From Public Policy to Materiality: Non-Financial Reporting, Shareholder Engagement, and Rule 14a-8's Ordinary Business Exception

In recent years, majority votes on shareholder proposals urging corporate boards to disclose climate-related risk have made headlines, with the help of mainstream investors like Blackrock and Vanguard. This Article argues that although shareholder activism is a powerful tool to raise the profile of emerging environmental, social and governance (ESG) risks or even to change corporate practice, it is not an adequate substitute for disclosure reform under the federal securities laws — in fact, it impedes it.

A key reason is that the U.S. Securities and Exchange Commission's interpretation of the Rule 14a-8 “ordinary business exception” forces shareholders to frame their proposals in a way that causes companies to discount the materiality of ESG information. The rule’s long use in shareholder activism around “public policy and social issues” also discourages support for new rulemaking that could improve market access to material ESG information. This Article urges the SEC to issue new interpretive guidance reaffirming its own early articulations of the ordinary business exception, which recognized the potential economic importance of ESG information to investors.