Annual Corporate Governance & Executive Compensation Survey

Shearman & Sterling LLP Shareholder Proposals 2019 – ESG No-Action Letter Trends and Strategies | 51 MICROMANAGEMENT IN NO-ACTION REQUESTS FOR ESG-RELATED REPORTS In the 2019 proxy season, various proponents submitted similar proposals on climate change to a number of energy companies and banks, requesting the boards of those companies to adopt targets, or to include in annual reporting a discussion of targets, or to adopt policies to reduce the carbon footprint of the company's loan and investment portfolios, in each case, in conformity with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature below two degrees Celsius. 5 In the related no-action requests, the companies argued that the proposal micromanaged the company and was therefore excludable under Rule 14a-8(i)(7). In all cases, the SEC staff concurred, finding that by imposing the overarching requirement of compliance with the Paris Climate Agreement, the proposals were seeking to impose specific methods for implementing complex policies, a task that requires the ongoing judgments of management as overseen by the board. In contrast, Anadarko Petroleum received a proposal requesting a report describing if and how the company plans to reduce its total contribution to climate change and align its operations and investments with the Paris Agreement's goal of maintaining global temperatures [(sic)] well below two degrees Celsius. 6 The company convincingly argued that such a report would essentially force the company to adopt a company- wide quantitative and time-bound reporting system measured against the Paris Climate Agreement, but the SEC staff disagreed. While SLB 14J clearly states that a proposal calling for a report may be excludable if the substance of the report relates to the imposition or assumption of specific timeframes or methods for implementing complex policies, the SEC staff may have found a distinction from the letters referenced above based on the inclusion of the "if and how" language of the proposal. 5 See ExxonMobil Corporation (April 2, 2019), The Goldman Sachs Group, Inc. (March 12, 2019), Wells Fargo & Company (March 5, 2019), Devon Energy Corporation (March 4, 2019, reconsideration denied April 1, 2019) and J.B. Hunt Transport Services, Inc. (February 14, 2019). 6 See Anadarko Petroleum Corporation (March 4, 2019). 7 See SEC Release No. 34-12598 (July 7, 1976), interpreting the predecessor rule. 8 See SEC Release No. 34-40018 (May 21, 1998). 9 See, e.g., Apple Inc. (November 19, 2018), Amazon.com, Inc. (March 3, 2016), The Dow Chemical Company (March 18, 2014), Entergy Corporation (February 14, 2014). SUBSTANTIAL IMPLEMENTATION AS A BASIS FOR EXCLUSION Rule 14a-8(i)(10) allows a company to exclude a proposal if it has been substantially implemented. The stated purpose of the exemption is to avoid the possibility of stockholders having to consider matters that have already been favorably acted upon by management. 7 When a company can demonstrate that it has taken action to address each element of a proposal, the SEC staff has generally concurred that the proposal may be excluded based upon "substantial implementation." The proposal need not be fully implemented in order to justify exclusion. 8 Differences are permitted if the essential objectives of the proposal are satisfied, or where the actions taken by the company "compare favorably" to the actions requested in the proposal. 9 The "substantially implemented" exemption is important in the context of ESG-related shareholder proposals, because often, the subject matter relates to matters that go to the reputation or brand of the company or implicate issues that are otherwise integral to a company's business and therefore have already been carefully considered by the board and management. As a result, companies may have already taken steps with respect to the issue, such as engaging with shareholders and other stakeholders, publishing reports or other information or developing policies with respect to the issue. Companies should, therefore, review their existing and planned actions with respect to the subject matter of the proposal to see whether they can construct a patchwork of actions that together compare favorably with the actions requested. CASE STUDY

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