Reality Catches Up with the Anti-Shareholder Narrative

The political and corporate interests seeking to restrict shareholder rights are carefully cultivating a narrative that the shareholder proposal process is out of control, “hijacked” by “activist” proponents abusing the system to advance unpopular proposals at the expense of “real” investors. As a result of recent SEC rule changes, it is argued, the number of ideological proposals has skyrocketed, vote totals have crashed, the no-action success rate has plummeted, and the number of no-action requests submitted by companies has fallen as corporations give up on the SEC being a fair arbiter of Rule 14a-8.

This is not a new narrative, but the aggressive anti-ESG movement has created a megaphone for these themes. ExxonMobil Corporation’s recent lawsuit against two shareholder proponents is an apt illustration of how these empirical claims are used to support attempts to curtail shareholder rights in the name of fixing a “flawed” process. Exxon’s complaint alleges that “the number of proposals that shareholders submit each year is rising because of how the SEC staff is applying the shareholder proposal rules,” which “can be traced only to changes in SEC staff positions,” specifically, Staff Legal Bulletin No. 14L (“SLB 14L”). Likewise, in a web page defending its lawsuit, the company asserts that SLB 14L “immediately result[ed] in a decrease in no-action relief, while the number of proposals submitted continues to increase,” while “far fewer no-action requests [are] being submitted in a system that no longer honors them.”

Similar factual claims about the state of the shareholder proposal process and the effects of SLB 14L are frequently repeated in op-eds and issuer-side analyses, including in this forum, and on Capitol Hill, in support of efforts to restrict shareholder rights. As such, it bears close attention. The interests aligned against shareholder rights are, in short, asserting that the process is broken and needs fixed, but the flip side is also true: if it ain’t broke… don’t “fix” it.

And, indeed, on closer inspection, the empirical case against shareholder rights is startlingly weak. The “process is broken” narrative consists of a series of very big, very confident claims based on very little data — and the data on which it relies is much more ambiguous than is typically admitted. As this season has demonstrated, the sky is hardly falling. The shareholder proposal process is operating much as it always has, with proponents and issuers alike rationally responding to a vast number of incentives, rules, and interpretations, ultimately resulting in an equilibrium in which no one is happy — compromise at its best.

To be more specific: the number of proposals submitted post-SLB 14L is historically unremarkable; the small increase in social and environmental proposals is almost entirely, if not entirely, attributable to a dramatic increase in anti-ESG proposals, which have proven largely unpersuasive and acted as an anchor on average vote totals; the number of no-action requests has rebounded fully from 2023’s low; and the no-action success rate is essentially the same as it was prior to SLB 14L during the Trump Administration, in which the SEC could hardly be described as overly friendly to proponents.

Under the most recent Rule changes, far from unduly favoring proponents, the SEC’s no-action process remains remarkably lop-sided in favor of issuers. It has never been harder to submit a shareholder proposal. There are more hoops proponents must jump through, and more opportunities for issuers to seek exclusion, than ever before. This season and last, this imbalance was further exacerbated by a series of decisions in which the Staff applied the micromanagement exclusion against pure disclosure requests. More than any trend identified by the anti-shareholder crowd, this new micromanagement interpretation threatens to upend the balance struck by Rule 14a-8.

This piece begins by briefly discussing SLB 14L and the reactions to it in light of the 2022 and 2023 proxy seasons. Next, we look to this season, in which every “trend” identified in 2022 and 2023 disappeared, despite SLB 14L’s continued application. Finally, we turn to a series of recent decisions in which the SEC has incorrectly applied the micromanagement rule to exclude disclosure proposals while seemingly crediting company arguments vastly expanding the zone of “discretion” that proponents may not impinge.

I. SLB 14L and the 2021-22 and 2022-23 Seasons

A. SLB 14L Returns Rule 14a-8 to Its Pre-2009 Status

On November 3, 2021, the SEC’s Division of Corporation Finance released SLB 14L. In it, the Staff announced a number of changes, the most significant of which involved rescinding previous guidance that had introduced a confusing and redundant “nexus” test into the ordinary business exclusion.

