Shareholder activist proponents are cheering the Securities and Exchange Commission’s reinterpretation of its 2005 Legal Bulletin 14C, which tried to define when companies could omit environmental and social policy resolutions as “ordinary business” issues because they involved an internal assessment of business risk.

The SEC's application of this bulletin has led to some controversial omission of proposals, and a coalition of more than 60 activist investors petitioned the SEC for a change in the policy last December. Since then, Mary Schapiro has taken office as commission chair, and Meredith Cross has become director of the Corporate Finance Division, which rules on corporate no-action requests to exclude shareholder proposals.

The revised policy is part of Staff Legal Bulletin 14E, which was issued earlier today. The 2005 bulletin concluded that resolutions could be omitted under SEC Rule 14a-8 (i)(7) as ordinary business matters, not suitable for shareholder consideration, if they involve “an internal assessment of the risks or liabilities that the company faces as a result of its operations that may adversely affect the environment or the public’s health.” Among the no-action decisions that sprang from this policy was a 2008 judgment that the New York City pension funds’ resolution on global warming, which an earlier generation of SEC staffers had help the city to draft in order to avoid omission, now fell into the excludable risk assessment category. In protesting the 2005 bulletin in their December letter, the shareholder activists argued that it had “excluded vital questions” about the financial impacts of corporate actions on society.

The new bulletin acknowledges that the staff has “become increasingly cognizant that the adequacy of risk management and oversight can have major consequences for a company and its shareholders.” Henceforth, the bulletin says, in deciding when a company can omit a resolution, rather than focusing on whether a resolution relates to an evaluation of risk, the staff will instead focus on the underlying subject matter to which the risk pertains. The SEC bulletin doesn’t give specific examples of where the policy may change, except to recognize that board oversight of risk is an issue that may “raise policy issues so significant that it would be appropriate for a shareholder vote.”

Stu Dalheim, director of shareholder advocacy at the Calvert Group, hailed the new bulletin as “a significant validation of shareowner rights.”

“As evidence continues to mount that issues such as climate change and water scarcity have financial materiality for business, it is critical that investors are able to use shareholder proposals to directly address these risks,” Dalheim told RiskMetrics Group.

Tim Smith, a senior vice president at Walden Asset Management, also praised the new bulletin. “The SEC’s new guidance is a welcome reversal of a long-time position, which eliminated the ability of shareowners to include any reference to risk in shareholder resolutions. Now investors are free to craft language for resolutions, including the obvious point that an issue like climate change may create financial or reputational risk for shareowners,” Smith said. “This opens the door for frank and candid discussion and votes on how various issues affect shareholder value.”

Likewise, Trillium Asset Management said it “welcomes the expanded opportunities provided by this policy reversal to advocate for greater corporate transparency and responsible corporate behavior.”

Noting the SEC’s proposed proxy access rule and disclosure standards, Trillium’s Jonas Kron said the new bulletin “is further confirmation that the SEC is taking positive steps to bring the proxy rules in line with its mission to protect investors; maintain fair, orderly, and efficient markets; and serve the public good.”

“What is distinct about [Staff Bulletin] 14E is that it is the first final step taken by the SEC that will change what the proxy will look like this coming year,” Kron said.

CEO Succession Planning
In the new bulletin, the SEC staff also revised its position on investor proposals seeking reports on CEO succession planning. During the last two proxy seasons, the staff allowed companies to omit the resolutions on ordinary business grounds because they related to the termination, hiring, or promotion of employees. In the new guidance, the staff acknowledged “that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce.”

The staff also observed that “recent events have underscored the importance of this board function to the governance of the corporation.” The bulletin didn’t mention any specific examples, but activists have renewed calls for succession planning reports since Bank of America CEO Kenneth Lewis’s surprise announcement in late September than he would step down. The Laborers’ International Union of America has submitted a succession planning proposal for Whole Foods Market’s 2010 meeting and plans to file at other companies.

Eric Shostal and Ted Allen contributed to this article.