A growing number of companies are petitioning the Securities and Exchange Commission to allow for the omission of corporate governance-related shareholder proposals, a RiskMetrics Group analysis of “no action” requests finds. The challenges have led to a spike in proposal omissions this year, with the SEC favoring issuers on a number of key governance measures.

Through March 25, issuers had challenged 33 percent of all governance-related proposals filed this year, compared with just 20 percent in calendar 2007. Challenges by issuers also are more likely to be successful this year than last. For example, 48 percent of last year’s requests for no action were granted, while this year’s figure so far stands at 69 percent, according to RMG’s analysis.

The fact that issuers have challenged one in three proposals filed this year, and that the SEC has allowed seven of 10 to be omitted, is troubling to many investors.

“Companies are doing whatever they can to get rid of shareholder proposals,” argues John Chevedden, a Los Angeles-based shareholder activist. Chevedden points to this year’s effort by companies to omit proposals on cumulative voting, a long-time proxy issue, as an example of corporate efforts to staunch the filing of investor resolutions.

According to RiskMetrics Group records, 24 companies allowed shareholders to vote on cumulative voting resolutions last year, with just one proposal facing a challenge at the SEC. This year, however, 10 of 33 such proposals filed have been challenged, with the commission thus far allowing nine to be omitted.

A number of firms have sought to exclude the proposal from their proxy by petitioning for no action under SEC Rule 14a-8(i)(2), which allows for exclusion when a proposal may cause the company to violate any state, federal, or foreign law it may be subject to. Delaware-incorporated Citigroup, which last year allowed the measure to go to a vote, successfully argued against the proposal this year on those grounds, noting that the adoption of cumulative voting may only be implemented by an amendment to the certificate, which requires both board action and shareholder approval.

According to Chevedden, companies such as Citigroup emphasized the omission of the implicit phrase “take the steps necessary to” with respect to board action, thereby allowing for them to claim grounds for proposal exclusion. The SEC staff has thus far ignored his rebuttal arguments, Chevedden said, leading the investor activist to question why the staff doesn’t simply allow the proposals’ inclusion so long as they are rephrased.

Citigroup officials contend that they sought to omit the proposal in light of the company’s adoption last year of a majority vote standard. In theory, cumulative voting can only be effective at those firms or in cases where plurality voting applies. Still, companies are allowed to maintain both cumulative voting and majority threshold voting under Delaware law, a point espoused by proponents. “I do not believe that any cumulative voting proposal was ever excluded by the SEC on the grounds that a majority vote standard could be incompatible with cumulative voting under Delaware law,” Chevedden said.

Still another reason for the spike is that more companies are seeking to omit resolutions on procedural grounds, observers say. “There’s been a tendency of late for companies to crack down on eligibility requirements,” noted Cornish Hitchcock, an attorney for the Amalgamated Bank’s LongView Funds, pointing to SEC rules that allow for omission when proponents fail to provide proof of holdings or other documentation required to file proposals. According to Hitchcock, individual shareholders, those representing retiree associations, and church groups have in particular seen an uptick this year in companies challenging their proposals on procedural grounds.

Roughly 30 percent of this year’s resolutions have been omitted for failure to meet eligibility requirements, compared with 26 percent in 2007, according to RMG records.

Many of this year’s shareholder proposals have been omitted on the grounds that the resolution relates to the company’s “ordinary business,” which, according to SEC rules, management is best placed to address. Most of this year’s crop of subprime-related proposals was excluded on such grounds, for example. Some SEC watchers have questioned decisions on subprime-related proposals given that at least one proposal—calling on homebuilder Pulte Homes to report on mortgage lending risks—passed muster, but similar proposals filed at other firms were omitted. Twenty-three percent of proposals omitted so far this year have been excluded on ordinary business grounds—a 10 percentage point increase over calendar 2007.

Overall, the SEC has sanctioned company requests to omit 22 percent of all governance-related proposals filed through March 25. During the same period last year, 11 percent of total filings were omitted, while full year figures for both 2007 and 2006 stood at just 12 percent.

Meanwhile, the number of social issue proposal-related omissions is down slightly from historical averages. In calendar 2007 and 2006, 17 percent and 16 percent of all social issue resolution filings were omitted, respectively, whereas this year the figure so far stands at 14 percent.

The decline can in part be attributed to the commission’s approval of revised proposals calling for the adoption of principles for healthcare reform which last year the SEC allowed companies to exclude on ordinary business grounds. (The SEC has historically allowed companies to omit proposals related to employee healthcare on the grounds that they touch on benefits, an ordinary business question.)

According to Hitchcock, the proposal was able to pass this year because proponents including the AFL-CIO used a principles-based template such as those now widely used to address concerns over climate change, employment in Ireland, and global human rights. “This year’s United Technologies decision [the first denying no action relief on a healthcare reform principles proposal] could pave the way for healthcare issues to keep from being omitted,” under the no action process, Hitchcock noted.