In brief, Rule 14a-8(i)(7) permits the exclusion of proposals relating to a company’s “ordinary business.” For decades, the Commission has interpreted this rule to include an exception for proposals raising significant policy issues — such as nuclear power, workforce discrimination, and climate change — even where the proposal raises those issues in the context of a company’s day-to-day business.[1] However, in a series of Staff Legal Bulletins, starting with 2009’s SLB 14E and continuing through 2019’s SLB 14K, the Staff announced and then repeatedly tinkered with an additional requirement: that the proponent demonstrate a sufficient “nexus” between the significant policy issue and the company.

As Sanford Lewis has explained in this forum, the “nexus” test was simultaneously confusing and unnecessary. Rule 14a-8(i)(5) — the relevance exclusion — already permits the exclusion of proposals that are “not significantly related to the business of the issuer.” And the repeated additions to the “nexus” test resulted in “[n]o-action letters bec[oming] significantly longer and the process more complex.” The Commission Staff likewise concluded that the “nexus” test was not “yield[ing] consistent, predictable results.”

SLB 14L’s changes to the ordinary business exclusion simply eliminated the “nexus” test, returning the ordinary business exclusion to “the standard the Commission initially articulated in 1976 . . . and which the Commission subsequently reaffirmed in the 1998 Release.” That standard is simple: a proposal may not involve a company’s ordinary business unless it raises an issue of social policy significant enough that it “transcends” the company’s ordinary business. If an issuer feels a proposal addressing such a significant social policy issue has nothing to do with its business, it is free to seek exclusion under Rule 14a-8(i)(5).

B. Overstated Effects on the 2022 and 2023 Proxy Seasons

After the release of SLB 14L, the 2022 proxy season saw an increase in the number of proposals submitted and a decrease in the no-action success rate. These trends increased in 2023, along with fewer no-action requests from companies. Issuers and anti-shareholder activists raised their bullhorns to make the case that SLB 14L broke the shareholder proposal process by favoring proponents.

A deeper analysis of the 2022 and 2023 proxy seasons, however, shows a significantly more complicated story.[2]

Increase in proposals: According to Gibson Dunn, a leading issuer-side law firm in the no-action process, the number of proposals submitted increased to 868 in 2022 and to 889 in 2023. But, as the firm noted, this was a continuation of a pre-SLB 14L trend. Indeed, the pre-SLB 14L increase from 2020 to 2021 (11%) was significantly greater than the post-SLB 14L increases in 2022 and 2023 (8% and 2%, respectively). Moreover, even after these increases, the total number of submissions was historically unremarkable — as Gibson Dunn notes, the 2023 figure was the highest “since 2016.” From 2014 to 2016, more than 900 proposals were submitted each year. So SLB 14L hardly opened any floodgates.

Decrease in no-action requests: Gibson Dunn’s data indicates that issuers submitted 272 no-action requests in 2021, 244 in 2022, and 175 in 2023. As described previously, this is frequently asserted to represent, in Exxon’s words, issuers giving up on “a system that no longer honors” such requests. But historical analysis paints a more complicated picture: 2021 was a recent high-water mark for no-action submissions, not the norm. The number of no-action requests submitted post-SLB 14L in 2022 was essentially identical to the number submitted pre-SLB 14L in 2019 and 2020, and 2022’s 22% submission rate was historically unremarkable. Unsurprisingly, given that the number of no-action requests is influenced by a number of dependent and independent variables, the historical data suggests that we should expect the no-action submission rate to vary significantly by year:[3]

Unquestionably, 2023 represented a low point for no-action submissions, and it is not our contention that SLB 14L had nothing to do with the decrease in no-action submissions. Indeed, we agree in significant part with Lewis’ argument that SLB 14L significantly clarified the legal basis for exclusion under the ordinary business rule, which one would logically expect to result in fewer no-actions as proponents are better able to craft their proposals. In any event, as explained in more depth below, the data from 2022 and 2023 — let alone 2024 — is not consistent with issuers “giving up” on the no-action process.

