Activists focusing on broad environmental and social issues are increasingly using the shareholder proposal process to push their agendas at U.S. public companies. The 2024 proxy season is no exception.
Several blue state public pension funds announced last week they will vote against some or all of ExxonMobil’s directors at the company’s annual shareholder meeting on Wednesday. The funds include the California Public Employees Retirement System and the New York State Common Retirement Fund, along with their allies in other blue states and cities. Their votes are meant to express dissatisfaction with a shareholder lawsuit ExxonMobil has brought against activist investors Arjuna Capital and Follow This. (The suit against Follow This was dismissed over jurisdictional issues.)
However, the issue these dissidents have with ExxonMobil’s leaders is unrelated to the company’s performance. Instead, the pension-fund officials are upset that ExxonMobil is asking the court to review the Securities and Exchange Commission’s handling of shareholder proposals. Since 2021, the SEC has made it easier for investors to submit proposals imposing specific environmental targets on companies and addressing broad social issues.
Several Republican officials have supported Exxon’s position. These officials argue that undue political interference at Exxon will harm job growth and hurt ordinary employees’ 401(k)s and pensions.
This situation raises a larger question: Why are Democratic and Republican state officials clashing over what is supposed to be a routine corporate matter? How did politics become so intertwined with business that a company’s shareholder meeting has transformed into a forum for political debate?
Much of the answer lies in the SEC’s altered interpretation of its rules for evaluating shareholder proposals. The commission’s rightful role is as a neutral referee. Instead, under its new rules, the commission has effectively encouraged activists to bring politics into the boardroom by requiring companies to consider any proposal that “raises significant social issues,” even if it has little to do with the company’s business or performance.
This policy change has predictably led to a surge in ideological proposals. In fact, the number of environmentally and socially driven proposals that reached boardrooms for a vote increased by 125% from 2021 to 2023. Simultaneously, overall investor support for environmental and social proposals dropped from 37% in 2021 to 20% in 2023.
Furthermore, the SEC has been less likely to side with companies seeking to exclude proposals since the policy change. In the year before the change, the SEC staff allowed companies to exclude proposals 40% of the time, but after the change, this rate dropped to 23%.
The change has sweeping implications, as the fight at ExxonMobil’s annual meeting is making clear. But the SEC was able to impose it without going through the rulemaking process since it is simply staff guidance. That means that there was no opportunity for the public to comment on the changes and for commissioners to vote. So now the policy debate is playing out at Exxon’s shareholder meeting instead.
Proponents of the SEC’s new interpretation argue that the changes rightfully enable shareholders to weigh in on significant social policy issues without being seen as micromanagement. However, the specific targets and timelines for climate action included in many current shareholder proposals require substantial knowledge of the target company, potentially limiting companies’ ability to make plans that fit their business and leaving all shareholders worse off.
In ExxonMobil’s case, Arjuna Capital and Follow This submitted a stringent climate-change proposal intended to limit the company’s growth, which would ultimately hurt shareholder returns. Surely, the shareholder proposal process was not intended to facilitate the demise of targeted companies?
Thankfully, Exxon’s lawsuit should help provide clarity for what shareholder proposals should be allowed and which ones should not per the SEC’s rules. If not, it is time to have a proper debate about the purpose and limits of the shareholder proposal process, instead of indirectly debating at a company’s shareholder meeting. That ultimately does not serve any shareholders, regardless of their personal opinion on the issue at hand.
Kyle Isakower is senior vice president of energy and regulatory policy at the American Council for Capital Formation.
