No New Year Resolutions?

The U.S. Securities & Exchange Commission (SEC) has proposed changes that could prevent many shareholders from raising issues of social and environmental corporate responsibility.

Over the past few decades, shareholder resolutions have played a significant role in persuading major companies to improve their labor, environmental and corporate governance practices. 

In 2004, Coca-Cola executives backed a shareholder resolution that led the company to invest in HIV prevention in Africa. The measure passed with flying colors. 

Over the past 15 years, a series of shareholder resolutions have helped force Nike to monitor labor conditions in its international supply chain. And shareholder resolutions have persuaded corporations, including Tyco and American Electric Power, to cut back on greenhouse gas emissions. 

But the SEC has proposed curbing these non-binding shareholder resolutions after a Sept. 2006 decision by the U.S. Court of Appeals for the Second District in New York spurred the agency to clarify a rule on whether shareholders can pass resolutions to nominate a person for a company’s board of directors. As a result of the court’s decision, the SEC drafted two proposals. The first would prevent such nominations. The second would allow them – but only with extensive restrictions. In the document explaining these proposals, SEC commissioners also discussed changing the way with which shareholder resolutions are dealt. 

“From a legal point of view, the [SEC’s document] is not a formal rule proposal,” says Domini Social Investments General Counsel Adam Kanzer. ​“But you have to take this seriously because it means the SEC is considering something and the next step might be a formal proposal.”

On Nov. 28, 2007, in a 3-1 party line vote, the SEC blocked investors from nominating board of director candidates. The vote did not deal with the proposed revisions to the shareholder resolution process, so it remains unclear whether commissioners will keep that proposal on their agenda. Socially responsible investment leaders say they are watching carefully to see if the SEC will return its focus to shareholder resolutions this spring.

A two-month public comment period for the SEC proposals closed Oct. 2, in which more than 22,500 comments were submitted. The vast majority of comments opposed curbs on shareholder rights.

Although resolutions calling for a company to change its practices rarely get more than a small percentage of shareholder votes, they have often been an effective way to get media attention, and thereby force a corporation to address an issue. 

Along with targeting deforestation, sweatshops, greenhouse gas emissions, investment in oppressive regimes and other such issues, non-binding shareholder resolutions can address corporate governance issues, including creating transparency, non-discriminatory hiring, and capping CEO salaries. Many times, a company may agree to change its policies to avoid having a resolution included on the proxy statement for its annual meeting.

But in the SEC’s recent proposal, the agency suggests allowing corporations to ​“opt-out” of allowing non-binding advisory shareholder resolutions. 

“The companies that don’t want to be held accountable would be the ones to opt-out,” says Tim Smith, chairman of the Social Investment Forum, a nonprofit organization whose members include hundreds of banks, mutual fund companies, analysts, and other financial professionals and institutions.

The SEC proposal also mentions replacing the shareholder resolution process with an electronic chat room and increasing the ​“resubmission threshold,” which is the percentage of votes a resolution must receive in order to be introduced the following year.

Currently, a resolution needs only 3 percent of votes its first year to be re-introduced, 6 percent the second year and 10 percent the third year. 

The SEC document discusses raising these thresholds to 10, 15 and 20 percent, respectively.

“About 80 percent of resolutions do get enough votes to come back,” says John Wilson, director of socially responsible investing for Christian Brothers Investment Services. ​“But when you talk about needing 15 to 20 percent more votes, you’ll exclude a lot of good resolutions that people just don’t know about.”

Wilson says that when his group started filing climate change resolutions in the ​’90s there wasn’t much interest. Now the resolutions are so popular that one filed with ExxonMobil got 31 percent of the vote this year.

In 2007, shareholders filed a record 43 climate change-related resolutions with U.S. companies, with 15 of them leading to positive actions, including resolutions filed with ConocoPhillips, Wells Fargo and Hartford Insurance, according to the Investor Network on Climate Risk, a $4 trillion network of investors with the stated mission of ​“promoting better understanding of the investment risks and opportunities posed by climate change.”

The U.S. Chamber of Commerce and the Business Roundtable (neither of which responded to interview requests for this story) filed public comments supporting curbs on shareholder resolutions, as did a handful of companies, such as General Motors, Xerox and Apache. Critics of advisory shareholder resolutions commonly refer to them as representing ​“special interests.”

“How can groups with trillions of dollars invested be special interests?” asks Smith. 

If the SEC’s proposals are instituted, socially responsible investors and advocacy groups whose interests they represent fear companies would be freer to profit from exploitative and destructive practices without fear of public oversight.

“It would be a big loss,” says Wilson.