Decreased no-action success rate: There is no question that 2022 represented a historically low no-action success rate — 38%, compared to an average of 68% from 2015-2021. Of course, the success rate rebounded to 58% in 2023 and, as discussed below, rebounded further in 2024. While SLB 14L certainly played some role in 2022’s low success rate, digging into the data reveals a more complicated picture:

• The no-action success rate declined across all proposal categories. While SLB 14L’s changes to the ordinary business rule were widely seen as permitting more environmental and social proposals, four of the five the most frequently challenged proposals in 2022 were governance proposals, per Gibson Dunn.
• The no-action success rate declined across every basis for exclusion, including those not affected by SLB 14L. While anti-shareholder activists blame SLB 14L’s return to the original “ordinary business” rule for the alleged post-SLB 14L no-action trends, Gibson Dunn notes that “[s]uccess rates in 2022 declined on every basis for exclusion, with the most drastic decline in success rates” for procedural and substantial implementation arguments. Neither the procedural bases nor the substantial implementation rule were significantly affected by SLB 14L. Indeed, the ordinary business exclusion was actually responsible for the second highest number of successful requests in 2022.
• Small sample size theater: It is particularly critical to assess this data in the context of its scale. Per Gibson Dunn’s 2022 recap: For 129 climate change proposals, 14 no-action requests were filed, an increase from 7 no-action requests in 2021. In both years, only one request was successful. Thus, the no-action success rate “fell” by half for climate proposals despite little meaningful change. A similar story with the micromanagement exclusion: “SLB 14L’s realigned approach” on that rule similarly is blamed for a drastic halving of the success rate for requests based on that exclusion — from six successful requests (13% success rate) to two (6% success rate). Simply put, it is impossible to draw meaningful conclusions from this little data.
• The 2023 rebound: While 2023 saw fewer no-action requests submitted, those requests were significantly more successful. Indeed, requests based on ordinary business did not significantly decrease in 2023 (ordinary business arguments constituted 35% of all no-action requests in 2021, 43% in 2022, and 39% in 2023), which one would expect if SLB 14L’s changes were causing issuers to give up on the no-action process. Likewise, the ordinary business success rate rebounded significantly.

Thus, despite “sky is falling” rhetoric from issuers and their political allies following SLB 14L, the data from 2022 and 2023 paint a significantly more complicated picture. Proposal submissions remained well within historical norms, and the no-action data does not support the argument that SLB 14L “broke” the system in favor of shareholders.

II. 2024 Season Further Weakens the Narrative

Built on the weak foundation of just two years of already ambiguous data, the anti-shareholder narrative is further undermined by the results of the 2024 no-action season. To put it mildly, the 2024 data is wholly inconsistent with any portrayal of the Rule 14a-8 process as broken, inappropriately biased toward proponents, or the subject of abuse by progressive activists.

Number of proposals and proposal support levels:  First, a caveat: data sources differ significantly in their analyses of this season. But one thing is clear: the number of proposals submitted — including the ESG proposals to which SLB 14L allegedly gave free reign — is not ballooning out of control. In fact, the best evidence appears to demonstrate that “pro-ESG” proposals have declined. In April 2024, PricewaterhouseCoopers noted that it expected fewer proposals to be submitted in 2024 because it had tracked 100 more proposals in 2023 than at the same point in 2024. Similarly, in this forum, SquareWell Partners documented a significant forty percent decline in ESG (including “anti-ESG”) proposals. The Sustainable Investment Institute (Si2) also showed a slight dip in ESG proposals, including a significant drop in “pro-ESG” proposals partially offset by a significant increase in “anti-ESG” proposals.

Proposal Support Levels:  A key element of the anti-shareholder narrative is that companies are being bogged down by unpopular proposals. “Proof” apparently comes in the form of declining average support and fewer proposals receiving majority votes. As an initial point, this narrative is conceptually wrongheaded. The average S&P 500 company has a market cap of $92.5 billion. If “only” 20% of a company’s shareholders express concern about, for example, the company’s climate transition plan, that represents nearly $18.5 billion in investments. Only in the topsy-turvy world of the anti-ESG furor is this a tiny minority, rather than an important insight for the issuer into the mindset of a fifth of its owners. Importantly, even with the anomalously low support in 2023, the average proposal received more than 20% support:[4]

Furthermore, initial indications are that, indeed, 2023 was an anomaly in support levels, presumably driven primarily by a combination of the low no-action submission rate and significant anti-ESG political pressure on major asset managers causing them to reverse course on proposals they had previously supported. 2024 is a new year. ISS noted in this forum that support for “pro-ESG” proposals in 2024 is up from 2023’s low point. The ISS data uses median rather than average values, but ISS reports that median support for environmental proposals is up from 19.8% to 21% and social proposals are up from 18.5% to 20.7%, while support for governance proposals increased from 29.7% to 34.9%. Meanwhile, 8.1% of all proposals voted on so far this year have received majority support, up from 2023.

