Many impact investors posit that holding positions in public companies leads to positive impact because of the ability to pressure management through shareholder proposals.
Champions of this approach point to recent examples like the ExxonMobil shareholder proposal that shareholders approved last May requesting that the oil giant consider enhanced reporting on climate change risks. (See, for example, “With new pledge, another foundation moves to align endowment with mission.”)
A recent SEC action highlights, however, the limitations of shareholder activism under federal and state law. Trillium Asset Management recently demanded that EOG Resources, an oil and gas company, submit for a shareholder vote a proposal to consider targets for reducing greenhouse gas emissions.
In response, EOG Resources argued that it was not required to submit the proposal for a vote because of an SEC rule that allows companies to refuse proposals that related to “ordinary business operations.” EOG also sought confirmation from the SEC that it could legally refuse the proposal.
In a published “no-action letter,” the SEC agreed with EOG, stating that the proposal sought to “micromanage the Company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
One could argue that this is simply another example of the Trump administration showing its dislike of climate-related regulation and activism. But this SEC action exposes real legal limitations on the ability of shareholders to influence corporate behavior. Both federal and state laws prohibit shareholder actions that seek to dictate corporate management decisions.
The ExxonMobil vote was heralded as a victory for activism. But the ExxonMobil board was not legally required to implement the climate-related proposal approved by shareholders. The proposal was completely non-binding from a legal perspective. ExxonMobil could likely have rejected from consideration a binding proposal because it would have impinged on the board’s exclusive authority to manage the company.
It took seven months after shareholders voted to approve the proposal for the ExxonMobil board to announce it had dropped its opposition and would implement the recommendations related to enhanced reporting.
Originally published at bluedotlaw.com on March 22, 2018.