During the 2010 US proxy season, shareholder resolutions seeking enhanced disclosure on climate change and sustainability attracted greater approval than in years past. 2010 also saw increased support for proposals that ask companies to report on their political contributions. Another hopeful sign was the withdrawal of an unprecedented number of environmental and social resolutions, as more companies agreed to address such issues before they came to a vote.
This season was shaped by several actions of the Securities and Exchange Commission (SEC) that related to environmental or social issues. A new SEC Staff Legal Bulletin in October 2009 made it harder for companies to omit shareholder resolutions on environmental or health risk assessment, as long as the proposal deals with a significant social policy issue. In December 2009, the SEC voted to require enhanced disclosure in proxy statements about how diversity is considered in the director nomination process. In January 2010, the SEC issued guidance to corporations on climate change disclosure.
Despite this, the overall number of environmental and social governance proposals omitted by the SEC staff remained largely consistent with 2009 figures. The SEC's new view on risk assessment proposals did, however, allow several resolutions dealing with climate change and natural gas hydraulic fracturing to make it onto corporate ballots; in prior years, these resolutions likely would have been omitted on "ordinary business" grounds.
Finally, the rate of ESG proposal withdrawals--typically, after constructive dialogue between companies and issuers--continued to rise, increasing from 37.5 percent in 2009 to 39.3 percent in 2010, according to ISS data.
Sustainability and Climate Change
A proxy request for sustainability reporting received majority support for the first time in 2010. The first-year resolution at Layne Christensen, which asked the company to issue a report on sustainability and its greenhouse gas (GHG) emissions, received 60 percent of votes cast. The previous record for this topic was 48.4 percent support at Terex in 2006. Overall, the average support for sustainability reporting proposals rose more than 9 percentage points from 19.8 percent in 2009 to 28.9 percent in 2010.
For the second consecutive year, a climate change proposal received majority approval, earning 53.1 percent support at Massey Energy. In 2009, a nearly identical resolution garnered 51.2 percent support at Idacorp. The New York City pension funds' resolution at Massey sought the adoption of quantitative GHG reduction goals. Massey has received similar proposals for the previous three years, although those resolutions asked more broadly for climate change reporting. The 2009 resolution received 45.6 percent support, up from 18.1 percent during its first year at the coal company in 2007. Several other climate change proposals received more than 35 percent support this year.
In 2010, there were two new types of climate change-related proposals submitted by shareholder activists relating to climate change. Testing the SEC's new approach to environmental risk, investors filed proposals at ExxonMobil, Chevron, and ConocoPhillips calling for a report on the financial risks from climate change. The proposal at ExxonMobil was withdrawn, while the resolutions at Chevron and ConocoPhillips received 8.6 and 7.5 percent support, respectively.
The other new climate change-related campaign, which asked companies to report on a set of principles to stop global warming, was led by the AFL-CIO. As with the labor federation's previous campaign asking companies to adopt healthcare principles (which was retired at the end of 2009), the global warming proposals saw a relatively high withdrawal rate. Seven out of nine resolutions were withdrawn. A climate-related proposal at Wal-Mart Stores was omitted for being "substantially implemented," while the only resolution to come to a vote received 7.8 percent support at Safeway.
Political Contributions
Investors continued to give strong support to proposals asking companies to report on their political contributions, as well as their trade association spending and policies. This broad campaign for political disclosure, coordinated by the Center for Political Accountability (CPA), is in its seventh year. Investors associated with a wide range of proponent groups--public pension funds, labor unions, social investment funds, religious groups, and foundations--filed 42 resolutions, of which 28 came to votes. The proposals averaged 30.7 percent support, up from 28.3 percent in 2009.
It remains unclear if the U.S. Supreme Court's January decision in Citizens United v. Federal Election Commission, which lifted restrictions on corporate spending in federal elections, inspired more support for this campaign. Most institutional investors established their proxy voting policies before the Citizens United ruling.
