The New York Time Magazine on Sunday (August 12) contained an article on shareholder activists and their use of Rule 14a-8, primarily in connection with their efforts at Exxon to improve governance and combat global warming.  The Exxon board met 9 times in 2006, with total compensation for each non-management director ranging from $336,000 to $583,000. 

Other than provide an insight into the battle between shareholder activists and the largest public company in the world, the article was notable for the reaction to the proposal of the board and the CEO.  The article centered around a proposal on green house gases.  The specific resolution provided:

• RESOLVED: shareholders request that the Board of Directors adopt quantitative goals, based on current technologies, for reducing total greenhouse gas emissions from the Company’s products and operations; and that the Company report to shareholders by September 30, 2007, on its plans to achieve these goals. Such a report will omit proprietary information and be prepared at reasonable cost.”  

Exxon Mobil sought to omit the proposal under Rule 14a-8(i)(7) arguing that this pertained to a matter of the ordinary business of the corporation but the staff of the Commission declined to issue the requisite no action request.  The provision illustrates the often arbitrary nature of the shareholder proposal business.  Thus, while this provision was allowed to remain in, the same was not true of a much milder proposals put forward by shareholders in TXU Corp. 

The proposal asked the board “to undertake a study of energy efficiency with respect to TXU’s existing and proposed power plants and report back to shareholders describing the impact that significant improvements in energy efficiency would have on TXU, and what role TXU can play to . . . increase revenue by helping customers reduce demand for electricity.”  The Connecticut Retirement Plans argued that the provision implicated broad policy goals.  

• In recent years, increasing energy costs, concerns about global warning, rising energy costs, and overdependence on foreign energy sources have focused significant attention on the issue of energy efficiency. In early 2006, the finance ministers of the Group of Eight (G8) industrialized nations agreed on energy security as the main focus of the group's July summit, and cited energy efficiency as vital to the smooth functioning and stability of markets. Following the summit, the G8 released a Plan of Action stating that "[i]mprovements to energy efficiency have benefits for economic growth and the environment, as well as co-benefits such as reducing greenhouse gas emissions, preventing pollution, alleviating poverty, improving security of energy supply, competitiveness and improving health and employment." (footnotes omitted)

TXU argued that the proposal could be excluded under Rule 14a-8(i)(7) because it implicated the company’s day to day business.  “Thus, the Proposal does not address any significant policy issue, but instead implicates only the internal considerations, financial consequences, impact, costs and benefits arising from the implementation of energy efficiency actions.” Moreover, as support, TXU cited a number of other letters excluding proposals “requesting similar climate change/environmental risk assessment reports on the basis that such reports related to the companies’ day-to-day operations and were not proper for shareholder consideration.” 

Despite the overall importance of the issue, the Commission granted the requisite no action relief.  The fact that the staff would grant relief in one case (TXU) and not in another (Exxon), despite the fact that both involve an analysis of the same subsection of 14a-8 and both involve an important public issue illustrates one reason why companies contest so many of these submissions.  There is always the possibility that they will benefit from an arbitrary ruling.  It raises the issue over the need to amend Rule 14a-8 to get the Commission out of the job of making these fine and sometimes inconsistent decisions. 

Second, the article shows some of the need for these types of proposals.  When the staff refused to issue the requested no action letter, the proposal was included in the Exxon proxy statement (one of 15) and submitted to shareholder for a vote.  None of the proposals passed, but with respect to the one concerning green house gases, the vote tally was as follows:

In other words, it wasn't precatory but sought the adoption of specific goals and it received 31%.  Was this something management ought to hear?  The article indicated that in the area of global warming, Exxon "has earned the disapprobation of everyone from the Royal Society, Britain's premier scientific academy, to Senators Olympia Snow and Jay Rockefeller."  In other words, the company has, if nothing else, suffered a public relations setback on the issue.  Nor, from the article, did at least one director on the board seem particularly interested in shareholder views on the subject.  As one director provided:  

• "Did that mean that board members were likely to be persuaded by shareholder arguments? King — who agreed to speak only in general terms about the job of a board member — said it wasn’t that simple. After 10 years on the board, she figured she knew more about the issues than the shareholders, and wasn’t her expertise the reason she’d been selected for the board in the first place? 'You’re working to maximize shareholder value,' she said. 'It’s very different from the political environment, where you are persuaded because you are afraid of being voted out by your constituents.'” 

In other words, the directors knew better and had no need to be responsive to the interests of shareholders.  The view of shareholders would seem harder to ignore when it gains 31% of the total shares cast.  For all the nuisance that shareholder proposals can seem to management, they can also provide an early warning of growing dissatisfaction.  It remains to be seen whether Exxon will take advantage of this early warning.