The latest craze on Wall Street is the “environmental, social, and governance,” or ESG movement, whose supporters profess to do good while making money. Many believe they got an early Christmas gift when the Securities and Exchange Commission (SEC) quietly announced a policy change to the shareholder proposal process that empowers political activists to disrupt corporate boardrooms across America. But that gift may be one they want to return.
For years, the SEC required shareholder proposals to have a nexus to the business of the company to be considered for a vote at a company’s annual meeting. The reason for this is simple. Without a relationship to the business, a proposal cannot improve the economic value of the company and the return to its shareholders. Thus, expending any resources on such proposals would be a waste of shareholder time and money.
However, over the past few years, a vocal minority of political activists and Washington politicians aligned with the ESG movement began demanding a change to that policy, and the SEC obliged. Now, unelected career bureaucrats can approve any shareholder proposal they believe has a “broad societal impact” even if that proposal has no nexus or relationship to the business of the company.
This change effectively strips Senate-confirmed SEC Commissioners of their power and delegates it to career staff under the Chair’s control. If the policy remains, then in future proxy seasons, the Chair, not the full Commission, will direct the staff to decide what issues have a “broad social impact” based upon the ideological views of whatever political party is in the White House.
As troubling as this is, the SEC’s announced policy change also occurred in the dark of night without a notice-and-comment rulemaking. This action is a blatant violation of the Administrative Procedure Act, which requires public input before a rule can finalized, and it continues a disturbing trend of regulators making up rules as they go along, without any input from the public or Congress.
The SEC is essentially forcing the American public to accept an end run around the democratic process so it can advance its own political priorities.
The SEC’s new policy also seems to suggest the scope of its “broad societal impact” clause will only capture ESG-related proposals. But what happens when a shareholder submits a proposal regarding subject matter that does not fit the movement’s definition of ESG?
For instance, what if a company receives a proposal calling on the company’s CEO to take a side on abortion, immigration, or religious freedom issues? Or one demanding the company defend human rights, end genocide, and protect the environment by condemning the Chinese Communist Party? Or one calling on the company to oppose any effort to “defund” police departments across the country? You get the point.
Surely these proposals also involve topics that have a “broad societal impact”. Will the SEC allow these topics to be voted on at a company’s annual meeting? Does the answer depend on which party is in the White House?
Not only will this policy embolden political activists along the ideological spectrum, but it will also turn corporate boardrooms into debate societies and needlessly divide shareholders along political lines. By injecting someone’s view of morality into the operation of public companies, the SEC has opened a can of worms that will making doing business very complicated, very quickly.
The SEC’s mission is to protect investors who put their capital at risk, facilitate small business access to our capital markets, and maintain market integrity. Nothing in that mission or any of the statutes governing the agency authorizes the SEC to force public companies and their shareholders to take sides on polarizing political questions that don’t impact the company’s business operations.
As Justice Oliver Wendall Holmes once sagely advised, “morality, per se, has no objective validity and moral terms, as used in law, lose their ethical meaning.”
The agency needs to step back from being a moral arbiter of shareholder proposals and focus on its core mission. America’s working families need the SEC, now more than ever, to protect them from anyone who seeks to politicize our financial markets.
- Mr. Iacovella is the Chief Executive Officer of the American Securities Association.
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