Some corporations seek to silence ‘Trojan Horse’ activists

After a change in SEC policy eased the path for shareholders to bring forward certain proposals, investors of all political stripes have increasingly pressed companies on hot-button issues such as climate, abortion, guns and diversity, filing hundreds of proposals each year.

The trend has continued into this year’s proxy season—the period when most companies have their annual meetings—which is unfolding now. But companies, many of which don’t want to wade into reputationally risky areas, might get the chance to tell shareholders to pipe down.

Telling shareholders to pipe down

In one suit challenging the status quo, oil-and-gas company Exxon Mobil, a frequent target of shareholder proposals, sued two shareholder proponents, arguing that they were activists pursuing a “Trojan horse" strategy to gain a platform to deliberately hurt its business despite only holding a tiny amount of shares.

In another suit now before a federal appeals court in New Orleans, the National Association of Manufacturers, a powerful Washington trade association, is arguing that the SEC has overstepped its bounds and shouldn’t be involved in deciding which proposals make it through.

Under the current system, shareholders are allowed to “commandeer" company proxy statements to try to advance their social or political goals in the corporate sphere after they failed in the political arena, NAM said in a court filing.

SEC’s gatekeeper role

The SEC is the gatekeeper on what companies must include in their proxy statements. Following a 2021 rule change that made it easier to float resolutions on issues that have a “broad societal impact," the number of proposals has crept up, hitting a record 739 this year, according to an analysis released Wednesday by ISS Corporate Solutions, a data and analytics provider.

This year, for example, investors proposed votes on whether investment bank JPMorgan Chase should audit the impacts of its climate policy on developing countries, whether technology giant Apple should be more transparent about its use of artificial intelligence and if food and beverage maker PepsiCo’s diversity program discriminates against white job applicants.

The SEC greenlighted those three proposals despite objections from the companies. The agency did, though, permit several U.S. airlines to exclude proposals on changing their offerings to serve more lactose-free and vegan food.

“The shareholder proposal process is akin to a public town square. It’s a way to engage in a public and noisy way on a particular topic," said Michael Littenberg, a partner at law firm Ropes & Gray who advises companies facing proposals. “In some cases…it is being abused."

Shareholders with as little as $2,000 in company stock for at least three years are eligible to put forward proposals under the SEC’s rule.

The Exxon proponents targeted in that lawsuit have now withdrawn their proposal and argued that the lawsuit is moot—one proponent, known as Follow This, says it wants to avoid a precedent that could stop “shareholder democracy" and keep carbon emissions off the agenda. But Exxon wants a court’s blessing to exclude them in the future, bypassing the SEC.

“When rules aren’t enforced against activists masquerading as investors, who have publicly stated they’re working to stop production of oil and natural gas, it undermines the whole system," Exxon said.

‘Shareholders need to have a voice’

The California Public Employees’ Retirement System, or Calpers, will vote to unseat Exxon’s board and chief executive in the company’s annual meeting later this month, Calpers Chief Executive Marcie Frost and Board President Theresa Taylor said Monday in an open letter citing the lawsuit against investors as the public pension fund’s rationale. Other state officials on Tuesday also called for change at the top.

Some companies may view activist shareholders as bad-faith meddlers, but advocates for the current process argue that shareholder proposals can alert companies to changing sentiments and let investors push for new corporate policy without having to unseat the board.

“Shareholders need to have a voice because management doesn’t always get it," said Danielle Fugere, president of As You Sow, a left-leaning nonprofit foundation that is behind many proposals. “Boards are not always focused."

As You Sow put forward more than 80 shareholder proposals this year, including one on alleged employee harassment at carmaker Tesla and another on competitor General Motors’ policies on deep-sea mineral mining.

Right-leaning organizations in recent years also have tried to hold companies to account. ISS Corporate Solutions said the number of so-called counter-ESG proposals increased in 2024.

One proposal targeted drug company Pfizer for donating to an “equity index" that rates hospitals and scores them higher if they display LGBT symbols. The backer, the National Center for Public Policy Research’s Free Enterprise Project, says Pfizer is spending money on promoting a divisive agenda. Shareholders rejected that proposal at Pfizer’s annual meeting.

Though the NCPPR, a conservative think tank that owns shares in a range of companies, brought this and other proposals, it favors a system where companies can exclude more proposals and the SEC isn’t the decider, said Scott Shepard, the director of the NCPPR’s Free Enterprise Project, which writes the proposals. Shepard said he supports Exxon’s suit.

“This proposal is a proposal that asks Exxon to lose money, to kick itself in the teeth," Shepard said. The NCPPR is a party to the lawsuit in which NAM is arguing to overturn the current system.

The SEC said in its own filing that the appeals court shouldn’t upend settled expectations.

But some argue that today’s system, though it may produce proposals that companies don’t necessarily welcome, can help promote longer-term thinking on big issues. And investors have put up the money to get their concerns heard, said Heidi Welsh, the executive director of the Sustainable Investments Institute, a nonprofit that researches organized efforts to influence corporations.

“There’s not really any basis for saying that some investors are better than others," Welsh said. “This is about suppression of voice in general. If you are going to make it really hard for people to participate in questioning the powers that be, people will question it less. Is that good for us?"

Write to Richard Vanderford at Richard.Vanderford@wsj.com