SEC Issues New Guidance on Shareholder Proposals and Engagement

Last week, the Securities and Exchange Commission adopted two new sets of?guidance?that may curtail ESG shareholder proposals and related engagement.?

ESG engagements:?

• The first guidance document heightens the reporting requirements for large asset managers that own more than 5% of a publicly-traded company and pressure that company to adopt ESG goals.
• Historically, index fund providers like BlackRock have been exempt from the most onerous filing and disclosure requirements because they are considered "passive" investors.
• But the new guidance suggests they may not be eligible to keep that status if they actively engage companies to adopt non-financial goals.

From the SEC's desk:?The guidance warns Wall Street asset managers that they may lose their exemptions if they urge companies to "undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation."?

Shareholder proposals:?The SEC also issued a new staff bulletin rescinding the Biden Administration's guidance that allowed ESG proponents to submit all kinds of socially-focused shareholder proposals, even when they were irrelevant to a company's bottom line.

• Economic Irrelevance Exclusion: The new guidance allows companies to exclude shareholder proposals that relate to operations that account for less than 5% of earnings or assets, even if they "raise social or ethical" issues. And the burden is on the proponent to show economic relevance: "[t]he mere possibility of reputational or economic harm" is not enough.
• Ordinary Business Exclusion:?The guidance also restores the ordinary business exclusion, which banned shareholder proposals related to day-to-day management issues. Under prior guidance, micromanaging-type proposals were allowed if they related to a "significant social policy" that affected society at large. Now, the proposals must be significant for the business itself.

Making Corporate Governance Great Again:?While many of the Trump Administration's policies are breaking new ground (see, e.g., crypto), these SEC guidance documents are not. Instead, they're mainly restoring the agency's historical, pre-Biden Administration interpretation of rules that have been in place since the 1990s. Hopefully, these common-sense changes will help keep politics out of the boardroom.