Staff Modifies Approach to No-Action Letters Relating to Risk and CEO Succession

The Division of Corporation Finance has reexamined the analysis it uses when considering shareholder proposals relating to risk and has determined that a different approach is more appropriate. Staff Legal Bulletin No. 14E provides guidance on the new analytical framework the staff will apply when considering proposals relating to risk. The bulletin, dated October 27, 2009, also addresses proposals on succession planning for a company’s chief executive officer and notifications to the staff about correspondence relating to no-action requests.

The staff receives numerous no-action requests from companies that wish to exclude shareholder proposals relating to environmental, financial and health risks. These companies frequently seek to omit the proposals under Rule 14a-8(i)(7), the ordinary business exclusion. The staff considers whether the proposals and supporting statements relate to a company’s evaluation of risk, which has been considered part of a company’s ordinary business operations.

If the proposal and supporting statement focus on an internal assessment of the risks and liabilities that a company faces as a result of its operations, the staff has permitted companies to omit them under Rule 14a-8(i)(7) as relating to the evaluation of risk. If the proposal and supporting statement focus on minimizing or eliminating operations that may adversely affect the environment of the public’s health, the staff has not permitted their omission.

According to the bulletin, the staff has seen a marked increase in the number of no-action requests seeking to exclude proposals relating to the evaluation of risk. Companies often argue that the proposals that do not explicitly request an evaluation of risk are still excludable under Rule 14a-8(i)(7) because they would require the company to engage in risk assessment. The staff is concerned that its analytical approach may have led to the unwarranted exclusion of proposals that relate to the evaluation of risk but focus on significant policy issues.

The staff is aware of the consequences that may result from inadequate risk management and oversight. Upon reexamination of its analytical approach, the staff will change its approach on a going forward basis. Rather than focusing on whether a proposal and supporting statement relate to the company engaging in an evaluation of risk, the staff will focus on the subject matter to which the risk pertains or that gives rise to the risk. The staff will no longer make its determination based on whether the proposal will require an evaluation of risk.

The staff will look at risk in a manner similar to the way it analyzes proposals asking for the preparation of a report, the formation of a committee or the inclusion of disclosure in an SEC-prescribed document. In those cases, the staff looks at the underlying subject matter to determine whether the proposal relates to ordinary business.

If a proposal’s underlying subject matter transcends day-to-day business matters and raises policy issues that are significant enough to be subject to a shareholder vote, it will not be excludable under Rule 14a-8(i)(7) as long as there is a sufficient nexus between the nature of the proposal and the company. The staff will apply the same standards as it applies to other types of proposals under Rule 14a-8(i)(7).

The board’s role in the oversight of a company’s management of risk is widely recognized as a significant policy matter regarding the governance of the corporation. Proposals that focus on the board’s role in the oversight of a company’s management of risk may transcend the day-to-day business matters of a company and raise significant policy issues that are appropriate for a shareholder vote, according to the bulletin.

During the last two proxy seasons, the staff has also received a number of no-action requests to exclude proposals relating to CEO succession planning in reliance on Rule 14a-8(i)(7). The staff has permitted the exclusion of these proposals because they related to the termination, hiring or promotion of employees.

One of the board’s key functions is to provide for succession planning. The bulletin notes that recent events have underscored the importance of this function to the governance of the corporation. The staff has now concluded that CEO succession planning raises a significant policy issue that transcends the day-to-day business of managing the workforce. Going forward, the staff will modify its treatment of these proposals by taking the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that relates to CEO succession planning.

If a company or a shareholder plans to submit correspondence in connection with a no-action request, the staff encourages them to contact the staff so that it may review the correspondence prior to issuing a response. The staff added that it would be helpful if companies and shareholders provided the date by which they intend to submit their correspondence. If a shareholder intends to reply to a company’s no-action request, the staff urged the shareholder to do so as quickly as possible after the company has submitted its request.