Academic journal article Washington and Lee Law Review

From Public Policy to Materiality: Non-Financial Reporting, Shareholder Engagement, and Rule 14a-8's Ordinary Business Exception

Academic journal article Washington and Lee Law Review

From Public Policy to Materiality: Non-Financial Reporting, Shareholder Engagement, and Rule 14a-8's Ordinary Business Exception

Article excerpt


In 2017, shareholder proposals urging corporate boards to report on their climate-related risk made headlines when they earned majority support from investors at ExxonMobil, Occidental Petroleum, and PPL.1 The key to this historic vote was the support of Blackrock, State Street, and Vanguard, which broke with management and cast their votes behind the proposals.2 The 2018 proxy season saw several more climate-related proposals earn majority support, and in 2018 and 2019 record numbers of proposals were withdrawn after the companies agreed to respond to shareholders' requests.3

The highly visible 2017 proposal illustrates a number of key aspects of shareholder activism today. The first is the mainstreaming of shareholder activism from its origins in the civil rights and socially responsible investment movements to a point where the largest institutional investors are integrating "environmental, social, and governance" (ESG) or "non-financial" factors into their voting and investment policies.4 Second, the proposal shows how the focus of shareholder activism around ESG matters has broadened beyond the civil rights, labor, and human rights issues that were its major target throughout much of the twentieth century. Climate change risk and corporate environmental impacts are now among the top subjects of shareholder proposals today.5 Third, as explained below, mainstream investors like Blackrock and Vanguard are supporting ESG-oriented activism for economic reasons, not only or even necessarily because of commitments to a particular ethical or political position.6 And finally, this proposal is one of many ESG proposals (about 20 percent of all environmental and social proposals in 2018) that seek greater corporate transparency about non-financial risks and impacts, either to better inform investor decision-making or to prompt changes in corporate practice.7

This Article focuses on the challenge of achieving corporate transparency for investment purposes and considers whether shareholder activism is the best way to achieve it. Many in the business community appear to think so.8 For example, in 2016, many corporations and law firms offered comments to the Securities and Exchange Commission (SEC) on the question of whether the agency should develop new ESG-related disclosure rules.9 Nearly all took the position that shareholder engagement and other forms of shareholder activism were the best way to improve ESG disclosure and that the SEC should leave well enough alone.10

The SEC appears to agree. Several SEC commissioners have spoken openly about their opposition to new ESG disclosure reform,11 and no such reforms have yet been proposed by the SEC. As a result, investors must rely on shareholder proposals like the ones submitted to ExxonMobil and its peers in order to obtain information that goes beyond what companies voluntarily disclose in their corporate sustainability reports or, to a limited extent, in their public filings. In contrast, many investors, governments, and international organizations now urge the need for non-financial reporting reforms that will help investors understand the financial impact of corporate environmental and social performance.12

I argue that although shareholder activism is a powerful tool to change corporate practice, it is an inefficient substitute for non-financial disclosure reform under the federal securities laws-in fact, it has impeded it. Rule 14a-8 of the federal proxy rules, which establishes the process and conditions for shareholders to submit proposals to a shareholder vote, restricts shareholders' ability to push for better corporate disclosure and also forces shareholders to frame their proposals in a way that causes companies to discount the materiality of ESG information.13 In particular, the interpretation of Rule 14a-8's "ordinary business exception," together with the rule's long use in shareholder activism around "public policy and social issues," are now discouraging support for new rulemaking that could improve investor and market access to material ESG information. …

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