Given the increase in “anti-ESG” proposals, any analysis of ESG shareholder proposals must now carefully account for this confounding variable.  The number of anti-ESG proposals has exploded in the past five years, with the National Center for Public Policy Research (NCPPR) boasting last year of its “record high” submissions, combined with those of a “record number of allied proponents,” leading to “more shareholder proposals from our side this year than ever before.”  Or, to put hard numbers on it, NCPPR brags that the 2.5% increase in pro-ESG shareholder proposals from 2022 to 2023 “[did] not compete with the 107.1% growth” from the group and its allies. ISS and Si2 have each also tracked an increase in anti-ESG proposals in 2024 compared to 2023.

To be sure, while it is “pro-ESG” proposals that bear the brunt of issuers’ and conservative politicians’ attention and ire, it is possible — in fact, it would be ideologically consistent — for anti-shareholder activists to object to the increase in both “pro-ESG” and anti-ESG proposals. Indeed, because anti-ESG proposals uniformly underperform “pro-ESG” proposals, it is anyone’s guess why those allegedly concerned about the proxy process being used to advance unpopular ideological agendas do not spend more time discussing anti-ESG proposals, which have averaged less than 5% support over the past decade (per Si2) and less time talking about climate proposals that routinely achieve 20-30% support levels.

Needless to say, As You Sow unreservedly endorses — and will fight to defend — the right of all shareholders to submit proposals on issues material to their interests, consistent with the ideals of shareholder democracy that constitute the foundation of American corporate governance. Nevertheless, it remains an important statistical fact for those interested in an accurate picture of the shareholder proposal process that a significant portion of the increase in “social and political” proposals (along with an anchor holding average support levels down) comes from a coalition whose leading member has expressed a belief that the shareholder proposal process is illegal and/or unconstitutional.[5]

No-action submission and success rates:  Here, the wheels fully come off the anti-shareholder narrative. As numerous observers have noted, the no-action submission and success rates year-to-date in 2024 are essentially identical to pre-SLB 14L levels. The Shareholder Rights Group’s analysis of SEC no-action decisions from November 1, 2023 to May 1, 2024, found a “sharp[] increase[]” in the number of requests — 259 total no-action decisions filed by issuers this year, compared to 167 at the same point last year. Despite the sharp increase in requests, the no-action success rate also significantly increased to 68%, which puts 2024 squarely in line with the 69% average during the issuer-friendly Trump administration.

Fundamentally, this data is totally incompatible with the idea that SLB 14L truly “broke” the shareholder proposal process. Rather, the 2024 data, in combination with a deeper analysis of the 2022 and 2023 data, tells a much less inflammatory story — that of a constant give and take between issuers and shareholders, in which the two sides react rationally to incentives generated by a wide variety of inputs (including Staff Legal Bulletins) and adjust their behavior in an effort to maximize success. When “rules” change, proponents adjust their proposals and issuers adjust their no-action arguments. More sudden changes in the system’s incentives can generate anomalous years, but the system ultimately self-stabilizes at a fairly consistent equilibrium.

III. 2023 and 2024 Developments: An Expanded Micromanagement Exclusion?

In reality, the most significant substantive development in the Rule 14a-8 process in the last two seasons has been largely ignored in the anti-shareholder furor. Far from representing a system unfairly tilted toward proponents, the SEC is more readily concurring with issuers’ increasingly aggressive use of the micromanagement exclusion. An early warning came in 2023’s Amazon.com, Inc. (Apr. 7, 2023) decision,[6] and preliminary data from 2024 shows micromanagement exclusions skyrocketing in its wake.

