By Dan Drollette Jr | November 4, 2019
Recently, the Sierra Club submitted a Freedom of Information Request with the Securities and Exchange Commission (SEC)—and then filed a lawsuit against the agency when the SEC defied the rules and refused to release any documents. The environmental organization’s efforts are all part of an ongoing attempt to get information about why there has been a drastic increase in the number of SEC decisions that allow companies to block shareholders from voting on resolutions at annual meetings.
These seemingly petty, arcane, and obscure SEC rulings have real, hard, cold consequences. These rulings mean that, for example, shareholders of Exxon stock cannot vote on proposals that would make Exxon keep track of—and report on—its greenhouse gas emissions.
The increased, heavy-handed presence of the agency also reflects a serious push-back by fossil fuel companies and the Trump Administration, to keep the lid on what is known as shareholder advocacy.
But that’s not all, as can be seen in this interview with the Sierra Club’s staff attorney, Joshua Smith, by the Bulletin’s Dan Drollette Jr.
Smith explains what’s going on, the legal thinking behind it… and why we should care.
(Editor’s note: This interview has been condensed and edited for clarity.)
Dan Drollette Jr: Before we get into this lawsuit regarding the SEC and this Freedom of Information Act request, I was hoping to get up to speed first. It sounds like in general, there had been a long-term, general trend towards more and more shareholder involvement in the way that corporations are run—what I think is called shareholder advocacy. Can you just tell us a little bit more about what that is, exactly? And what can people reasonably expect to achieve when they go to Exxon and say: “Here’s something we’d like you to do about climate change”?
Joshua Smith: Organizations like the Sierra Club have a long history of running corporate accountability campaigns, and encouraging corporations to adopt policies—such as sustainability or climate-related goals—as part of their governance structure. And one way to do that is to encourage shareholder resolutions under the Securities Exchange Act, where a qualifying group of shareholders—which typically need to meet a relatively small threshold—can draw out, scribble out, draft a resolution. And sometimes they’re fairly straightforward and not very onerous, and sometimes they’re more complex, but the idea is that they can adopt or “draft” shareholder resolutions to propose to all of the shareholders to vote on at the annual meeting of all those who hold shares in the corporation.
And what we’d been seeing is an increasing interest among shareholders in promoting and advocating for policies that are as sustainable as can be expected for an organization or a company like Exxon.
In other words, big groups of shareholders—such as retirement fund managers or state pension managers—have been coming together in an attempt to adopt, for example, a retirement plan portfolio that is greener and more sustainable and more conscientious of the impacts of climate change on future generations. These organizations have proposed shareholder resolutions that there be principles or guidelines that the company would hopefully agree to live by.
In the case of the ExxonMobil proposal, this was a fairly innocuous shareholder proposal: It simply asked all of the shareholders to vote on a proposal that would require the company to keep track of and report its greenhouse gas emissions—more specifically, where Exxon’s emissions stood in terms of the Paris Climate Accord goals that had been established a few years back.
And so this was really just a reporting resolution from the shareholders, essentially saying “we want you, the company, to do these reports, based on public data.” Nobody was asking the company to provide proprietary information, but instead provide the public with some insight as to what role ExxonMobil has in accelerating greenhouse gas emissions—or hopefully, reducing them.
DD: There’s something I’m not quite clear on. When you talk about a resolution, are you referring to a binding thing, sort of like when Congress passes an act and says “this will be the law from now on”? Or is it more loosey-goosey, describing general guidelines and principles? In other words, are the shareholders trying to minutely oversee all the things that ExxonMobil is doing?
JS: Well, if the resolution is adopted by all of the shareholders, it could become binding. And there are different ways to frame these proposals, some of which might have less force and effect than others. But in this particular case, if a majority of the voting shareholders had adopted the resolution, it would have been a binding requirement that would require the company to report every year on what its greenhouse gas emissions were, and how those compared to the Paris Climate Accords.
