Rule 14a-8: Perhaps Slow-Walking Recission is Best
In a recent post on the Harvard Law School Forum on Corporate Governance, titled “Rule 14a-8: Perhaps There’s Another Way,” Sarah Wilson, Founder and CEO of Minerva Analytics, tackles the hot topic of Rule 14a-8 rescission. At bottom, she argues for implementing a version of the UK Takeover Panel to regulate procedural requirements for proposal submission while leaving decisions about content scope to shareholders. Along the way, she argues that The Heritage Foundation, including by way of its American Investor Initiative, “is having second thoughts” about prior positions Heritage has taken on the issue, and that Heritage “seems distinctly unhappy with the SEC’s direction of travel” and is thus left in “the strange position of defending the very mechanism it spent years arguing had made shareholder meetings too political.” These characterizations of Heritage warrant some clarification.
To begin with, we at Heritage certainly hope we never stop assessing past positions in the light of current experience, and that we will always do our best to reflect the latest understanding of the myriad factors impacting policies over time. Having said that, our current view of Rule 14a-8 is not nearly as conflicted as Wilson presents.
For example, Wilson contrasts our past criticism of proxy advisers, ESG and “woke investment,” with our current position of cautioning against too hasty rescission of Rule 14a-8. Specifically, as we noted in a recent letter published in the Wall Street Journal, we believe the goal of depoliticizing corporate governance is best served by a “generous grace period” before rescission takes effect.
The current mix of corporate commitments took shape over decades in which mainly one set of proponents used the proposal process. Proponents who favor corporate neutrality, Heritage among them, have only recently begun to use the process effectively. Ending it abruptly would freeze in place the results of that one-sided period. A transition period would also allow states to develop their own frameworks for shareholder proposals, give companies and investors time to adjust, and avoid entrenching a status quo that formed under proxy-advisory and asset-manager voting practices that are themselves only now being reformed.
While our position may in some sense have shifted from “keep the rule” to “rescind the rule slowly,” the animating principle remains the same: The prosperity-generating power of free-market capitalism must be defended against the myriad conflicts of interest distorting relevant inputs from corporate leaders, asset managers, proxy advisors, activists, and others. Particularly with respect to ESG (including DEI, sustainability, and net zero, as well as the successor labels under which similar commitments are increasingly marketed), resisting the use of corporate and regulatory machinery to advance policy goals that could not be achieved through markets or legislatures is a consistent theme. As has been said: “Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.”
To illustrate, consider the four justifications most commonly offered for corporate sustainability commitments and investments, and why each, on closer examination, proves incomplete. First, sustainability commitments are often described as a matter of legal compliance. But the leading climate-disclosure mandates, such as California’s SB 253 and SB 261, require companies to report emissions and climate-related risks, not to adopt reduction targets. And when we have offered to withdraw shareholder proposals if a company would state publicly that its sustainability commitments are legally required, companies have generally declined to do so. That reluctance suggests the commitments rest on something other than compliance.
Second, sustainability commitments are frequently defended as risk management, a necessary cost of reducing exposure to climate-related harm. But according to the Global Carbon Budget 2025, the United States accounts for roughly 13 percent of global fossil CO₂ emissions, compared with about 32 percent for China and 8 percent for India. Even if every U.S. corporation reached net zero, the effect on global emissions, and so on the physical risks companies face, would be modest without comparable action elsewhere. Firm-level transition risks, such as regulatory and litigation exposure, may justify some measures. But those risks call for targeted, quantified responses, not open-ended commitments.
Third, sustainability commitments are said to reflect client demand. BlackRock’s 2020 letter to clients, for example, justified its sustainability initiatives in part by noting that “more and more of our clients have focused on the impact of sustainability on their portfolios.” Client demand alone, however, does not show that a commitment creates value for shareholders. Demand for a product does not justify supplying it at any price, and sustainability commitments deserve the same discipline. Their costs and benefits should be fully disclosed so that clients and shareholders can make informed judgments.
Finally, one would expect companies making substantial sustainability commitments to have done the relevant expected-value analysis and to track the returns. Yet even advocates of corporate sustainability acknowledge that this rarely happens. The director of NYU Stern’s Center for Sustainable Business has observed that “most companies are not monetizing the Return on Sustainability Investment,” and that financial benefits “are tracked differently (if at all) by different units and are not aggregated.” Without such measurement, it is difficult to assess whether these commitments serve shareholders’ interests.
If these conventional justifications are incomplete, a further explanation lies in the incentives of the parties involved. Asset managers market ESG products and compete for mandates from clients who want them. Proxy advisors have offered ESG-related advisory services alongside their voting recommendations. And corporate managers benefit from the wide discretion that stakeholder-oriented commitments afford. Other incentives may reinforce these: avoiding confrontations with activist investors, the reputational benefits of visible sustainability commitments in settings such as the World Economic Forum, the social and professional norms within which many executives and directors operate, and bias against people of faith. Together, these incentives help explain why corporations would adopt net zero commitments without documented support for their returns, despite well-documented concerns about affordability, national security, and energy independence.
All the foregoing also helps explain low vote counts on anti-ESG proposals. Once you’ve accounted for the influence of conflicted asset managers, proxy advisors, and corporate insiders – and public pension funds whose voting policies may weigh collateral policy objectives alongside beneficiaries’ financial interests– there aren’t many votes left that can reflect the views of the “true owners.” As Jerry Bowyer, also mentioned in Wilson’s article, has essentially noted, if a foreign country’s national election returned 2% or less of the votes in favor of a candidate widely known to only have 50% of the support, all the defenders of democracy would be calling the election corrupt and illegitimate.
Yet this is basically what we see in proxy voting every season when it comes to conservative anti-ESG and anti-DEI proposals. Vote totals can also be misread in the other direction. When an anti-DEI proposal receives 2% support, the result is sometimes reported as showing that 98 percent of shareholders ‘support DEI.’ Yet comparable pro-DEI proposals have recently drawn similarly low support, particularly since asset managers revised their voting policies and proxy advisors came under regulatory scrutiny. That pattern suggests low totals often reflect reluctance to support prescriptive proposals of either kind, not an endorsement of the underlying policy.
All the foregoing helps explain why Heritage believes rescinding Rule 14a-8 too quickly would turn laudable federalism into problematic favoritism by sealing in conflicted gains just when free-market proponents have started making material gains getting corporations back to neutral. And that position can be completely consistent with also supporting the ultimate rescission of the rule due to it being unauthorized and undermining proper federalism.
Much more can, should, and will be said about the proper balance of state oversight of proposal submission and scope requirements, as well as federal oversight of related corporate disclosures in interstate commerce. But for now, it is worth noting that a consistent theme animates Heritage’s past and present positions on Rule 14a-8. Heritage certainly appreciates the ways we are witnessing private ordering, federalism, and the marketplace of ideas operating in response to the proposed rescission of the rule, but we are in fact happy “with the SEC’s direction of travel.”
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