How Shareholders Can Fill an Environmental Regulatory Void

How Shareholders Can Fill an Environmental Regulatory Void

By Carlton Tarpley, Staff Contributor

Currently, environmental regulations are squarely in the cross hairs of both the President and Congress. Immediately after taking the oath of office on January 20th, President Trump launched “An America First Energy Plan”[1] which includes eliminating “harmful and unnecessary policies such as the Climate Action Plan and the Waters of the U.S. rule.”[2]

As President Trump seeks to downsize the Environmental Protection Agency’s (“EPA”) regulatory role, the Republican House of Representatives has been targeting both past and future environmental regulations by passing:

  • the Regulations from the Executive in Need of Scrutiny (“REINS”) Act requiring congressional approval[3] for economically significant[4] rules;
  • the Regulatory Accountability Act limiting Chevron Federal Agency deference[5] and allowing special interest groups to stall important protections through endless litigation;
  • the Midnight Rules Relief Act enabling Congress to review multiple regulations issued during the last 60 days of the previous administration;[6] and
  • two joint resolutions under the Congressional Review Act attacking EPA’s greenhouse gas emissions standards on oil and gas operations[7] and the clean water rule.[8]

Marginalizing environmental regulations may be the Presidential and Congressional agenda for the coming term, but this situation could be viewed as an opportunity for activists to create change through alternative, creative channels outside of EPA regulations. One successful channel may be shareholder proposals.

Since 2006, corporations have adopted more progressive environmental policies due to investor proposals under the Securities and Exchange Commissions’ (“SEC”) Rule 14a-8.[9] This rule requires companies to include shareholder proposals in their proxy materials when presented for a vote at their annual meetings.[10] Institutional investors, such as pension and hedge funds, first started using their shareholder power under 14a-8 to submit proposals related to issues like climate change, upon the  Department of Labor’s recommendation to consider environmental matters when investing funds governed by the Employee Retirement Income Security Act (“ERISA”).[11]

Although corporate board members have the discretion to exclude proposals if they are “not a proper subject”[12] for security holders, involve “ordinary business”[13] operations, or if their “economic significance”[14] is minimal, shareholders have overcome these hurdles by connecting environmental issues to profitability risk and executive pay, which are pertinent shareholder concerns. For example, the Office of the New York State Comptroller requested that a major energy corporation outline its plan “to enable increased deployment of distributed low-carbon electricity generation resources”[15] that would both reduce greenhouse gas emissions and protect shareholder value given the predicted solar and wind power transformation within the electric utility industry.

Environmental shareholder proposals are flooding not only oil and gas companies but also insurance companies, automakers, airlines, and hotel operators. These proposals are bringing to the forefront financial risks due to companies’ relationships with clients in the energy industry.[16] Ernst & Young found environmental and social topics represented 52% of all shareholder proposal submissions in 2015, compared to 46% in 2014 and 39% in 2013.[17] In 2016, 58 out of 302 “Future 250” company proposals raised environmental concerns.[18] The new year is predicted to generate even more proposals, potentially including nominations of board members with expertise in climate change.[19]

Ultimately, shareholder proposals must gain a majority vote to mandate corporate adoption, and no environmental proposal has yet received this level of support.[20] Nonetheless, environmentalists should not be discouraged because receiving less than majority approval is not outcome determinative. Any support greater than twenty percent is considered significant and difficult for corporate boards to ignore.[21] Furthermore, managers have an incentive to compromise with investor voting blocs before annual meetings to avoid “negative publicity or reputational damage”[22] for the company, its directors, or its executives. These situations also provide opportunities for management to cede ground on environmental issues in exchange for creative liberty in other relevant business areas.[23]

Although some argue that environmental activists are abusing Rule 14a-8 and diverting corporate attention away from shareholder wealth maximization,[24] studies show this is not necessarily the case. Firms that are early adopters of corporate policies related to environmental and social issues end up outpacing their peers in terms of stock market and accounting performance.[25]

