The issuance of the bulletin at this time means that many shareholder resolutions, most of which are filed in November, can now expressly inquire into the issues of greatest concern and interest to investors, namely the financial risks associated with an array of issues, from climate change, to subprime lending, to other major social and environmental issues.
The bulletin also states:
In addition, we note that there is widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation. In light of this recognition, a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote.
Shareowners will still need to surmount various hurdles under other the existing shareholder resolution rules, including the sometimes vexing problem of demonstrating to SEC staff that the issue being raised is a large enough social policy issue to surpass "ordinary business". Investors will also need to ensure that resolutions are drafted to surpass various other hurdles in SEC rule 14a-8, such as micromanagement, duplication, and substantial implementation.
The policy in question was adopted informally early in the Bush administration in a series of staff decisions which excluded shareholder resolutions on environmental and social issues based on the theory that they asked the company to "evaluate risk." The policy was later formalized in staff legal bulletin 14 C, Jun. 28, 2005. Today's bulletin is viewed by investors as an override of the limitations of 14C. The change came after a concerted effort by shareowners to reverse this staff policy. In December 2008, a group of 60 investing organizations wrote to then President-Elect Obama urging him to make a priority of reversing the impediment to shareholder resolutions seeking disclosure of financial risks.On September 22, 2009 a group of investor representatives met with the new director of the Division of Corporation Finance, Meredith Cross, and asserted that this staff ruling deserves priority attention for reversal.
In a meeting with the staff of the SEC Division of Corporation Finance on September 22, an array of shareholder representatives from institutional, pension and socially responsible funds expressed dissatisfaction with aspects of the current SEC process. The meeting was chaired by Meredith Cross, the newly instated Director of the Division of Corporation Finance.
In preparation for the meeting, the author collaborated with several investor organizations including the Social Investment Forum, the Interfaith Center on Corporate Responsibility and Shareowners.org to conduct an internet survey of 40 shareholders, most of whom identified themselves as frequent filers of shareholder resolutions. 80% of respondents said they found the no action letter process to be frustrating or extremely frustrating. Strikingly, 85% of the respondents disagreed with the statement "the staff no action letter process is transparent and accountable" and 81% of the respondents disagreed with the statement "the staff provides sufficient information and justifications for individual decisions."
Principal among the shareowner objections to the current process was Staff Legal Bulletin 14C issued by the SEC staff during the Bush Administration declaring that the SEC would allow companies to exclude shareholder resolutions that ask companies to disclose financial risks associated with environmental issues. The same so-called risk evaluation exclusion has since then also been applied to human rights, public health, climate, and even subprime lending issues.
Most of the 15 or so investor representatives who participated in the September 22 meeting with SEC staff criticized this so-called risk evaluation exclusion. We referred to the letter from 60 investors sent December 11, 2008 to then President-elect Obama, hoping for change in this area. That letter noted:
The adoption of this new bar on resolutions requesting “risk evaluation” represented a significant departure -- disregarding the reasonable and principled approach that had governed at the SEC for decades, and replacing it with a radical interpretation of the rules. The result has been to limit shareholder resolutions to questions about the impact that companies are having on society in general, excluding vital questions about the impact that any of these issues may have on the company’s future finances. Institutional investors, especially those that hold long-term stakes in the marketplace, have expressed interest in being able to monitor the financial impacts that various issues pose on their portfolio holdings.
Notably, 90% of the respondents to the shareowner survey stated that they had been forced by staff rulings to write resolutions to avoid asking for disclosure of particular financial risks that they were concerned about. This is a vexing matter of censorship of investor inquiry for an agency that has been accused of botching its handling of Bernie Madoff and other recent disasters.Contacts for media comment:
Sanford Lewis, Investor Environmental Health Network 413 549-7333
Jonas Kron, Trillium Asset Management 503-592-0864
Adam Kanzer, Domini Social Investments 212-217-1027
Tim Smith, Walden Asset Management 617-695-5177