Annual Corporate Governance & Executive Compensation Survey

Shearman & Sterling LLP 52 | Shareholder Proposals 2019 – ESG No-Action Letter Trends and Strategies SHAREHOLDER PROPOSALS SEEKING NEW BOARD COMMITTEES TO OVERSEE ESG MATTERS ESG-LIMITING PROPOSALS One interesting phenomenon in the area of ESG-related shareholder proposals is the emergence of what can only be characterized as "ESG- limiting proposals" by proponents who argue that companies should not be engaging in voluntary efforts to support environmental sustainability or other initiatives. For example, proposals entitled "Greenwashing Audit" were brought A number of shareholder proposals were brought during the 2019 proxy season requesting companies to create board committees to oversee certain ESG-related topics. While several of these were successfully excluded on ordinary business grounds, 10 the outcomes of others were determined on substantially implemented grounds. Apple received a request to establish an international policy committee to oversee policies including human rights, foreign governmental relations and international relations affecting the company's international business, especially in China. 11 Verizon was asked to establish a public policy and social responsibility committee to oversee its policies and practices that relate to public policy issues that may affect the company's operations, performance, reputation and stockholder value, including, among other things, human rights, corporate social responsibility and political and lobbying activities and expenditures. 12 ExxonMobil was requested to establish a climate change committee to evaluate its strategic vision and responses to climate change, and better inform board decision making on climate issues, indicating that the charter should explicitly require the committee to engage in formal review and oversight of corporate strategy, above and beyond matters of legal compliance, to assess the company's responses to climate-related risks and opportunities, including the potential impacts of climate change on business, strategy, financial planning and the environment. 13 In each case, the company concluded it could exclude the proposal under Rule 14a-8(i)(10) on the basis of substantial implementation after describing the existing board committee with oversight responsibility for the referenced subject matter and the extensive disclosures the company makes about oversight and policies on the relevant matters. The SEC staff concurred in the case of the Apple and Verizon requests for no-action relief, but was unable to concur in the case of the ExxonMobil letter. It is difficult to determine whether the different outcome in ExxonMobil was related to some perceived difference in the analysis in the no-action letter requests (although that is not apparent on the face of the letters). The result in ExxonMobil may also have been based on the proposal's more specific references to charter requirements in the charter of the proposed committee that perhaps could not be demonstrated to exist in the existing board committee charters, although it would seem a bit overly technical to prevent exclusion simply because the proposal asks for specific charter language. Given the success of similar letters on the basis of the ordinary business exemption, the result suggests that companies faced with new committee proposals should base their exclusion requests on both the ordinary business and substantially implemented exemptions wherever possible. 10 See, e.g., Amazon.com, Inc. (March 28, 2019), McDonald's Corporation (March 12, 2019). 11 See Apple Inc. (November 19, 2018). 12 See Verizon Communications Inc. (February 19, 2019). 13 See ExxonMobil Corporation (April 2, 2019). 14 See Duke Energy Corporation (March 12, 2019), Exelon Corporation (March 12, 2019). at Duke Energy and Exelon Corporation by the same proponent, in each case, requesting an annual report on actual incurred costs and associated benefits to shareholders, public health and the environment of the company's voluntary environment- related activities. 14 In both cases, the companies were unsuccessful in excluding the proposals based on vagueness, ordinary business or substantial implementation grounds, despite a detailed discussion of the board's analysis and, in each case, noting that the proponent is a co- founder of a pro-coal special interest group and runs a website critical of climate change science, which the letters claimed puts the proponent at odds with the views of the majority of the companies' shareholders. CASE STUDY

• Cover