Corporate executives are hoping the Trump Administration will constrain the Shareholder Proposal Rule by allowing greater board discretion to dismiss environmental proposals during the proxy process. However, this seems doubtful given Trump’s choice of financial advisors and agency appointments, most notably Carl Icahn as a regulatory advisor. Icahn is famous for acquiring large amounts of stock in companies like Netflix, Apple, and Yahoo and using Rule 14a-8 to advocate change and increase stock prices. It is unlikely Icahn will have much interest in creating shareholder activism roadblocks.[26]

Additionally, Trump did not select rumored forerunner Paul Atkins to be SEC Chairman. Atkins opposes environmental groups’ “pressure on corporations through the shareholder proposal process”[27] and recommends giving board members more power under 14a-8. Instead, Trump selected a corporate lawyer, Jay Clayton, to fill Mary Jo White’s position.[28] Two more SEC commission positions are expected to be filled. Nonetheless, given Trump’s inclination to curb regulatory oversight, there’s little chance any formal rule-making concerning universal proxy access will be on the agenda anytime soon, which provides an opportunity for shareholders to keep pressing environmental concerns in 2017.[29]

[1] Issues, The White House.Gov, (last visited Jan. 24, 2017).

[2] Id.

[3] H.R. 26, 115th Cong. (2017).

[4] Exec. Order No. 12866, Regulatory Planning and Review, 58 Fed. Reg. 51735 (October 4, 1993) (defining “Significant regulatory action” as “any regulatory action that is likely to result in a rule that may . . . [h]ave an annual effect on the economy of $100 million or more or adversely affect in a material way the economy…” or “[r]aise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order”).

[5] H.R. 5, 115th Cong. (2017).

[6] H.R. 21, 115th Cong. (2017).

[7] H.R.J. Res. 22, 115th Cong. (2017) (providing for congressional disapproval under Chapter 8 of Title 5, United States Code, of an EPA rule relating to “Oil and Natural Gas Sector: Emission Standards for New, Reconstructed, and Modified Sources”).

[8] H.R.J. Res. 16, 115th Cong. (2017) (disapproving a rule submitted by the Department of the Interior known as the “Stream Protection Rule”).

[9] See James R. Copland & Margaret M. O’Keefe, Environmental Issues, Proxy Monitor (2016),

[10] Shareholder Proposal Rule, 17 C.F.R. § 240.14a-8 (2010).

[11] See Sarah C. Haan, Shareholder Proposal Settlements and the Private Ordering of Public Elections, 126 Yale L.J. 262, 294 (Nov. 2016).

[12] 17 C.F.R. § 240.14a-8(i).

[13] Id.

[14] Id.

[15] See DTE Energy 2 Degree Scenario Analysis 2017, Ceres, (last visited Jan. 24, 2017).

[16] See Mara Lemos Stein, Environmental Proxy Proposals Are Making More Demands, Wall St. J. (Nov 28, 2016 2:33 PM).

[17] 2015 proxy season insights: Shareholder proposal landscape, Ernest & Young (Apr. 2015),$FILE/EY-shareholder-proposal-landscape.pdf.

[18] Copland & O’Keefe, supra note 9, at Fig. 1.

[19] See Heidi Welsh, 2016 Proxy Mid-Season Review, Harvard Law School Forum on Corporate Governance and Financial Regulation (September 9, 2016),

[20] Copland & O’Keefe, supra note 9.

[21] Stein, supra note 16.

[22] Haan, supra note 11, at 295.

[23] Id.

[24] Id.

[25] Jody Grewal, George Serafeim, & Aaron Yoon, Shareholder Activism on Sustainability Issues, Harvard Business School, available at

[26] David Benoit, Trump Names Carl Icahn as Adviser on Regulatory Overhaul, Wall St. J. (Dec. 21, 2016 5:46 PM),

[27] Patrick Temple-West, Trump Team Member Slams Unions, Activists in Favor of Businesses, Politico (11/28/16 03:25 PM),

[28] Renae Merle, Trump to tap Wall Street lawyer Jay Clayton to head SEC, Wash. Post (Jan. 4 2017),

[29] Chelsea Naso, Activist Investors Set For Busy 2017, Law360 (Jan. 2, 2017, 1:03 PM),