SEC restores corporate control over ESG proposals

The Securities and Exchange Commission (SEC) has wasted no time in reforming controversial regulations under the Trump administration. Beyond targeting formal rules, GOP commissioners have taken no prisoners when axing informal guidance. Acting Chair Mark Uyeda proved this point by terminating the agency’s Staff Legal Bulletin (SLB) 14L, which has opened the floodgates for activist shareholders to propose environmental, social, and governance (ESG) resolutions.

Under Uyeda’s watch, the SEC has adopted SLB 14M, which restored the agency’s prior three guidance documents (I, J, and K) while preventing any further disruption to the 2025 proxy review season.

The greatest detriment of SLB 14L was that it undermined a company’s ability to exclude politicized proposals that run afoul of the firm’s primary interests. Under former Chair Gary Gensler, the 2021 guidance hamstrung a firm’s ability to access legal categories of exclusion. These time-saving remedies kept ESG measures off a company’s annual proxy ballot, the slate of agenda items that public companies consider each year.

How the SEC’s guidance undermined federal and state law

Prior to SLB 14L, corporate boards enjoyed broad discretion to reject any ESG proposals that fell under one of the 13 categories of exclusion. Such categories provide substantive bases for excluding shareholder proposals that fail to comply with Rule 14a-8 of the Securities and Exchange Act of 1934.

Notably, SLB 14L revised the SEC’s interpretation of “economic relevance” and “ordinary business exclusion,” diminishing a company’s ability to invoke these crucial avenues for excluding controversial shareholder proposals.

Not only was this problematic from a federal standpoint, as the SEC misinterpreted the legal remedies firms enjoy under 14a-8, but it also undermined state corporate law. By revoking SLBs 14J and 14K, the SEC overrode state corporate law that deferred to a board’s expert judgement to exclude matters threatening its ordinary business. Thankfully, SLB 14M restores corporate access to both the economic relevance and business exclusion categories among other pathways of relief.

The economic relevance category (Rule 14a-8(i)(5)) allows companies to exclude proposals that target operations accounting for less than 5 percent of the firm’s total assets, net earnings, and gross sales. Importantly, this category allows companies to dismiss dozens, even hundreds, of economically insignificant proposals from their proxy ballot. This category was crucial for companies denying ESG proposals, which very often account for minimal portions of the firm’s economic activity.

The business exclusion category (Rule 14a-8(i)(7)) enables firms to reject proposals that fall under its “ordinary business.” This means that companies can exclude ESG initiatives that dictate what the firm can or cannot do on a regular basis. Similar to the economic relevance category, the business exclusion represents a major reservoir of corporate relief from ESG. It prevents what the SEC calls the “micromanagement” of corporate affairs by the politicized interests of activist shareholders.

How SLB 14L disrupted proxy review using unrestrained ESG

As intended by the SEC, SLB 14L brought massive disruption to the 2021-2024 proxy review seasons. Under this guidance, the SEC’s Division of Enforcement no longer deferred to a company’s broad discretion to exclude ESG proposals under the legal categories of 14a-8.

This made companies far more cautious and less willing to file “no action” letters with the Division of Enforcement. No action letters are sent to guarantee approval from the SEC that it will not enforce legal penalties against firms that exclude certain proposals from their ballot. SLB 14L greatly narrowed the scope for permissible exclusions of shareholder proposals, making it notably more cumbersome and legally tenuous for companies to obtain no-action relief.

As consequence, companies were inundated with a flood of ESG proposals, unrestrained by the legal guardrails that once excluded them. This led to the politicization of the proxy review process, known colloquially as “ESG fatigue.” The precipitous rise in political and social proposals reciprocally led to a decreasing level of support from shareholders across every category of ESG.

When examining the proxy review numbers, the SEC intervened far more to deny no-action letters during the 2022 season. As a result, companies issued 25 percent fewer requests for relief to the SEC in 2023 than in 2022, indicating that they were “less willing to invest resources and energy in challenging some proposals.” This stems from a chaotic end to the 2021 season that saw the first major increase in prescriptive proposals submitted.

To its credit, the SEC appeared to reverse course and accept 68 percent of no-action letters submitted in the 2024 proxy season. However, the effect of this is somewhat diminished by the fact that companies filed far more requests to exclude a larger number of ESG proposals. So, much of agency’s decision to grant no-action may have been motivated by a need to quell the abnormal rise of ESG initiatives.

What to expect under SLB 14M

Now under new leadership, the SEC has rightfully revoked SLB 14L and has thus restrained ESG-themed shareholder activism. This provides the perfect opportunity to reverse the avalanche of paperwork previously required to respond to such not-profit-related proposals. Under SLB 14M, the SEC has restored its longstanding tradition of taking a “case-by-case” review of shareholder proposals that trigger significant policy issues for targeted companies. The SEC will account for each firm’s unique circumstances and business interests when considering no-action letter requests.

Moving forward, Congress can codify 14M’s effects into law by adopting the “Stop Woke Investing Act.” This important bill caps the number of shareholder resolutions that a public company can include in its proxy ballot in a given year. It would also ensure that companies only consider materially relevant proposals that contribute in some way to their financial performance.

Adopting the Act would safeguard companies from the dangers of ESG long term, particularly against any future SLB threatening to undermine the proxy review process.