The SEC Should Avoid Overreach and Support Investors' Fiduciary Duty
The Securities and Exchange Commission is taking steps that could change how shareholders exercise their ownership rights and how institutional investors manage risk. The issue is larger than environmental, social and governance investing. It goes to a basic question of fiduciary duty: Can an asset owner evaluate information that may affect the value of its portfolio without being treated as a political activist?
The SEC's Shift in Policy
The SEC has moved beyond debating particular ESG practices. In August, the Division of Corporation Finance announced that it would stop responding to shareholder-proposal no-action requests altogether. Companies must still notify the SEC when they intend to exclude a proposal, but the staff will no longer indicate whether it would object
In September came a more consequential step: the Commission the federal rule that gives shareholders a way to place qualifying proposals in corporate proxy materials. Under the proposal, questions about shareholder proposals would be left primarily to state law and corporate governing documents. [Chairman Paul Atkins says the change is necessary because the SEC should not intrude into state corporate law.
A Campaign Against "Woke" Proposals
The debate over federal versus state authority is legitimate. But the SEC's policy direction also sits squarely within a larger political and business campaign against ESG and against shareholder proposals characterized as ideological or "woke."
In a 2022 comment letter, the Business Roundtable called for Rule 14a-8 to be restored to what it considers its original purpose by excluding proposals that advance "broad ideological agendas .It argues the process should focus on long-term value creation and has urged Congress and the SEC to act.
The U.S. Chamber of Commerce has taken a similar position. On the day the SEC announced its proposal to rescind Rule 14a-8, the Chamber welcomed the action saying special interests had exploited the rule to advance their agendas at the expense of public companies and shareholders. The alignment matters. The Trump administration, business organizations and federal agencies are challenging ESG, DEI and related shareholder activity as ideological, while the SEC is changing the regulatory structure that governs how shareholders bring such matters before fellow owners. One need not assume the SEC is acting at the direction of these organizations to recognize that their policy positions and the Commission's proposed rule changes point in the same direction.
But a political label does not answer an investment question.
A pension fund does not become a political organization because it evaluates workforce turnover. An endowment does not abandon fiduciary discipline because it examines climate exposure. A foundation does not become an activist because it asks whether human-capital practices affect financial performance. Investors routinely examine information that management finds inconvenient or that political constituencies find controversial. The fiduciary test is narrower: Does the information have a reasonable connection to risk, return, valuation or long-term financial performance?
Activists Must Answer with Evidence
Shareholder advocates also have a responsibility. When the Business Roundtable, the Chamber and their allies call ESG proposals "woke," proponents should respond with evidence of financial materiality, not an appeal to social importance. They should explain how an issue can affect revenue, costs, capital allocation, productivity, litigation exposure, regulatory risk, access to capital, workforce stability or long-term enterprise value.
A pension fiduciary need not support a proposal because it advances a social objective. The question is whether the underlying factor could reasonably affect beneficiaries' economic interests. Employee turnover that affects productivity is a financial consideration. So is a governance practice that creates material litigation or regulatory exposure, or a climate risk that threatens assets, supply chains, insurance costs or capital expenditures.
This approach is consistent with the SEC's own emphasis on materiality. Even the Business Roundtable has suggested that climate-related information should be disclosed when material to investors .The same standard should apply to ESG and anti-ESG proposals alike, without first asking whether the subject is politically conservative or progressive.
It also gives advocates a stronger response to the SEC's criticism of Rule 14a-8.Commissioner Mark Uyeda has argued that some proposals are pushed by political interests with no fiduciary obligation to the company or its shareholders, and that some subjects lack material relevance.Those concerns should not be dismissed. They should be answered proposal by proposal.
The burden runs in both directions. Companies and trade associations should not be able to wave off a proposal by labeling it "woke." Proponents should not expect support merely because their goal is desirable. Both must address the same question: What is the economic connection between the issue and long-term financial interests?
What Rescission Would Change
Rule 14a-8 has never required investors to support every proposal. It gives shareholders a way to bring qualifying matters before fellow owners, who then decide. Some proposals may be political, duplicative, immaterial or overly prescriptive. Others address matters investors reasonably believe affect corporate value. The proper response is to examine the economic facts, not to presume an entire category of subjects is ideological.
Rescission would change that balance. The SEC says it restores the traditional authority of state corporate law. Critics counter that it could produce different shareholder rights depending on a company's state of incorporation and give boards greater control over what reaches shareholders. The business groups that have pressed for narrowing the rule would be among the beneficiaries.
Smaller shareholders have the most to lose. Large institutions can engage companies privately, hire lawyers and consultants, and speak directly with management. A small shareholder has far fewer resources, and the federal proxy process has offered a relatively inexpensive way to put a question before fellow owners. The retreat from the no-action process adds uncertainty, leaving companies and proponents to resolve disputes through other means, including costlier litigation.
The full article also addresses the SEC’s October report on Climate Action 100+