New rules proposed by the Securities & Exchange Commission would make it harder for investors to file resolutions and get independent advice.
Last November, the S.E.C. launched the biggest attack on shareholder rights in its history, when three of the five commissioners voted to give preliminary approval to two proposals that curtail shareholders’ ability to effect change. These proposals fly in the face of the S.E.C.’s mandate to protect investors, established by President Franklin D. Roosevelt and Congress in the depths of the Depression. In fact, the proposals would move power from investors to company management.
One proposal would make it far more difficult for shareholders, particularly smaller “Main Street” investors, to raise issues in the form of shareholder resolutions at public companies’ annual meetings (Rule 14a-8). The second would require the proxy advisory firms that provide investors with independent analysis for shareholder meetings to show greater deference to the companies they cover.
The 60-day comment period for the proposals ended February 3. Commissioners are now reviewing the nearly 2,000 public comments on the two proposals, which have been overwhelmingly negative, and consider whether to finalize the proposals or withdraw them. We urge the Commission to withdraw both proposals and to continue to honor its mission to protect investors.
The commissioners who voted for the proposals have not provided a compelling rationale for these measures nor empirical evidence of the problems they might solve. It appears, unfortunately, that these commissioners have been guided by the Chamber of Commerce, the Business Roundtable and other lobbyists for company executives, rather than by investors.
Holding companies accountable
The proxy process is an important conduit for investors to communicate with management. Just as students receive grades, employees receive evaluations and politicians face elections, company management teams receive positive and negative feedback and are held accountable through the proposals raised, and the votes cast, by their shareholders at their annual meetings.
The S.E.C.’s long-standing shareholder proposal rule is working well. Nonetheless, a majority of commissioners voted to do away with the longstanding and simple requirement that shareholders must have held at least $2,000 worth of shares for one year in a company to be eligible to file a shareholder resolution at its annual meeting. Instead, their proposed rule creates a new tiered system based on the length of time the shares are held.
For shares held one year, the S.E.C. proposes a massive increase in the stock ownership required—to $25,000. If held for two years, the amount is $15,000. Only if a shareholder has held the shares for three years will ownership of $2,000 suffice to file a resolution.
Second, the S.E.C. seeks to hike the support that shareholder resolutions must receive—based on the percentage of the shares voted—to be eligible for resubmission. Historically, resubmission thresholds have been set at modest levels to allow issues to gain support over time from other investors. The proposal changes these thresholds from 3 percent of the shares voted the first year, 6 percent the second year and 10 percent the third year and beyond, to 5 percent, 15 percent and 25 percent, respectively.
These provisions could prevent emerging environmental, social and governance issues from receiving the attention they merit.
For example, it took years for shareholders concerned about climate change risk to gain substantial support from other investors, sometimes only receiving single-digit support at the outset. Shareholder proposals requesting that companies reduce their greenhouse gas emissions now sometimes obtain majority support – and companies are taking note.
It is now standard practice for the most widely held U.S. companies to have formal policies banning discrimination on the basis of sexual orientation – policies that were largely non-existent before the early 1990s when pension funds and other investors began filing proposals with this request. And while progress has been slow, publicly traded companies have increased the gender and racial diversity on their boards over the last decade, thanks in large part to shareholder pressure, first seen in shareholder proposals that again initially won only single-digit support.
Moreover, companies that wish to be listed on U.S. stock exchanges must be able to demonstrate that a majority of their directors are independent—not current or former employees of the company. This concept, too, originated in shareholder proposals.
Corporate lobbyists portray shareholder proposals as overwhelming the resources of public companies, but on average, a company receives a shareholder proposal only once every seven years. When shareholders cast their annual ballots, only 2 percent of voting items are shareholder proposals. And the proposals nearly always are non-binding – merely registering a view reflecting the collective voice of shareholders.
Lobbyists for corporate executives may be even more keen to rein in proxy advisory firms. The second S.E.C. proposal would require that draft reports be submitted – not once but twice – to company management for review. Proxy advisors then face a threat of litigation should their final recommendations not reflect editorial suggestions by the company.
We believe that the multi-million-dollar lobbying campaign to weaken proxy advisors is motivated by corporate CEOs’ extraordinary sensitivity about any criticism of their pay. Since the Dodd-Frank Act of 2010, companies have been required to allow shareholders a non-binding up or down vote on top executives’ pay packages. While 98 percent of shareholder votes support executive compensation, proxy advisory firms can be influential if they recommend a “no” vote. In essence, the SEC proposal would give executives a special role in shaping commentary on their own pay. We would add that the proposal raises serious First Amendment issues that are sure to be challenged in court if implemented as proposed.
We accept that receiving criticism and feedback in the form of shareholder proposals, proxy advisors’ recommendations and votes at annual meetings, can be unpleasant for corporate CEOs. However, the job of the S.E.C. is to protect investors, not to shield publicly traded company executives from accountability. Making it more difficult for investors to file resolutions and to gain independent, third-party advice does not protect investors, and in the long run it will not help companies either.
Ken Bertsch is executive director of the Council of Institutional Investors. Lisa Woll is the CEO of US SIF: The Forum for Sustainable and Responsible Investment.