Ruth Saldanha: The proxy season will soon be underway, and it looks like this year will continue to be hot for shareholder proposals. Themes such as climate change, Say on Pay, and others continue to be raised at company meetings. But an increasing number of shareholder proposals are being submitted to the U.S. SEC for no action decisions. If the SEC agrees to keep these proposals out, then they don't come to the shareholders for a vote at all. So, why is this happening and what does this mean for the 2022 proxy season? Morningstar's Director of Stewardship, Jackie Cook, is with us today to discuss this. Jackie, thank you so much for being with us today.
Jackie Cook: Thanks, Ruth. It's nice to be here.
Saldanha: It seems like the number of no action requests to the SEC have indeed increased this year. Is this the case, and if so, why?
Cook: So, it's difficult to evaluate whether the number of no action requests has increased for a specified period. I mean, it's reasonable to assume that it has, and that's because we're hearing that a lot of shareholder resolutions have been filed this season, perhaps a record number of shareholder resolutions. On the other hand, I think that we're seeing a lot of intense engagement, preseason engagement, and this could lead to more withdrawals than usual. Just depending on how these engagements go, now, of course, shareholders go into engagement with quite a strong hand this year, and they may not be willing to withdraw unless their full resolution or proposal has been met. So, it's hard to say ahead of time whether we'll see more issues on the proxy ballot.
What might increase the number of no action requests is that under new rules that the SEC adopted at the end of 2020, more shareholder resolutions may be excludable because of new thresholds that were introduced requiring higher levels of support for previously filed shareholder resolutions. On the other hand, the SEC introduced interpretive guidance at the end of 2021, making it less likely that they would exclude a shareholder resolution on the basis of the ordinary business rule. So, there are a few reasons why we might see no action request increase or decrease.
Saldanha: So, what does this mean for shareholder proposals that have been excluded? I mean, can they never be filed again?
Cook: Well, under the new thresholds the excludability applies to resolutions that have been filed in the previous five years, and it also applies to ownership requirements. But let me just focus on the resubmission thresholds. So, the new rules that were put in place under Jay Clayton's chairmanship of SEC that shareholder resolutions for resubmission have to be supported by at least 3%, 6% or 10% of shareholders if subsequently filed one, two or three times within a five-year period. Now, those thresholds are 5%, 15% and 25%, making it quite a lot more difficult for shareholder resolutions to achieve the threshold, especially the three-year resubmission threshold at companies where insiders control a significant proportion of the vote. But they can be filed. There can be filed outside of their five-year window. And there is another factor that may impact whether or not they can be refiled, and that is whether they're judged to be addressing substantially the same subject matter. And that's a judgment call on the part of the SEC.
Saldanha: So, what does all of this mean for the 2022 season?
Cook: So, for the 2022 season, I think we're seeing a lot of interest in the proxy process ahead of the season. So, we're seeing a lot of discussions of the resolutions that have been filed, a lot of speculation about vote outcomes and about what's actually going to appear on the ballot. We're certainly going to see withdrawals. We're going to see strong dialogue between shareholders and resolution proponents. I think we're also going to see what we are going to see resolutions on the ballot that are specifically around climate more targeted at companies setting goals and disclosing their progress towards these goals. So, we're going to see shareholder resolutions becoming more specific about what companies should be pursuing or achieving or disclosing, especially with relation to climate change.
Saldanha: What are some of the themes investors should keep an eye on this season? Do you think there could be any surprises for shareholders?
Cook: Well, there are always surprises for shareholders. So, I don't like to – and I'm always surprised. So, I mean, it might be easier to talk about what I won't be surprised to see. I mean, I think I am expecting to see that support for environmental and social issues on the proxy ballot increases again, and this would be for a number of years running we've been seeing support increasing. But I won't be surprised to see a lot of coverage of the proxy season. Surprises I think will come from votes on the bread-and-butter corporate governance issues. So, the director elections, Say on Pay. I think we should watch these closely because a lot of investors, a lot of big institutional investors are talking about climate governance and about board ESG competence. And so, we may see more focus on how ready boards are for climate transition and we may see investors applying their votes in director elections and Say on Pay with these considerations in mind.
Saldanha: Great. Thank you so much for joining us with your perspective, Jackie.
Cook: My pleasure. Thanks Ruth.
Saldanha: For Morningstar, I'm Ruth Saldanha.
