In uplifting news to shareholder advocates, proxy advisor firms, pension funds and smaller investors, the U.S. Securities and Exchange Commission (SEC) announced that it would not enforce the Trump-era proxy rules on shareholder voting, which resulted in restrictions on voting on environmental, social, and governance (ESG) issues brought forth by smaller investors.
SEC Chair Gary Gensler released a statement recommending that the Commission revisit its 2020 codification, 2019 interpretation and guidance of proxy voting. Those rules effectively limited the ability of shareholders to make proposals to be voted on during annual meetings by substantially raising the holding amount and length of ownership requirements, as well as by creating barriers for resubmission of unsuccessful proposals.
Often, proposals submitted by smaller shareholders include issues concerning climate, social, governance or sustainability aspects of a firm’s management. A recent example is the historic win of a small activist hedge fund, Engine No. 1. The fund shook up ExxonMobil’s board of directors’ composition by successfully replacing three of its directors with Engine No. 1’s own climate-conscious candidates. Exxon was lagging compared to other oil and gas giants in its transition to climate-friendly strategies, instead of increasing its spending on fossil fuel investments.
Among the shareholders who voted for the Engine No.1 board candidates were California Public Employees Retirement System, California State Teachers Retirement System and New York State Common Retirement Fund. In addition, the majority of investors voted in support of two other climate-related proposals. Those included requesting that Exxon reports on how its climate lobbying aligns with the goals of the Paris Agreement and providing disclosure of the climate change risks the company faces.
With the SEC’s reversal of its position on last year’s ruling, small investors will continue to have access to proxy voting and board rooms to advance ESG issues or to force companies to make the necessary changes.
Proxy advisor firm Institutional Shareholder Services (ISS), which sued the SEC to stop those rules and whose case is still pending in court, commented on the news.
“We welcome the SEC’s announced decision to consider revisiting its proxy adviser rulemaking, which we believe was ill-conceived, inconsistent with the law, and pushed through under the previous administration against the wishes of investors the agency is meant to protect,” said Gary Retelny, President & CEO of ISS. “We look forward to participating in the upcoming rulemaking process and encourage all good governance supporters to do the same,” Retelny further stated.
The reversal also comes on the back of a letter signed by 200 fund managers, proxy advisors, foundations and consumer groups which was sent to all members of Congress earlier this year seeking to overturn the SEC’s prior ruling. The letter highlighted how the SEC’s rules would curb shareholders’ access to bring forth resolutions on important ESG problems facing many companies.
U.S. Senate Democrats also introduced a resolution in March to repeal the SEC’s rule.
“Last year’s changes to the SEC rule on shareholder proposals made it much harder for working families and investors to hold corporate management accountable,” said Senate Banking Chairman Sherrod Brown in a statement to Reuters. “Congress must repeal the rule. We also need to find ways to increase shareholder participation and to make executives more accountable,” commented Sen. Brown.
