Left-wing activists weaponize the shareholder voting process by compelling publicly traded companies to adopt policies that are rooted in politics and irrelevant to their financial performance. Congressional legislation is needed to tamp down on the number of activist resolutions and focus on reforms that can improve public companies and provide financial benefits to all shareholders.
Publicly traded companies are subject to the Securities and Exchange Commission’s proxy voting rules. Section 14 of the Securities Exchange Act of 1934 governs the voting process and interactions between shareholders and company management when determining how to run the firm.
SEC Rule 14a-8, which is derived from this statute, provides 13 exceptions that allow a company to exclude resolutions from consideration for a vote, pending SEC approval. Many of these resolutions are gratuitous and fail to have a material economic effect on a company and its shareholders.
Not all shareholders agree on what constitutes material information when making voting decisions. When talking about the SEC’s climate disclosure rule, SEC Commissioner Hester Peirce stated that “[a]ll reasonable investors value financial returns, but they may diverge on which non-economic considerations are important.” Peirce explains it is necessary to avoid “spamming” investors “with information that is irrelevant to the company’s financial picture.”
The SEC is largely to blame for the increase in left-wing shareholder activism. In 2021, Gary Gensler’s SEC published a guidance document that condones activists forcing public companies to focus on self-described social, environmental, or ethical issues.
Staff Legal Bulletin No. 14L, as the guidance is known, makes it more difficult for public companies to exclude shareholder resolutions from being placed on a company’s proxy statement. Under the status quo, companies may be required to solicit shareholder votes on resolutions requiring company-wide “racial equity audits” or commitments to reduce company greenhouse gas emissions by a specified date.
Last year, public pension funds were “among the most prolific proponents on social issues” and unions submitted or supported “primarily proposals on racial equity audits and political spending disclosure.” Pension funds and unions are coercing American companies to adopt ESG-related policies.
Although support for ESG-related proposals is dwindling, the overall number of ESG-related resolutions being submitted is increasing. According to one report, “[t]he number of resolutions on environmental and social topics increased by 23 percent in 2023 to 337, from 273 in 2022.”
The number of activist shareholder resolutions continues to increase at a staggering rate. Last year, ESG-related proposals represented about 65 percent “of total submissions.” Activist proposals continue to represent a large swath of total shareholder resolutions.
ExxonMobil’s recent lawsuit is a perfect example of investor activism at work. The oil and gas company sued activist investors, Follow This and Arjuna Capital, for submitting resolutions that would require Exxon to reduce its greenhouse gas emissions. Shareholders already “rejected proposals with substantially the same subject matter” as the resolution put forth by the activists.
The California Public Employees’ Retirement System (CalPERS) recently announced its intent to vote against ExxonMobil’s CEO and board of directors as retribution for suing Follow This and Arjuna Capital. Exxon’s lawsuit is justified considering that activists have weaponized the proxy voting process by acquiring minority stakes in companies and submitting slapdash shareholder resolutions on topics that lack relevance to a company’s financial performance.
The best solution to prevent activists from submitting gratuitous resolutions is by passing the Stop Woke Investing Act (S. 3179). The bill would impose limits on the number of resolutions that can be submitted during a company’s annual proxy meeting. The number of resolutions depends on the size of the company.
The bill also requires that the resolutions have a material effect on the financial performance of the company, which would force investors to submit proposals that focus on pecuniary returns to all shareholders.
In a nutshell, the bill removes power from the SEC and activist investors and allows companies to have more latitude to determine which resolutions will receive votes. The bill narrows the scope of resolutions to ensure companies and investors do not waste time on political issues and focus more on real issues such as cash flows, debt, operating expenses and revenue.
Activist investors should not be allowed to use the proxy voting process as a tool for political gamesmanship. The Stop Woke Investing Act empowers American capitalism while simultaneously chastening ESG policies.
It is time to remove politics from boardrooms and ensure pecuniary factors are always the sole consideration.
Bryan Bashur is the director of financial policy at Americans for Tax Reform.