to the each of the Devon and Exxon proposals, the Staff said that, “by imposing this requirement, the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” [6] The Staff used the word “impose” twice in this sentence, but that doubling-down does not obviate the fact that the precatory recommendation would not impose anything on the company, other than for management to place the item on its proxy card and include the proposal and supporting statement in the proxy statement. These are requests to the boards on a major public policy issue, not directives.

Nor, for that matter, do the proposals require “specific methods.” The proposals thread the needle between vagueness and recommending overly specific policies. They do not suggest specific goals or a timetable, but rather frame a general structure, well understood by investors, for disclosure of goals.

Mandatory ESG Disclosure: Coming to an SEC Filing Near You?

Last week, the House Financial Services Committee debated five draft bills that would require companies to disclose information about climate change risk, political contributions and other ESG topics (you can also watch this week’s committee markup). This Davis Polk blog summarizes the hearing:

The committee memorandum prepared by the majority staff prior to the hearing stated that “investors have increasingly been demanding more and better disclosure of ESG information from public companies.” The target for improving this disclosure has been the SEC, which received an October 2018 petition from a coalition of investment managers, public pension funds and non-profit organizations requesting that the agency develop a robust ESG disclosure framework. Representative Juan Vargas (D-CA) noted in his remarks that this petition was the impetus for his draft legislation, ESG Disclosure Simplification Act of 2019, one of the bills considered at the hearing.

Several committee members on both sides of the aisle noted that, as interest in ESG disclosure rises, some public companies have responded by voluntarily adding these types of issues to their reporting efforts. However, debate ensued when considering that the draft bills would mandate this type of disclosure for all public companies. Issues raised during the question and answer period included:

– Whether mandated disclosure is necessary given current voluntary disclosure practices;
– The potential increased regulatory burden of these disclosures, which could negatively impact U.S. IPO markets; and
– Whether ESG issues qualify as material information for investors.

This column from Bloomberg’s Matt Levine points out that advice to quantify & disclose climate change risks might be something that companies hear from management gurus – and certainly some of their investors. But that has a different ring than an SEC mandate – especially if the underlying goal is to “solve climate change through the mechanism of corporate disclosure.” If regulating through securities laws ends up being our best hope to solve big problems, yikes – but at least we have a lot of thoughtful people in the field. And some even think a uniform ESG disclosure framework would help companies.

More on “California Reports on Mandatory Women Directors”

Last week, Broc blogged about discrepancies in the first “board diversity” report that the California Secretary of State published under new Section 301.3(c) of the California Corporations Code. A Secretary staffer later spoke with Cooley’s Cydney Posner to explain why the report looks the way it does – here’s an excerpt from her blog:

First, in the methodology, the Secretary acknowledges that there are gaps in available data because of the various filing deadlines: Forms 10-K are due, generally depending on the size of the company’s public float, 60, 75 or 90 days after the end of the company’s fiscal year, and the deadline for filing the California Statement is 150 days after the end of the company’s fiscal year. Accordingly, in some cases, the representative indicated, companies that may have their principal executive offices in California may not have filed their 10-Ks or California Statements during the designated review period and, as a result, their data was not included. (But there still appeared to be some unexplained omissions from the lists.)

Second, according to the representative, because of the language in the statute defining “female” as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth,” the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement. Rather, the Secretary is determining compliance based only on the California Statement, which, since March, has included a specific inquiry regarding the number of “female” directors.

Third, the California Statement is required to be filed by both foreign and domestic corporations and, if a company replied to the question regarding the number of female directors, even if it indicated that its principal executive offices were not located in California, the Secretary included that company on the compliant list; i.e., foreign corporations were not screened out. For the March update, the Secretary plans to provide a separate list of companies that report compliance but do not have principal executive offices located in California.

We should expect that some timing issues will continue to affect the March 1, 2020 update report. Notably, given the process the Secretary is following, current information from the California Statement regarding compliance for 2019 may not be available for the 2020 update report for companies with calendar-year FYEs, among others. For example, companies with calendar-year FYEs will have filed their California Statements in the first half of 2019, but if they do not add a female director and become compliant until, say, the third quarter of 2019, they will not have reported that compliance on their California Statements in time for the March 1, 2020 update (unless they were to file early). As of now, the Secretary does not intend to develop a new separate filing for purposes of soliciting the relevant information on board gender diversity on a more timely basis, but it can’t be ruled out. However, the Secretary does contemplate some revisions to the California Statement, currently expected to be in place by the beginning of 2020. Keep in mind also, that, no fines should be imposed until the Secretary adopts appropriate regulations, and my understanding is that the process of developing regulations has not yet begun.

California won’t be the only state requiring reports on board diversity – the Illinois General Assembly recently passed its own “Diversity Disclosure Bill,” which will require companies headquartered in that state to include diversity info in annual reports filed with the Secretary of State. However, as this Vedder Price memo explains, the version of the statute that ultimately passed in the “Land of Lincoln” doesn’t mandate the inclusion of women or minorities on boards or fine companies that fail to achieve a statutory target, which had been part of the original bill. At the federal level, the House Financial Services Committee has also passed a couple bills on the topic…

Liz Dunshee