SEC Chair’s Policies Facilitate The Abuse Of Shareholder Proposals

Earlier this month, shareholders of CNX Resources rejected a shareholder resolution asking that the company disclose its lobbying activity and confirm that it is consistent with the Paris Climate Accord.

On its face, the proposal and result seem unremarkable. However, the behind-the-scenes negotiations in the build up to the vote are a clear example of how our proxy process is broken and is being increasingly used to pressure public companies to prioritize political objectives, instead of increasing value for shareholders.

Instead of protecting investors, the Securities and Exchange Commission (SEC) under the leadership of Chairman Gary Gensler has encouraged this type of abuse of the corporate governance system, through a series of policy actions that manifestly harm investors.

First, Mr. Gensler changed the SEC’s policy on no-action relief to make it easier for environmental and social proposals to make it onto a company’s ballot, which resulted in a surge in the number of such proposals on company ballots.

Next, he announced that there would be no enforcement of the SEC’s 2020 proxy advisor rule during the 2021 proxy season and rushed through a slimmed down rule on proxy advisors that eliminated key provisions that would have improved a company’s ability to respond to adverse proxy advisor recommendations and communicate with their shareholders.

Finally, the SEC is now considering changes to the recently updated shareholder proposal rule that could potentially make it easier to resubmit failed shareholder proposals year after year.

The results of these policy changes were on full display at CNX’s annual meeting. Shareholders were forced to vote on a proposal calling for more reporting on lobbying in line with the Paris Accord even though the company had already disclosed its trade association memberships and made it clear that neither it nor any of its associations had lobbied against the Accord. CNX even sent the shareholder who submitted the resolution, Handley hotels, a letter explaining that the company does not lobby against Paris in any way and expressed disappointment that Handley refused to even engage with the company after submitting their flawed proposal.

Despite these efforts, the largest of the two main proxy advisers, Institutional Shareholder Services (ISS), still recommended its clients vote in favor of the provision. When CNX wrote to ISS and tried to meet with the advisor it was ignored. This matters because proxy advisor recommendations can have significant sway over the success of shareholder proposals, with many investment managers voting in lock step with advisor recommendations to avoid having to perform their own due diligence on each item.

While the resolution did not pass, its introduction—and ISS’s voting—forced the company to submit a supplemental filing to the SEC, which is costly and adds legal liability for the company. Ultimately, the vote accomplished nothing save for making the company spend shareholders’ money and resources responding to the resolution.

Despite the significant effort the company took to communicate with shareholders, nearly a quarter of shareholders still voted for the flawed proposal – which serves as yet another example of many investors blindly following the advice of the proxy advisors.

What’s more problematic about these events is that Handlery Hotels’ decision to submit the proposal appears to have been led by political rather than fiduciary motivations. In fact, the entire proxy process was managed for Handlery Hotels by an organization called Proxy Impact, which solely exists to try to advance social policy via proxy votes. Handley even submitted the same boilerplate shareholder proposal to several other companies this year, including Targa Resources
TRGP
, Dow Chemical and Cottera –suggesting that this proposal has little to do with the specific activities of any one company.

ISS benefits from this behavior by recommending to support resolutions that have nothing to do with benefiting investors, while simultaneously providing consulting services to companies on how to receive favorable recommendations on the ever expanding panoply of ESG topics covered in these proposals. The SEC’s curious rollback of a rule that would have checked their behavior is a manifestation of the entire administration’s perspective that investors’ money takes a back seat to political exigencies.

If the 2020 proxy advisor rule was in place this proxy season, CNX would have had the opportunity to review and respond to ISS’s recommendation without going through the costly and ineffective process of submitting a supplemental filing, saving shareholders’ funds. Most importantly, ISS would have been required to alert their clients that CNX responded to their recommendation and investors would have been compelled to review the response.

Finally, Mr. Gensler has also removed SEC supplemental guidance advising investors that they should make use the information available as a result of the 2020 proxy advisor rule, which served as an alert to investors reminding them that they are legally responsible for how they vote on shareholder proposals and cannot simply outsource their vote to proxy advisors.

The explicit purpose of the SEC is to protect investors, but its acquiescence to activists wanting to hijack the proxy advisory process, combined with its refusal to rein in proxy advisors’ predilection for following their own policy preferences rather than the best interests of investors, has made a mockery of the Securities Exchange Act.

While CNX comfortably defeated Handley’s proposal, the vote points to an alarming trend and suggests that Mr. Gensler’s SEC is prioritizing politics over the interests of the investors he is meant to protect.