How ‘ordinary’ is the business of climate change?

“In our view, the proposal seeks to micromanage the company”, wrote the US Securities and Exchange Commission (SEC) in a letter addressed to Bank of America on February 29.

The proposal being referred to was filed by a bevy of activist shareholders including the non-profit advocacy group As You Sow. It asked for a detailed report on the bank’s financed emissions in automobile manufacturing, energy and power. The SEC’s response means the resolution will not be discussed at the bank’s 2024 annual general meeting.

If companies can convince America’s securities regulator that a particular climate-related shareholder resolution seeks to micromanage the company, they have sufficient ground to avoid discussing it at the AGM.

Officially, this is known as the “ordinary business rule”. In the 2024 proxy season, the rule will play a critical role and a familiar debate will resurface: is climate change ordinary business?

Ordinary business

The ordinary business rule has its roots in the 1970s and rests on a simple logic - most day-to-day business operations should come under the exclusive ambit of company management.

Back in the 1980s, what was ordinary or not came down the SEC’s interpretation of whether “it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting”.

Today, for companies seeking to avoid a climate-related shareholder resolution, the ordinary business rule is one among many legal justifications available. A justification they make through a no-action request to the SEC.

In 2023, 26% of these requests cited the ordinary business rule as the basis for exclusion. It was by far, the least successful in convincing the SEC.

How ordinary is climate change?

Whether a company’s net zero plan is ordinary business or not comes down to two factors. First, the subject matter. The SEC has a clear stance here. Any issue of significant societal and company impact, such as climate change, is not ordinary business. Yet, the devil is in the details and the rule is hardly applied uniformly or ubiquitously.

“The staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company”, says the SEC.

Such considerations have brought several climate-related shareholder resolutions into AGMs.

In the 2023 proxy season, a shareholder resolution at Amazon demanded a report on the carbon footprint of its employee pension plan. Company management argued that the 401(k) plan was ordinary business i.e. it was not something shareholders should have a say on.

The SEC dismissed Amazon’s claim. Its official verdict states: “as such, the focus on the retirement accounts’ impact on climate change and the impact of climate change on the employees as retirees, transcends ordinary business”. The 401(k) was ordinary business. Its carbon footprint was not.

Too granular, too complex?

The second critical factor the SEC considers is the prospect of micromanagement.

Micromanagement is a complex legal argument to make. Companies need to convince the SEC that the proposal limits management’s discretion over the company’s net zero plan.

Limits on discretion are a matter of how the resolution is worded. If a climate-related shareholder resolution simply asks a company to set an interim target or seeks a report on its decarbonisation progress without recommending a methodology, it is unlikely that the management’s discretion is curtailed.

The more detailed the shareholder demand is, the more likely it is that discretion is limited. Granularity is the Achilles heel of climate-related shareholder resolutions.

“We will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management”, says the SEC’s guidance.

Then there is the question of complexity. If a matter is deemed to be so complex that the average shareholder is not expected to understand it sufficiently, the threshold of micromanagement is breached.

In Bank of America’s case, the company argued that the resolution was complex, granular and prescriptive.

“When proposals request the adoption of specific approaches to address climate change matters, the extent to which a proposal permits the board or management to retain discretion is particularly relevant”, the bank says in its no-action request. The SEC agreed.

There is now a strong legal precedent for companies to convince the SEC that climate-related shareholder resolutions could result in micromanagement. For these resolutions to make it into AGMs, they will need to be meticulously designed and strategically worded.

Climate change might not be ordinary business but the art of filing successful climate resolutions in 2024 will be anything but ordinary.