Broc Romanek reports:
A few weeks ago, Corp Fin issued two interesting no-action responses to Goldman Sachs regarding the evaluation of risk. Through them, I think the Corp Fin Staff is trying to define the contours of the risk assessment guidance provided in Staff Legal Bulletin 14E back in '09. As you'll recall, the Staff indicated in that SLB that it will evaluate whether a proposal is excludable under 14a-8(i)(7) by focusing on the type of risk that the proposal seeks to address (i.e., climate change risk is not excludable but proposals relating to ordinary business risk are).
Interestingly, the first Goldman letter seems to turns this concept on its head. In that letter, the Staff concluded that Goldman could not exclude a proposal requesting:
"that the board prepare a report disclosing the business risk related to developments in the political, legislative, regulatory, and scientific landscape regarding climate change."
That did not sound like ordinary business risk to the Staff. In denying exclusion, the Staff noted that:
"We are unable to concur in your view that Goldman Sachs may exclude the proposal under rule 14a-8(i)(7). In arriving at this position, we note that the proposal focuses on the significant policy issue of climate change. Accordingly, we do not believe that Goldman Sachs may omit the proposal from its proxy materials in reliance on rule 14a-8(i)(7)."
In contrast, the following day, the Staff addressed a proposal in the second Goldman letter that:
"the board report to shareholders the risk management structure, staffing and reporting lines of the institution and how it is integrated into their business model and across all the operations of the company's business lines."
Given the role that risk played in the collapse of so many Wall Street firms - and the issues that Goldman has had to address with the SEC - I think some might have expected the Staff to take the position that this proposal raises significant policy issues. But not so as the Staff allowed the exclusion, noting that:
"There appears to be some basis for your view that Goldman Sachs may exclude the proposal under rule 14a-8(i)(7), as relating to Goldman Sachs' ordinary business operations. We note that the proposal relates to the manner in which Goldman Sachs manages risk.We further note that the proposal addresses matters beyond the board's role in the oversight of Goldman Sachs' management of risk."
So a shareholder proposal for a report on climate change risk management, taking into account "the political, legislative, regulatory, and scientific landscape," must be included even though it is far from certain that it will have any effect on Goldman at all. In contrast, we do know quite a lot about the impact of financial risk management on systemically important institutions like Goldman, all it bad news for investors, but that proposal stays out.
The first proposal came from an ecomentalist outfit, which is obviously less concerned with the return on its investment than with using that investment as a soapbox to spout the climate change gospel. Although the second came from one of those Catholic orders that usually pushes social proposals, this proposal actually relates to real financial/investment concerns.
If you were an investor, which proposal would you think was relevant to your investment? If you were an investor, would you want your investment taxed so that some ecomentalist with a few shares can force the company to solicit proxies on this proposal at company expense?
Once again, I argue that the SEC and courts should ask whether a reasonable shareholder of this issuer would regard the proposal as having material economic importance for the value of his shares. This standard is based on the well-established securities law principle of materiality. It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent. Absent such a standard, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else’s property—the company is a legal person, after all, and it is the company’s proxy statement at issue—for use as a soap-box to disseminate their views. Because the shareholders hold the residual claim, and all corporate expenditures thus come out of their pocket, it is not entirely clear why other shareholders should have to subsidize speech by a small minority.