In response to the decision, the New York State Common Retirement Fund did submit a new proposal at American International Group, asking for an annual shareholder vote to ratify the political spending program for the previous fiscal year. The proposal received just 0.5 percent support, as some investors feared that an "up or down" vote on political spending would sideline proper disclosure. The vote also was dampened by the federal government's nearly 80 percent voting stake in the company.
This year's CPA campaign included a new proposal asking for a report on "grassroots lobbying" spending in addition to disclosure of a company's political contributions and trade association spending. The proposal was filed at AT&T and JPMorgan Chase; both firms filed no-action requests that argued that the term "grassroots lobbying" was not sufficiently defined. The SEC allowed both companies to omit the resolutions.
Environmental Issues
Two new campaigns in 2010 addressed the environmental impacts of coal ash and hydraulic fracturing of natural gas. Both campaigns received remarkably high levels of support for a first-year environmental proposal. Green Century and the As You Sow foundation led the campaign, which asked for a report on coal ash (or coal combustion waste) at five companies: FirstEnergy, CMS Energy, MDU Resources, Southern Co., and Xcel Energy. The proposal at CMS Energy received the greatest support (43.1 percent), followed by 40.5 percent at MDU Resources. Resolutions were withdrawn at FirstEnergy and Xcel.
A new shareholder campaign asking for a report on natural gas hydraulic fracturing (also known as "fracking") in the extraction of shale gas also garnered significant shareholder support. While a number of the 11 involved companies challenged the proposal on "ordinary business" grounds, the new SEC bulletin helped proponents counter this argument. Four of the “fracking” proposals were withdrawn and one proposal was omitted because its proponent failed to provide verification of stock ownership. The remaining resolutions averaged 30 percent support; the best showing was a 41.8 percent vote at Williams Cos.
More Proposals are Withdrawn in 2010
For many activist shareholders, the vote results on environmental and social resolutions are not the only goal of proxy season. Withdrawal agreements are also indicators of success, as they follow successful negotiations with companies regarding a resolution. The 2010 proxy season was another good year for proponents in this respect.
At the time of this article's writing, 142 environmental/social proposals of the 361 filed have been withdrawn. This 39.3 percent withdrawal rate, up from 37.5 percent in 2009, was attributable in part to the success of the board diversity campaign. Sixteen of 17 proposals were withdrawn, quite possibly as a result of the SEC's new diversity disclosure rule.
The New York City pension funds continued, as in prior years, to achieve a substantial number of withdrawals relating to the funds' campaign seeking the amendment of corporate Equal Employment Opportunity (EEO) policy statements to prohibit discrimination based on sexual orientation and gender identity. The proponents withdrew 15 out of the 26 resolutions filed (58 percent) in 2010 as compared to nine out of 11 in 2009. The willingness of issuers to negotiate may be the result of the shareholder support that such proposals typically receive; the 10 EEO resolutions that came to vote in 2010 averaged 35 percent support, and one received a 49.1 percent vote at Gardner Denver.
In addition to seeing an increase in average support, sustainability report proposals were also the subject of many withdrawal agreements this season. So far this year, 23 of the 40 proposals, or 58 percent, have been withdrawn.
SEC Cuts Back on Corporate "Exclusions" of Proposals
For the second consecutive year, the SEC permitted fewer exclusions of proposals relating to social and environmental issues. Approximately 12.6 percent of ESG proposals were omitted during the 2009 and 2010 seasons, as compared with an average of 15.9 percent from 2004 to 2008, according to ISS' checklist of shareholder proposals.
As in 2009, many of this year's omissions were on "ordinary business" grounds. The Open Media and Information Companies Initiative, known as "Open MIC," which launched a campaign on Internet freedom last year, again had many of its proposals omitted on those grounds.
The SEC granted 13 no-action requests to exclude proposals on procedural or technical grounds. Eight of those resolutions were omitted because of the proponents' failure to verify their stock ownership on a timely basis.
Editor's Note: The vote results in this article are based on votes cast "for" and "against" and don't include abstentions or broker votes.