Now, the important point here is that the Securities Exchange Act does allow the Securities and Exchange Commission—the regulator—to step in if shareholders put together resolutions that are too onerous for a corporation to comply with. The goal is to have a mechanism that avoids having a small group of shareholders commandeer the objectives of the corporation.
And there are some fairly narrowly defined instances, where the company can say: “Wait a second, this proposed resolution goes way too far afield, and interferes with our core business.” And the company can say: “We don’t want to include this as part of our proxy statement, our annual statement. We don’t want to put it up for a vote.” So, there’s essentially a provision that allows the company to take no action on the proposed resolution. And that’s the term for it: a “no action.” And the SEC reviews these statements calling for “no action,” and either agrees with them or disagrees with them.
What we’re seeing here is that even in instances where shareholders are trying to adopt non-binding policies or sustainability goals or informational goals—things that really don’t interfere with the fundamental workings of the corporation—they’re being marked as “no action.” In other words the company itself, the board, or whoever, and the SEC, are working together to block proposed resolutions from even coming to a vote, or from being included in their annual SEC filings.
DD: So the SEC is essentially reinterpreting the rules. Rather than be a neutral, outside judge or umpire, they’re becoming an activist in favor of obfuscation. They’re stepping in, to favor the blocking of attempts at transparency and sustainability. Is that one way to look at it?
JS: I think that’s exactly right.
And the concerns we at Sierra have are twofold, really.
One is that the majority shareholders and the SEC are working together to preclude, or box out, any attempt by other shareholder groups at transparency, or at adopting sustainability goals.
And then the second concern we have is that that the SEC has engaged in a sort of a de facto rule-making here. Normally, a company can reject a proposed shareholder resolution only in situations that fit within the parameters of certain carefully delineated standards in the SEC’s regulations—what are known as “exceptions.” Saying that a proposed resolution goes too far afield and interferes with the company’s core business is one such exception.
Some exceptions are a little bit more ambiguous than others. There are I think 13 different exceptions that allow the company to reject a proposed shareholder resolution—and the SEC can either agree or disagree on any of those 13 exceptions.
So again, our concerns are sort of twofold. One is that the SEC and the fossil fuel industry are working together under the Trump administration to decrease transparency and make it more difficult for the public to understand what the government is doing.
The majority shareholders, interested fossil fuel folks in general, and the SEC are corroborating or colluding—which may be a loaded term—but working together to preclude or box out any attempt by other shareholder groups at transparency, and at adopting sustainability goals.
And secondly, that the SEC is engaged in unlawful rulemaking, with respect to these exceptions.
DD: From the background reading I’ve done, it sounds like there has been less and less successful shareholder advocacy activities lately, especially in the past two years. The Financial Times said that there are about 50 percent less shareholder resolutions being brought than in the previous 12 months. Is that generally the tenor of things?
JS: Yes, that’s the general impression we’ve gotten. We haven’t done a comprehensive survey, but in just the last year-and-a-half, we’ve seen at least 12 situations where the SEC has stepped in to block resolutions from further action.
And these involved substantial numbers of shareholders, who put forward resolutions around climate-related issues.
And when I say substantial, again under the federal statute, there is sort of a threshold ownership requirement that any shareholder needs to hit in order to propose one of these resolutions, and have it go into the annual filings. And that makes sense. It prevents some yahoo from buying one share of a particular stock, and then proposing a bunch of different resolutions that maybe have nothing to do with the company.
But in at least 12 circumstances in the last 18 months, we’ve seen pretty significant numbers of shareholders—and we’re talking about many millions of dollars of shareholders—put forward resolutions around climate-related issues. And in those 12 situations, SEC has stepped in at the behest of other corporate entities, to block or allow the company to exclude those resolutions from further action. And that’s a significant increase; it’s unprecedented, as far as we can tell.
DD: To a non-lawyer, this sounds like one of those obscure things that the Trump administration can do to prop up the fossil fuel industry, that’s not going to get a whole lot of pushback. It’s not very visible, and the public is not going to be very aware of it. It’s manipulating the rules, just bending things enough to get their way. That’s my impression, as an outsider…
JS: I think that’s exactly right; there have been a couple of different reports on these general issues in recent months.
