Colleen Honigsberg and Robert J. Jackson, Jr. write that Exxon Mobil’s decision to sue its own investors over a shareholder proposal threatens to enervate an admittedly imperfect but ultimately valuable mechanism that provides shareholder feedback to corporate managers and helps both parties negotiate better governance outcomes.
This past January, faced with a shareholder proposal encouraging the company to accelerate its greenhouse-gas emission reduction efforts, Exxon’s management took an unprecedented step: suing its own shareholders for “abuse” of the Securities and Exchange Commission’s shareholder-proposal process. After months of litigation, one of the investors who brought the proposal, Arjuna Capital, agreed not only to withdraw the proposal but to pledge never to bring such a proposal again, finally persuading a federal judge in mid-June to dismiss the case as moot. Exxon’s tactics should worry anyone who values productive dialogue between a publicly traded company and its investors.
Shareholder proposals have long been a source of controversy, with many complaining that these proposals cause management to incur substantial costs to respond while adding little to no value for shareholders. Even the SEC agrees that many shareholder proposals are unhelpful—SEC staff approved some two-thirds of no-action requests on shareholder proposals this year, allowing companies to exclude those proposals from their proxy.
The critique that shareholder proposals provide no value, however, is overinclusive; what is true of some proposals is not true of all. As the SEC has explained, shareholder proposals can also “provide an important mechanism for investors to express their views, provide feedback to companies … and raise important issues for the consideration of their fellow shareholders….” Research has shown that these proposals have been “key drivers” of governance changes such as the destaggering of board elections to increase corporate boards’ accountability to shareholders.
Critics further ignore that many of these proposals serve to begin productive dialogue between management and shareholders but are later withdrawn without a vote, often leading to an arguably superior outcome for the firm. Consider, for example, that each year between 20% and 40% of proposals never come to a vote. Instead, they are withdrawn by the proponent after negotiations that often produce corporate commitments to analyze, or act upon, the subject of the proposal without the expense of a vote. Recent research sheds light on two underappreciated facts about withdrawn proposals and the bargaining process they reflect.
First, withdrawn proposals rarely come from the small shareholders some critics call “gadflies.” Instead, research shows that most withdrawn proposals come from institutional investors who withdraw their proposals when they are satisfied with management’s response. These institutions, studies have suggested, have “greater ability to negotiate” with management.
Second, withdrawn proposals can have beneficial effects on corporate-governance matters such as executive compensation. For example, one study finds that withdrawn shareholder proposals on executive pay are associated with subsequent changes in executive-pay practices. So even when shareholder proposals never appear in the company’s proxy, they can produce bargains that benefit all of the company’s investors. But, as the research in this area cautions, “negotiations between managers and shareholders are most effective when both parties can contribute to the negotiation process,” and “tilting the process in favor of one party has adverse effects.”
Thus, the law in this area should facilitate this form of engagement and negotiation—and consider the limited incentives of investors to bring proposals in the first place. It has long been understood that public-company shareholders—usually diversified, rationally apathetic investors—have little economic incentive to incur the costs of engaging with and monitoring corporate management.
To the degree that Exxon’s lawsuit impacts the incentives of shareholders to engage with management, it reduces them. That’s why Exxon’s litigation—and its outcome—are so troubling. Working with another shareholder, Arjuna Capital proposed that Exxon shareholders resolve “by an advisory vote to go beyond current plans, accelerating the pace of emissions reductions in the medium-term for its greenhouse gas (GHG) emissions.” Rather than seek to exclude the proposal or bargain with investors, Exxon sued Arjuna—a Delaware LLC based in North Carolina and Boston—in the Northern District of Texas, hailing their investor thousands of miles away. Although Arjuna withdrew its proposal days later, that was not enough for the judge: Only Arjuna’s pledge never to bring such a proposal at Exxon again got them out of court.
As explained above, investors have little incentive to monitor and engage with corporate management, and the shareholder-proposal process provides a backdrop for bargaining between investors and managers. The benefits of those bargains accrue to all investors. But Exxon’s lawsuit suggests that investors thinking of bringing a shareholder proposal could bear the considerable costs of being sued by the company—costs that could stop the proposal bargaining process before it has even begun. If few shareholders can justify the costs of engaging with and monitoring public-company management without the risk of litigation, even fewer can do so when a company can credibly threaten to sue.
That is especially true because the trial judge overseeing the Exxon case handled it so carelessly. As noted above, soon after Exxon sued Arjuna Capital, the investor withdrew its proposal—but rather than dismiss the case as moot, the judge produced a 23-page opinion betraying ignorance of the SEC’s shareholder-proposal rules and riddled with evidence of the judge’s priors. As to the former, the judge incorrectly ignored recent amendments to the SEC’s shareholder-proposal rules made under both the Trump and Biden administrations addressing concerns about proposals, like Arjuna’s, that had previously been voted on by shareholders. As to the latter, the judge recited management’s talking points in this area as if they were facts, volunteering a view that it is “true” that “Arjuna’s leadership is ‘manifestly biased’ against Exxon,” and that the “SEC is behind the ball on [the shareholder proposal] issue.” Having to litigate is always costly; having to litigate in front of a judge who has already decided against you is especially so.
These concerns are exacerbated by the court’s insistence that Arjuna pledge never to bring such a proposal at Exxon again. As noted above, few investors have incentives to engage in such monitoring. Requiring activist investors to pledge not to do so to avoid costly litigation in an obviously unfriendly venue simply deprives the market of an already scarce resource: investors willing to spend time and money on monitoring management. And if other companies follow Exxon’s strategy, both corporate managers and investors will be deprived of the benefits that such investors produce by putting forth shareholder proposals.
Indeed, the very existence of Exxon’s lawsuit, and the Texas court’s obvious sympathy to it, risks deterring investors from monitoring corporate management through shareholder proposals. Although Exxon, the Business Roundtable, and the Chamber of Commerce have long taken the view that such proposals are strictly costly, the economic evidence suggests that a more nuanced view is appropriate. Protecting the valuable aspects of these proposals should be a priority for the SEC and the investors it protects. Should another case like this find its way into a similarly sympathetic courtroom in the future, both the SEC and institutional investors should ensure that the court has the benefit of more nuanced economic analysis of shareholder proposals
Authors’ Disclosures: Colleen Honigsberg is Associate Dean of Curriculum and Professor of Law at Stanford Law School and serves as an officer of the SEC’s Investor Advisory Committee. Robert Jackson is professor of law at NYU School of Law and was a Commissioner of the U.S. Securities and Exchange Commission from 2018 to 2020. Read ProMarket’s Disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
