Dive Brief:
- The Securities and Exchange Commission officially proposed rescinding Rule 14a-8, — which governs the shareholder proposal process — on Wednesday, paired with amendments to what companies are required to include in their proxy materials.
- The rescission proposal comes a few weeks after the SEC sent the rules to the White House for regulatory review. The proposed rescission of the rule did not come as a surprise as SEC Chair Paul Atkins said earlier in the year that the agency was “holistically evaluating the rule.”
- The move to eliminate the shareholder proposal rule was denounced by shareholder activists across the political spectrum, while legal experts said activism is likely to change venues but not disappear.
Dive Insight:
The proposals would leave the laws governing shareholder proposals in the hands of states and give companies additional leeway to determine what to include in their proxy materials. Andrew Poreda, a senior research analyst for asset management firm Sage Advisory Services, said the rescission “isn't a fight about ESG. It's a quiet rewrite of what it means to own a piece of America's largest companies.”
“The debate around rescinding 14a-8 has been framed as another skirmish over environmental and social proposals,” Poreda said in emailed comments to ESG Dive Wednesday. “That framing is a trap. This is not about climate resolutions or diversity reports. It is about whether the people who supply the capital retain any meaningful voice in the enterprises they own.”
The removal of the rule is expected to have ripple effects throughout the rest of the ecosystem, according to David Fredrickson, senior counsel for law firm Covington & Burling. Fredrickson, who now advises clients on capital markets and corporate governance, previously had a 25-year stint at the SEC in various legal roles, including as chief counsel for the Division of Corporation Finance and as senior legal adviser to the deputy director of the corporation finance division.
Fredrickson said in emailed comments Thursday that, despite the SEC’s framing of the rule as intruding on state laws, traditionally the rule had been viewed as a “cost-shifting measure” for certain shareholder proposals that were “otherwise proper under state law” to be included in public companies’ proxy statements.
“Shareholder proposals are part of a larger ecosystem of relations between companies and their shareholders,” Fredrickson told ESG Dive. “Removal of this means of communication could have larger implications for that entire ecosystem.”
A group of investor advocates sent the SEC a regulatory petition in July, urging the agency to not rescind the rule and, instead, adopt more targeted changes. The group — which included sustainability nonprofit Ceres, the U.S. Sustainable Investment Forum, the Interfaith Center on Corporate Responsibility, the Shareholder Rights Group and For the Long Term, as well as New York State Comptroller Thomas DiNapoli — argued in their regulatory petition that “outright rescission of Rule 14a-8 would upset a longstanding balance between investors and their companies.”
Andrew Collier, senior director of Ceres’ “Freedom to Invest” campaign, said rescinding the rule “will increase instability and costs for both companies and investors and further weaken American capital markets and the foundations that uphold them,” in a statement Wednesday.
The National Center for Public Policy Research — a regular proponent of anti-ESG shareholder proposals — called the changes to shareholder proposal rules “short-sighted.”
“The allegedly 'free market' commissioners at the SEC have proposed to lock in left-wing shareholder activist gains and leave pro-free enterprise shareholder activists to the tender mercies of corporate management-loving state laws,” Steve Milloy, director of NCPPR’s Free Enterprise Project said in a statement Thursday.
The SOC Investment Group, the shareholder engagement arm of union federation the Strategic Organizing Center, said in an emailed statement Wednesday that the agency “is catering to a small minority of companies that would rather avoid addressing their own shareholders’ concerns than protect the investors whose capital powers our markets.” SOC Investment Group Executive Director Tejal Patel also called the rescission proposal “shortsighted.”
“The ability to file shareholder proposals is a fundamental investor right that has addressed critical concerns with governance, executive pay, and corporate policy,” Patel said in a statement. “That's not a weapon or loophole; it's a cornerstone of accountability.”
Despite the changes, shareholder pressure is expected to shift venues rather than disappear, according to J.T. Ho, partner at law firm Cleary Gottlieb Steen & Hamilton, told ESG Dive. Ho said that if Rule 14a-8 becomes “a less available avenue” for shareholder pressure, it could increasingly show up in other forms of shareholder action like director elections, public campaigns and direct engagement.
“For issuers, the practical takeaway is to think about shareholder proposals as part of a broader engagement and activism landscape,” Ho said in emailed comments Thursday. “Less activity under Rule 14a-8 would not necessarily mean less shareholder pressure — it could mean that pressure surfaces through channels that are more consequential for the board.”
