Center Letter Requests SEC Revisit Abrupt Shift on Company-Sponsored Shareholder Resolutions

Corporate Governance

This week, HR Policy's Center On Executive Compensation joined with 16 other organizations in requesting the SEC reverse a controversial decision that is "extremely disruptive to fundamental governance" and is likely to have far reaching implications in the shareholder proposal process, including proposals on executive compensation.  In December 2014, the SEC staff issued a "no action" letter indicating that it would not recommend enforcement against Whole Foods if it decided to exclude a proxy access proposal offered by gadfly activist James McRitchie, because it conflicted with a proxy access shareholder proposal that the company had offered.  On January 16, however, SEC Chair Mary Jo White made a surprise announcement that the SEC was not only reversing the Whole Foods no action letter, but the agency would not issue any further opinions on whether companies could exclude shareholder proposals which conflict with management proposals until the SEC staff conducted a review of the agency's position on the issue.  The Center's letter states that the reversal represents a significant departure from the well-established precedent that companies are permitted to exclude shareholder proposals that directly conflict with a proposal offered by management, which helps mitigate the confusion that results from competing proposals.  The letter also addresses the unconventional manner in which such a significant policy shift was made, noting that the decision came in the middle of the 2015 proxy season and "not only after the deadline for submission of no-action request letters for many issuers had passed, but also after the boards of many companies had taken action [on excluding or including shareholder proposals]."  In addition, the shift did not include any apparent consideration or vote by the SEC's other four Commissioners, representing a departure from standard SEC protocol with regard to major policy decisions.  The SEC is expected to evaluate its position on the issue this year, but meanwhile it has effectively become more difficult for companies to implement reasonable governance and compensation changes through the shareholder proposal process.  For example, some companies have offered proposals to modify their policy on accelerated vesting in a change-in-control.