Wednesday, November 25, 2015

New Climate Ruling by SEC Strengthens Shareholder Advocacy

Sanford Lewis, Esq.* 

 A new ruling by the Securities and Exchange Commission (SEC)  holds far-reaching implications for investor efforts to promote proactive corporate responses to climate change.  Every spring in annual meetings, shareholders vote on hundreds of proposals asking  corporations to take more proactive action to consider and reduce  impacts on climate change –  to shift toward renewable energy sources, to reduce greenhouse gas emissions, and to consider risks to their financial future associated with an overemphasis on fossil fuels. 

The proposals are filed by public pension funds, religious institutions and socially responsible investors holding stock in the companies. However,  a massive portion of the vote for or against the proposals is controlled by large mutual funds which  often vote reflexively against shareholder proposals, with  limited accountability to explain their rationale.

 In a letter issued November 24, 2015, SEC Staff held that a proposal seeking to hold a mutual fund accountable for its poor voting record on climate proposals is not excludable from the proxy statement. The proposal at Franklin Resources Inc.( doing business as Franklin Templeton Investments) was submitted by Zevin Asset Management LLC on behalf of its clients.[1] In the proposal which will now appear on the proxy in the spring:
Shareowners request that the Board of Directors issue a climate change report to shareholders by September 2016, …[to] assess any incongruities between the proxy voting practices of the company and its subsidiaries within the last year, and any of the company's policy positions regarding climate change.
This assessment should list all instances of votes cast that appeared to be inconsistent with the company's climate change positions, and explanations of the incongruency. The report should also discuss policy measures that the company can adopt to help enhance congruency between its climate policies and proxy voting.

 Perhaps most notably, the Company argued to the SEC in a request for a no action letter (that would allow the company to exclude the proposal) that its existing legally required [2]disclosures of  its proxy voting records and guidelines  “substantially implement”  the request of the proposal. Those disclosures reveal that the company’s voting record on climate change is near the bottom of the pack among mutual funds (See chart, courtesy of CERES). The guidelines show that its subsidiaries have a great deal of flexibility  to decide whether to vote for or against climate proposals.

The proponent argued that since the company says it takes a “long-term” view of investments and  has endorsed the UN Principles for Responsible Investment, this posture of environmental leadership seemed inconsistent with its climate voting record.  Shareholders are entitled to ask  the company for  a better explanation of this seeming inconsistency, and also to encourage the company to do better.

  The Company argued that the subject matter of the proposal was proxy voting (excludable based on prior decisions as relating to ordinary business), while the proponents successfully asserted that the proposal focused on  a transcendent policy issue of climate change, which is not excludable. The decision was a first  opportunity for the SEC to apply its newly minted Staff Legal Bulletin 14H (CH) which held that if the focus is a significant policy issue, it’s not excludable even  if the proposal touches on “nitty gritty” business practices.[3] 

The Company also argued that as a parent company, Franklin Resources Inc., lacked the power to evaluate or influence proxy voting of its subsidiaries. Subsidiaries have a fiduciary duty to evaluate proxy proposals on behalf of their clients without “undue influence” by a parent company. However, proponents asserted that the proposal left leeway for the parent company to provide legitimate assistance to the subsidiaries, for instance risk assessment resources,  without crossing a line into improper influence.

 Download the full text of the SEC decision and correspondence from the company and the proponent. 

 *Disclosure: The author represented the proponents in defending the proposal before the SEC.

[1] The Proposal was also co-filed by First Affirmative Financial Network, LLC ("FAFN"), on behalf of its client, Waterglass, LLC, and Friends Fiduciary Corporation ("FFC”).
[2] Form N-PX
[3]  “[T]he Commission has stated that proposals focusing on a significant policy issue are not excludable under the ordinary business exception “because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” Thus, a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the “nitty-gritty of its core business.” Therefore, proposals that focus on a significant policy issue transcend a company’s ordinary business operations and are not excludable under Rule 14a-8(i)(7).”