As background, Rule 14a-8 contains no explicit “micromanagement” exclusion. Rather, the Commission has interpreted Rule 14a-8(i)(7)’s “ordinary business” exclusion to contain a second, related rule permitting the exclusion of proposals that seek to micromanage a company. The rule’s structure could also be characterized as two nested exceptions: The ordinary business rule has an exception for proposals raising significant social policy issues, but the significant social policy exception itself has an exception that permits the exclusion of proposals that seek to micromanage the company. In 1998, the Commission defined the micromanagement rule as centered around the question of whether the proposal “prob[es] too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” In SLB 14L, the Staff explained that certain recent decisions and guidance “may have been taken to mean that any limit on company or board discretion constitutes micromanagement,” which was not the Commission’s intent. Thus, the Staff articulated that, going forward, it would “take a measured approach to evaluating companies’ micromanagement arguments,” focusing on:

the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management. We would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.

In short, “micromanagement” under Rule 14a-8 basically comports with the common usage of the term. The emblematic examples of micromanagement are proposals asking a hotel company to change its showerheads, see Marriott International, Inc. (Mar. 17, 2010), and asking SeaWorld to replace its live orca exhibits with virtual reality experiences, see SeaWorld Entertainment, Inc. (Mar. 30, 2017). But the Staff has historically carefully policed the limits of the exception, ensuring that proposals addressing corporate policy at a macro level do not fall within its scope. Thus, proposals requesting the adoption of a paid sick leave policy, see CVS Health Corp. (Mar. 18, 2022), or a cessation on the sale of fur products, see Coach, Inc. (Aug. 19, 2010), have not been excluded.

In 2023’s Amazon.com decision, the micromanagement exclusion was extended significantly beyond its traditional scope. As background, Amazon’s climate disclosures include disclosure of certain “Scope 3” GHG emissions associated with the products sold by the company. These disclosures, however, are limited to the company’s first-party products (e.g., Kindles).  Amazon does not disclose the Scope 3 emissions associated with its third-party products sales. This is a significant omission because first-party sales constitute 1% of Amazon’s sales; disclosures from competitor companies Walmart and Target indicate that Amazon’s unreported emissions are likely to constitute the vast majority of the Company’s total emissions. It is well-settled that emissions data, including Scope 3 emissions, are material to investors’ decision making. Amazon’s failure to disclose the full range of its Scope 3 emissions was, both before and after the submission the proposal, a source of public controversy. In short, we think it clear that the decision by a company not to disclose the vast majority of its emissions is a big (or macro) deal, well within the traditional purview of investors and the shareholder proposal process.

The proposal,[7] simply put, asked the company to measure and disclose the above-described emissions. In response, the Company argued that the proposal micromanaged it by “dictating the scope of activities and categories to be included within” its emissions disclosures, which “replace[d] management’s judgments about the appropriate activities to include.” In short, the company argued that the proposal micromanaged it because it requested disclosure of information the company had chosen not to disclose.

To be sure, some disclosure requests might actually micromanage a company insofar as they seek extraordinarily “granular” information. See, e.g., Verizon Comms., Inc. (Mar. 17, 2022) (requesting disclosure of the written and oral content of every piece of diversity-related employee training materials used at or sponsored by the company). But, as we pointed out in reply to the Company’s no-action letter, proponents seeking disclosure of material information have no choice but to precisely identify the information they want disclosed: anything less and the proposal can be excluded as either vague, see Rule 14a-8(i)(3), or substantially implemented, see Rule 14a-8(i)(10).[8]

Nonetheless, the Staff concurred with Amazon, concluding that the proposal “seeks to micromanage the Company by imposing a specific method for implementing a complex policy disclosure without affording discretion to management.” It is unclear how a proponent can request disclosure of unquestionably material information while “affording discretion to management” if naming the information requested is enough to impinge management’s discretion. The crux of the problem appears to be the SEC’s blurring of the lines between the “specific method” aspect of micromanagement and the “granularity” aspect of micromanagement. Traditionally, proposals asking a company to do something must avoid prescribing a “specific method,” while proposals asking a company to disclose something must avoid seeking overly granular information. But any disclosure proposal, by definition, will prescribe a “specific method,” if “identifying the information you want disclosed” represents a “method.” Thus, Amazon.com, Inc. is an extremely troubling precedent.