The problem is that one of the key ways to disrupt the emission of carbon into the atmosphere, is going to have to be corporate accountability. So that’s been the goal here for the Sierra Club for some time. And this is, as you sort of allude to, a backdoor way for the Trump administration to kind of throw a monkey wrench into that goal, and sabotage that directive.
And so yeah, it is a sort of under-the-radar mechanism that the Trump administration can, and it appears to us, is in fact using. It makes it more difficult for shareholders themselves to have a say in corporate governance. And it makes it more difficult for the public to understand what these companies are doing—and what they could be doing—to combat the catastrophic effect of climate change.
DD: So that explains why you folks filed a Freedom of Information request about the doings of the SEC, and why there was a lawsuit when they didn’t respond. But what do you folks hope will happen with this lawsuit? Are you hoping to get the SEC to admit to what it has been doing, to change its policies, to stop doing it? What’s the goal here?
JS: This is a Freedom of Information Act lawsuit, asking them to fulfill a fairly straightforward and uncontroversial requirement: that each federal agency must provide the public with information that allows the public to understand what the agency is doing.
The SEC has an obligation to provide the public with the information that we’ve requested—specifically, we’ve requested the communications between the SEC and corporate entities about climate-related shareholder proposals, and information about the process by which SEC decides whether to agree with this “no action” option that some companies like to take.
And we believe that the information itself will be illuminating for a couple of different reasons.
First, it allows people that care about the future of the planet to know exactly what’s happening behind the scenes between this particular administration and the fossil fuel industry.
This administration has exhibited a pattern of working with industry behind closed doors, to expand fossil fuel development, extraction, and burning. And we’re concerned that this same pattern of circumventing environmental restrictions has spread to other agencies, including the SEC, the EPA, the Department of Interior—all the way down the line.
So at a minimum, this information is going to help shed light on what’s going on behind closed doors.
And then second, depending on what these documents show, if there has in fact been a change in agency policy without going the through formal rule-making process, then that is unlawful in itself. To the extent that that information is contained in any of these documents, we would most likely pursue legal action under the Administrative Procedure Act.
DD: Do you have a time frame? Do you expect a judgment in a couple of months, a couple of years, or after Trump’s out of office?
JS: The Freedom of Information Act says that agencies have 20 days to provide at least a preliminary decision about whether they intend to comply with the request for documents. In this case, the SEC has refused to provide any information about whether it intends to provide any documentation at all, despite several inquiries. In fact, they said that they’re not going to be able to process this request for three years.
So that was one of the main catalysts to this particular lawsuit.
In terms of timing, we hope that within the next three-to-six months, we will have a court-ordered production schedule in place, and that’s what we’ve seen in other similar contexts.
So within that time period, we hope to have a schedule where we begin receiving documents. I certainly anticipate that we will at least begin to see some documents before the next presidential election heats up in 2020, late 2020.
DD: Were there any other comments that you wanted to make about this legislation, or just in general, about what the Sierra Club is trying to do to take on the fossil fuel interests?
JS: I would just reiterate that throughout this administration, we’ve seen a disturbing pattern of a lack of transparency—and a pattern of agencies under the Trump administration working in lockstep with industry interests, typically the fossil fuel industry, to advance their interests over the interests of the rest of the country.
With respect to climate, this is especially concerning—to see this administration routinely look the other way, and ignore significant risks.
And so again, the core of this litigation is to shine a light on what’s going on behind closed doors, and require this administration to comply with the basic obligations that it has under clear statutes like the Freedom of Information Act.
Part of our goal is simply to get the facts out there. Information allows people to make informed choices and to take action, in line with what their values are. That’s one of the reasons I think these kinds of cases are so important.
Interests and information, hopefully, will beget action.
(Fun fact: The author is a Sierra Club member, which he first joined in high school.)
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Keywords: SEC, climate change, fossil fuel companies, greenhouse gas emissions, shareholder advocacy
Topics: Climate Change, Interviews