The Securities and Exchange Commission (SEC) has announced a major policy reversal on shareholder resolutions which is likely to lead to an increase in ESG risk and succession planning-related proposals.

In a legal bulletin published this week, the SEC said that companies could no longer automatically exclude CEO succession planning or ESG risk-related resolutions using the "ordinary business" clause. The bulletin spells out the analytical framework that will be used to determine proper omission from proxy statements under Rule 14a-8(i)(7), the "ordinary business exclusion".

On ESG risk, the SEC will take a case-by-case approach to determine whether a proposal will be rejected based on “the subject matter to which the risk pertains or that gives rise to the risk.” Specifically, it will consider whether the underlying subject matter of the risk evaluation transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote.

On succession planning the bulletin notes the marked increase in requests for these proposals over the past two proxy seasons. Such proposals typically request that the companies adopt and disclose written and detailed CEO succession planning policies with specified features, including that the board develop criteria for the CEO position, identify and develop internal candidates, and use a formal assessment process to evaluate candidates. In the past, the SEC allowed companies to exclude these proposals because they were regarded as ordinary business. This will no longer be the case.

“We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce.”

In 2009 a survey by the National Association of Corporate Directors (NACD) revealed that of the 600 companies in its survey:

• 43% have no formal CEO succession plan
• 61% have no CEO-replacement plan in an emergency
• 61% have no internal candidate development plan
• 67% have no long-term (five year) succession plan

According to Scott Fenn of ProxyGovernance, the SEC's reversal is being heralded as a "major victory by shareholder advocacy groups who had mounted an effort to reverse the SEC position on risk taken during the Bush Administration". In December 2008, a group of 60 investing institutions wrote to newly elected President Obama calling for a reversal of the SEC staff position on financial risks. On Sept. 22, a group of 15 investors met with Meredith Cross, the new director of the SEC Division of Corporate Finance, and criticised the risk evaluation exclusion.

Laborers’ International Union of North America’s (LIUNA) Staff and Affiliates Pension Fund has already indicated its intention to use the new ruling to submit  CEO succession planning resolutions for the 2010 proxy season. Since 2007, LIUNA has engaged with approximately 50 companies on succession planning and commenting on the SEC annoucement, LIUNA General President, Terry O’Sullivan said: "This is a major victory for shareholders and we intend to file CEO succession proposals at a number of corporations this year.”

Links

SEC Staff Legal Bulletin >>

National Association of Corporate Directors >>

LIUNA >>