Unfortunately, the 2024 season made clear that, far from rethinking the Amazon.com precedent, the Staff is doubling down on it. Issuers, once more reacting rationally to the incentives introduced by the prior season, aggressively pursued micromanagement arguments — and were successful. According to preliminary calculations by the Shareholder Rights Group, in 2023, micromanagement arguments accounted for 8 out of 27, or 30%, of successful Rule 14a-8(i)(7) requests. In 2024 so far, micromanagement arguments have accounted for 25 of 56, or 44.6%, of winning requests based on the ordinary business/micromanagement rule. Unsurprisingly, citations to Amazon.com, Inc., are common.

The proposals excluded under the micromanagement rule in 2024 were varied in scope and structure — as were those not excluded. The upshot is tremendous confusion about what “micromanagement” means in the context of Rule 14a-8(i)(7). For example, consider the following “transparency report proposals: The Staff concurred with a company’s request to exclude on the basis of micromanagement a proposal that the board “oversee the preparation of a living wage report” related to payment of company employees. Amazon.com, Inc. (Apr. 1, 2024). But it declined to concur with a company’s efforts to exclude a proposal requesting that the company “prepare a transparency report that explains the Company’s use of artificial intelligence in its business operations and the board’s role in overseeing its usage, and sets forth any ethical guidelines that the Company has adopted regarding its use of artificial intelligence.” Paramount Global (Apr. 19, 2024). It agreed with a company’s exclusion of a proposal requesting that the company “issue a report on the Company’s union suppression expenditures.” Delta Air Lines, Inc. (Apr. 24, 2024), but declined to agree with a company’s request to exclude as micromanagement a proposal requesting a report on “how the Company is addressing the impact of its climate strategy on relevant stakeholders, including but not limited to its employees, workers in its supply chain, and communities in which it operates, consistent with the ‘Just Transition’ guidelines of the International Labor Organization and indicators of the World Benchmarking Alliance.” Republic Servs., Inc. (Mar. 27, 2024). Of course, because the Staff does not explain its decisions, proponents and issuers alike are left sifting through tea leaves to determine when a transparency report micromanages a company and when it does not.

The Staff also extended Amazon.com, Inc.’s application of the rule to simple disclosure requests. Take, for instance, a proposal submitted to several banks on behalf of shareholders by As You Sow. Each of the recipient banks had set net-zero targets for certain sectors; committed to assessing clients’ net zero targets and aligned transition plans; and stated that their progress in meeting their own targets was based in significant part on their clients’ transition success. The proposals therefore asked each bank to disclose, for each sector with a target, the proportion of sector emissions attributable to clients not aligned with a credible Net Zero pathway. This basic request answered a big question: was the bank likely to meet their targets or not? The proposals did not request that the banks take any action that they were not already taking, other than disclosing information they were already collecting. It was not an onerous request; in response to the proposal, Citibank disclosed the requested information, which took about half a page in its climate report.

Nonetheless, based on the banks’ arguments that the proposals “seek[] to eliminate management’s discretion by dictating specific methods for the Company’s already extensive disclosures,” see, e.g., Bank of America Corp. (Feb. 29, 2024) (company letter at 2), the Staff concurred in their exclusion. Here, again, the “specific method” language, in which a request to disclose certain information becomes a “specific method” of implementing a disclosure and therefore micromanages the company. It is a perfect argument — a proposal can be excluded if it requests disclosure of information that is not already being disclosed. There is no logical way around this for proponents.

The point here is not to take potshots at the SEC Staff or issuers or to complain about no-action losses. Rather, it is to point out that the narrative of the SEC as out-of-control in favor of proponents is inconsistent with actual results and our own experience (in many more ways than we can detail here). Rather, what we see is an imperfect but reliable shareholder proposal process that, for eight decades, has upheld the core principles of shareholder democracy, the very foundation of American corporate governance. As the D.C. Circuit explained:

[T]he clear import of the language, legislative history, and record of administration of section 14(a) is that its overriding purpose is to assure to corporate shareholders the ability to exercise their right — some would say their duty — to control the important decisions which affect them in their capacity as stockholders and owners of the corporation.

Medical Committee for Human Rights v. SEC, 432 F.2d 659, 680-81 (D.C. Cir. 1970).

False and misleading statistics and narratives about the shareholder proposal process strike at the heart of shareholder democracy. If changes to the Rule 14a-8 process are in order, they should, at minimum, be based on an accurate portrayal of that process.

Endnotes