The Stop Woke Investing Act and ‘ESG fatigue’

The Securities and Exchange Commission (SEC) has made it far too easy for activist shareholders to overturn the traditional proxy review process. The SEC’s Staff Legal Bulletin No. 14L (SLB 14L) has impeded public corporations’ ability to exclude shareholder proposals that provide no material benefit to firms.

Thus, we have seen a precipitous rise in shareholder activist campaigns pressuring companies to adopt environmental, social, governance (ESG) proposals. Some have noticed “ESG fatigue,” as companies are faced with an increasing number of proposals that carry declining shareholder support year after year. This trend has threatened to distract corporate boards from resolutions that would actually advance a company’s financial interests.

The SEC’s SLB 14L diminishes the threshold by which corporations can reject immaterial proposals. This encompasses climate proposals that advance an ulterior political agenda or social programs that are irrelevant to profit maximization. In concert with this, the SEC has proposed restrictive provisions to amend Rule 14a-8.

If finalized, the amendments would expand the criteria for acceptable shareholder proposals during the proxy review season, while restricting the categories for excluding unsatisfactory proposals. Public companies would only be permitted to exclude certain duplicate, resubmitted, and implemented proposals that are substantially similar or have already been adopted.

Thus, the SEC seeks to hamstring public corporations from rejecting frivolous ESG measures, while empowering activists to expand the scope of what proposals can be submitted for consideration. The amendments to Rule 14a-8 would only further undermine corporate discretion in this process by narrowing the criteria for what can be excluded.

Relief may be in sight. Sens. Mike Braun (R-IN), Eric Schmitt (R-MO), and Ted Budd (R-NC) have introduced the Stop Woke Investing Act (S. 3179). A coalition of 13 concerned interest groups have signed a letter in support of the Act.

The bill calls for the SEC to amend the Code of Federal Regulations to safeguard corporate discretion in proxy review. It would cap the annual number of shareholder resolutions that a company would be required to include on its proxy ballot. Duplicate or highly similar proposals would be consolidated into one.

Additionally, the bill requires that every resolution accepted to the proxy ballot bear some material relationship to the company’s financial performance. It would also restore corporate responsibility over selecting resolutions for consideration.

Capping the profusion of shareholder resolutions is understandable given the surge in nonfinancial proposals offered in recent years. Since 2020, every proxy season has set a new record for the total shareholder proposals submitted annually. In 2023, we saw a total of 836 proposals vs. 801 in 2022 for Russell 3000 companies[JL1]  (the largest 3000 US public companies). This increase has been overwhelmingly the result of ESG-focused measures.

While environmental and social proposals have been on the rise, the degree of shareholder support for these has been declining. Companies don’t value these proposals nearly as highly as the radical stakeholder interest groups inspiring them or the activist shareholders proposing them. The average support for ESG shareholder proposals went from 31% in 2022 to 23% over the first half of 2023. Social-based proposals obtained the lowest rate of support at 17%.

Several major asset managers even turned down ESG proposals in 2023, citing their redundant and overly prescriptive focus. BlackRock decided to deny 742 of its 813 proposals (93%) primarily because of fatigue over low-quality ESG efforts.

“We observed a greater number of overly prescriptive proposals or ones lacking economic merit,” said Joud Abdel Majeid, BlackRock’s global head of investment stewardship. “Because so many proposals were over-reaching, lacking economic merit, or simply redundant, they were unlikely to help promote long-term shareholder value and received less support from shareholders, including BlackRock, than in years past.”

Another consequence of the SEC’s SBL 14L is that corporations have found it increasingly difficult to file no-action letters. This regulatory mechanism permits corporations to obtain approval from the SEC to dismiss the most problematic ESG measures. SBL 14L severely impairs the use of no-action letters by undermining corporate discretion over ESG matters. Thus, companies have expended far more resources than necessary to review duplicate, irrelevant, and illegitimate resolutions.

Companies like Exxon have even turned to the courts to obtain relief. After fending off such proposals, companies often have less energy left to consider resolutions that actually advance their financial interests.

The Stop Woke Investing Act seeks to end ESG fatigue and restore corporate oversight in the proxy review process. Since the SEC’s SBL 14L guidance in 2021, corporations have largely ceded control to activist shareholders. Many firms have wasted valuable time and resources just to comb through mountains of paperwork.

It’s time for Congress to restore sanity to the proxy review process. Mechanisms like SBL 14L that push ESG activism should be repealed. As the coalition letter reads, “American companies need to be able to conduct business without interference from activists that have no intention of maximizing financial returns, but only focus on making political statements.”