Friday, October 2, 2015

Response to Proposed Concept of a Corporate "Statement of Significant Audiences"

A recently published paper by Harvard Business School's Robert Eccles and Tim Youmans  proposes that all publicly traded corporations be required to publish  an annual “Statement of Significant Audiences.”  The purpose of such a publication is partly to debunk the notion that the fiduciary duty of the Corporation extends only to its shareholders and its profitability.

 Needless to say, that subject is a heavily contested territory. This author and many of his legal clients and colleagues believe that the correct analysis is that the Corporation  and its Board of Directors owe a fiduciary duty to society, to many stakeholders, not just to the shareholders.

The concept of publishing an annual statement of significant audiences is in line with similar requirements under the Global Reporting Initiative to annually report on the company's stakeholders.  The annual statement of significant audiences proposed by the authors is part of their overall effort with others to establish integrated reporting by corporations, in which environmental and social issues appear alongside typical SEC financial reporting requirements in a single integrated report.  They assert in the article that identifying the "significant audiences" of the company is just as relevant to an SEC form 10-K or 10-Q as it is to an integrated report.

This proposal represents a useful rebuttal to often overstated and damaging endorsements of shareholder primacy in defining the scope of board and management fiduciary duties. For instance, when it comes to the problem of climate change and the catastrophic long-term damage posed to society, an overweening emphasis on  shareholder primacy and the lack of accountability to future generations of shareholders and non-shareholders arguably is at the heart of decisions by certain major oil companies to blindly focus on fossil fuel development with appallingly little concern for the long-term implications to other audiences who should have substantial concern, and to whom the company owes accountability.

While the Statement of Significant Audience  idea is meritorious and should be of interest to  the growing number of NGOs and investors who agree with this take on the Corporation and accountability to its stakeholders, unfortunately the paper extensively refers to the corporation as a "legal person." For instance,  the article states:

The objective of the corporation, as a separate and potentially immortal legal person, is simply to survive and, if possible, to thrive. 

Attaching the statement of significant audiences to the notion of corporate personhood represents unnecessary baggage. As stated in the dissent by Justice Stevens in Citizens United v. Federal Election Commission
It might also be added that corporations have no consciences, no beliefs, no feelings, no thoughts, no desires. Corporations help structure and facilitate the activities of human beings, to be sure, and their “personhood” often serves as a useful legal fiction. But they are not themselves members of “We the People” by whom and for whom our Constitution was established.                                                                                                      
Many shareholders, individuals and organizations that  could be natural supporters of the concept of a statement of significant audiences may find the references to corporate personhood to be a nonstarter. There is a  substantial effort  within those “significant audiences” to revise or eliminate the  confusing concept of corporate personhood, including through constitutional amendment. For instance, S.J.Res.18  sponsored by Sen. Tester (D-MT)  proposes an amendment to the Constitution, known as the People’s Rights amendment, would specify:
“Section 2. The words people, person, or citizen as used in this Constitution do not include corporations, limited liability companies or other corporate entities established by the laws of any State, the United States, or any foreign state, and such corporate entities are subject to such regulation as the people, through their elected State and Federal representatives, deem reasonable and are otherwise consistent with the powers of Congress and the States under this Constitution.”
A state-by-state effort is underway to support such a constitutional amendment. For instance, in Washington State,  the organization WAmend is pursuing a Constitutional amendment to clarify that it should be citizens, the living breathing "We the People" meant by the founders — not corporate entities—that are entitled to the rights enshrined in the Constitution.

I would encourage advocates of the "statement of significant audiences" to extricate unnecessary references to corporate personhood. In doing so, they might find greater buy-in by natural advocates and allies for the concept.

* * *
Sanford Lewis is an attorney  whose clients include institutional investors,  social investment firms and nonprofit organizations. His practice is focused on shareholder proposals, shareholder rights and improving corporate environmental and social disclosure requirements of the Securities and Exchange Commission. Mr. Lewis was co-author and lead researcher on The Rose Foundation paper, “Fooling Investors and Fooling Themselves: How Aggressive Corporate Accounting and Asset Management Tactics Can Lead to Environmental Accounting Fraud.” He is also a documentary filmmaker.  Mr. Lewis has a BS in Environmental Studies and Urban Communications from Cook College, Rutgers University, and a JD from the University of Michigan Law School.