SEC denies Apple's request to exclude a proxy proposal to establish a board-level human rights committee.
By April Hall and Eve Tahmincioglu
The heat is turning up on corporate boards to take environmental, social and governance issues (ESG) seriously, thanks to a recent decision by the Securities & Exchange Commission (SEC) to not impede such proposals from going before company shareholders.
It all started when Apple Inc. sent a letter to the SEC in November asking to exclude proxy proposals that were related to a host of humanitarian issues. In making its case, company officials new SEC guidance creating an "ordinary business" proxy exception.
According to the SEC Staff Legal Bulletin No. 14I (SLB 14I), published on Nov. 1:
The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.”
While many companies make requests to skip including certain proxies, the guidance was seen by some in the investment community as a way to bypass proposals by labeling them ordinary business, according to a Reuters article published last month.
But those fears were somewhat allayed with the SEC's decision to deny Apple's request, potentially putting a spotlight on ESG issues for management and the board.
The Apple request highlights a further difficulty that companies may face in taking advantage of the new SLB 14I guidance: under what circumstances, if any, could a company argue on the one hand that ESG issues are ordinary course and permeate operational decisions so that they should be excludible under the ordinary business exclusion, and also argue on the other hand that they are not “economically relevant” – i.e., that they are not related to substantial business operations?
No matter how this plays out, ESG is clearly something boards have to say focused on.
ConocoPhillips Co. director Jody Freeman sees ESG as part of the board’s key responsibilities and an essential part of strategic planning.
“We play the same oversight and fiduciary role on behalf of shareholders on ESG issues as we do on everything else,” says Freeman, who sits on the public policy committee of the energy company.
Encouraging corporations to consider the greater good is nothing new. It has had many iterations and names, i.e. corporate responsibility, socially responsible investing and “the triple bottom line.” ESG is the latest salvo, broadening the concept to include everything from gender inequality to bribery to climate change; and it’s gaining momentum in Corporate America.
For ConocoPhillips, these issues have been a strategic concern since Freeman joined the board in 2012, a fact that’s an exception among many corporate boards.
ESG issues ranked lowest among business strategy drivers, according to a PwC survey of nearly 800 board directors; and anecdotally Directors & Boards found many directors who didn’t even know what ESG was. But there’s growing pressure from investors and other stakeholders to make ESG a bigger priority in the boardroom.
If the issues are not addressed in the boardroom, trillions of investment dollars could be at stake, which is why investors have the power to bring these issues to the board and make an impact.
“Investors have done a terrific job of getting this to the forefront,” says Paula Loop, leader of the Governance Insights Center at PwC, about ESG.
“There is a fair amount of education that needs to happen,” she notes. “Executives need to speak about it during strategy sessions with the board and with investors — executives need to embed it in the broader strategy sessions.”