An SEC decision allowed EOG Resources to exclude a shareholder resolution on GHG emissions
A recent SEC decision allowing EOG Resources, one of the largest U.S. independent oil & gas companies, to exclude a shareholder resolution on GHG emissions reduction targets goes against past precedent, and may be a harbinger of further limits on shareholder engagement. Some companies may be pleased with the development, but they should be careful what they wish for.
The U.S. Security and Exchange Commission’s (SEC) decision to permit Houston-based EOG Resources, Inc. to exclude a shareholder resolution calling for the company to establish GHG emissions reduction targets runs contrary to its historic refusal to do so[1] for nearly identical resolutions. By some counts, more than 130 such resolutions[2] have been filed in corporate proxies over the past several years, in some instances over objections from the board identical to those raised by EOG, and never been excluded on that basis.
This particular resolution simply called for EOG to adopt “company-wide, quantitative, time-bound targets for reducing greenhouse gas (GHG) emissions…” and issue a report on the same. In other words, it neither prescribed the targets, nor the method, nor the quantity of emissions reductions required. Moreover, the resolution was precatory, meaning that the company was not obligated to implement it even if it received the support of the majority of shareholders.
Why The Fuss?
If the resolutions are merely precatory, then why the fuss? In short, management objected on the basis that endeavoring to meet any GHG reduction targets of its own making, over any time period, would interfere with the regular operation of its business; namely, to focus exclusively on the economic development of oil and gas assets, climate concerns notwithstanding.
EOG’s objections relied primarily on the “ordinary business” rule, which permits exclusion of proposals that “deal with a matter relating to the company’s ordinary business operations.”[3] An exception to the rule exists for matters that invoke significant social policy issues transcending day-to-day operations (even if they impact those operations). The SEC has relied upon this exception in the past, refusing to issue “no action” letters for a range of climate-related shareholder resolutions.
The decision on the EOG resolution likely flows from a subtle but significant change in SEC policy. In a little-recognized SEC Legal Bulletin in November of last year, the SEC indicated that company boards, bound by fiduciary duties, should be the primary gatekeepers for determining whether a matter is of such significant social concern that it merits a shareholder vote. On its face the point may seem benign, but in effect the SEC has shifted its obligation to decide what constitutes social policy to the company’s board. This comports with the view of many corporations’ views that shareholder views on issues of significant social importance are playing an outsized role in the management of the company.
Will the SEC Decision Embolden Climate Laggards?
It remains to be seen whether the SEC will defer to company boards on related resolutions. It did reject a similar challenge from Chevron, which argued that disclosing information sought by shareholders would impede its litigation defense. By and large, similar objections did not surface with respect to other climate-related resolutions this year, but the SEC’s decision is likely to embolden issuers next year.
This is certain to cheer those companies that would prefer the climate issue to go away, but it is unlikely to have that result. The resolution process cannot compel a company to take a particular course of action, but it can provide a “poll” of investor concerns and priorities. Excluding such resolutions will deprive EOG of a key survey of its investor base and force investors to register their concerns through other channels, such as annual votes on remuneration, auditor selection and board confidence. The power of proxy access, now instituted at a number of major corporations, has given shareholders additional abilities to influence a company’s strategic direction.
Ultimately, even companies can (or should) agree that they are run for the benefit of their investors. Does EOG want to know how significant the climate issue is to its investors? Should it? It should probably come as no surprise to EOG that it has found itself on a list of companies that Danish pension fund PKA will divest from based on EOG’s unwillingness to adequately address climate concerns.[4] One is reminded of Blackrock CEO Larry Fink’s warning to CEOs last year that companies which fail to demonstrate a long-term strategy that accounts for important social issues risks “los[ing] the license to operate from key stakeholders.”
Robert Schuwerk – Executive-Director (North America)
[1] The SEC granted EOG a “No Action” letter. A “No Action” letter is, in effect, a promise to the company that the SEC will not take enforcement action should the resolution be excluded from the proxy statement to be voted on at the company’s annual general meeting of shareholders. Companies wishing to exclude such resolutions will seek these opinions in lieu of a more alternative, and lengthy, litigation process.
[2] https://www.axios.com/oil-producers-climate-change-exemption-e3887656-42c0-4510-ad0d-6118cc3aef94.html
[3] Rule 14a-8(i)(7) of the Securities Exchange Act of 1934.
[4] http://www.pionline.com/article/20180412/ONLINE/180419948/denmarks-pka-divests-from-35-oil-and-gas-companies
