Shareholders Brace for Less Proxy Power in Second Trump Term

Investor activists are preparing for President-elect Donald Trump’s SEC to discard policies that made it easier for them to press companies on their environmental and social practices through the proxy process.

Companies currently can turn to the Securities and Exchange Commission for advice when they would like to keep a shareholder proposal off their annual meeting ballot, giving the agency a role as referee in the process. Guidance issued under President Joe Biden’s SEC reversed policies under the first Trump administration that had granted companies more leeway to bar proposals on social or ethical issues that did not have a significant impact on their business.

Environmental and social proposals proliferated under the Biden administration’s more permissive policy, and even those that did not pass ratcheted up pressure on businesses to take steps ranging from disclosing political spending to examining pay disparities across their workforce to studying ways to reduce plastic packaging that’s used once and thrown out.

But the Biden guidance, known as a staff legal bulletin, was not a formal regulation. The incoming administration could easily dismantle it and bring back the policies of the first Trump administration. Efforts on Capitol Hill to give companies more authority to keep shareholder bids off their ballots are also poised to gain momentum in the next Congress with Republicans in control of both chambers.

One such effort, a bill House Republicans passed in September, includes a provision to give companies limitless power to scrap any shareholder proposal they want.

The likely return to more restrictive proxy policies has some shareholder groups on edge.

“The attack on shareholder property rights is of significant concern,” said Danielle Fugere, president and general counsel for As You Sow, which has advocated for proposals on climate change; diversity, equity and inclusion; ocean plastics; and political spending.

The shareholder proposal process has worked for decades as an orderly way of allowing the people or institutions who invest in companies a say in how those businesses operate, Fugere said. To limit types of proposals that make it onto ballots would introduce market instability, she said.

“What’s being proposed, and what we’ve seen out there is going to be highly detrimental to the shareholder market—to transparency, to expectations” and to issuers, she said.

Possible Paths

SEC regulations are difficult to overhaul because they require the agency to propose and approve a new rule modifying or reversing the old one, which typically takes many months or years. But guidance such as the SEC’s staff bulletin on proxy proposals can be quickly reversed or changed, depending on who’s in charge of the agency.

The SEC under Trump could reinstate the guidance issued during his first administration or issue new policies that limit or end the Biden-era approach. Another option would be to go through the formal rulemaking process and adopt regulations that mirror the House GOP bill.

An SEC chair named by Trump can direct the agency’s staff to change the guidance the regulator uses to interpret its shareholder proposal rules as early as January, without going through the lengthy rulemaking process.

The latest guidance, known as Staff Legal Bulletin No. 14L, dates to 2021, in the early months of Democrat Gary Gensler’s SEC chairmanship. The bulletin generally made it harder for companies to reject shareholder proposals concerning environmental, social, and governance issues because it reversed advice during the first Trump administration that businesses could block resolutions on social or ethical matters that didn’t substantially affect their operations.

The agency still sided with companies about 68% of the time in deciding which proposals would be cleared to show up on investors’ ballots, according to statistics compiled by the Shareholder Rights Group, an association of investor groups. But shareholder proposals on environmental and social issues—including anti-ESG bids— jumped 33% since the legal bulletin was issued in 2021, proxy advisory firm Institutional Shareholder Services Inc. said in a recent analysis.

The National Center for Public Policy Research, a self-described “independent conservative think tank,” used the more-lenient SEC policy toward shareholder proposals to bring a series of bids challenging current corporate DEI programs. But Scott Shepard, a lawyer for the group, said the goal was to show flaws in the proxy system that he argued doesn’t follow the Administrative Procedure Act, which sets ground rules for agency regulatory actions. If the rules change to a less-lenient SEC policy environment, “it’ll be a bit of a headache for us and for others—but it’s fine,” he said.

Indeed, Shepard’s group sued the SEC over its system. The US Court of Appeals for the Fifth Circuit tossed the center’s case in November, however, keeping in place the agency’s power to referee disputes over which shareholder proposals appear on company ballots.

“I hope it would be true that once we’ve discovered that there is no statutory basis whatever for this jerry-rigged process that doesn’t follow the APA, we would want to see it knocked down,” Shepard said.

Market Impact

One way or another, shareholders will voice their concerns over how the companies in which they’re invested operate, said Jonas Kron, chief advocacy officer for Trillium Asset Management, a firm that manages about $5.1 billion in assets with a socially conscious strategy. Absent the proxy process, shareholders could revolt and contest typically uncontroversial annual meeting votes like board directors, executive compensation or even auditors, Kron said. Or they’ll turn to the courts.

If the current system is replaced with “the Wild West,” Kron said, “you might not like what you get.”

Already on the company side Exxon Mobil attempted to bypass the SEC’s referee role to keep an environmental proposal off its ballot. A judge dismissed the case but only after the oil giant won concessions from the shareholder activist group.

There’s hope that the process will still allow shareholders of all stripes ways to engage with companies, said Mindy Lubber, CEO of investor group Ceres.

“I’m not living under a rock, but the value has been so clear that I’d like to believe some of that will continue,” she said.