Battle for Shareholder Rights Shifts to the SEC

By Frank Sherman

Within the toolkit of a shareholder, the right to propose resolutions for consideration by fellow shareholders is one of the most critical to influence corporate behavior (see SGI blog article posted last year). Further, other tools may be less effective without a robust right to propose resolutions. Many companies find a dialogue preferable to a resolution. Without the risk of a resolution, more companies may choose to forgo dialogues with shareholders. Thus, efforts to restrict shareholder rights are alarming, and those rights are under attack on a number of fronts.

Last year, the House of Representatives threatened this right with passage, along party lines, of the Financial Choice Act (H.R. 10) . The bill would have replaced large parts of the 2010 Dodd–Frank Act and increase the ownership threshold for filing resolutions from $2,000 to 1% of common stock outstanding, and extend the stockholding duration requirement from one year to three years (Harvard Law School Forum). The 1% threshold means that an investor would need about $10 billion in shares to file a resolution with Apple or Amazon and would foreclose the resolution process to all but the largest shareholders. In the Senate, the companion bill (S. 2155) got out of Committee but, fortunately, never made it to the floor.

Another bill aimed to regulate proxy advisory firms like Institutional Shareholder Services and Glass Lewis. As well, the recently proposed bipartisan Senate bill S. 3614 – Corporate Governance Fairness Act (Reuters) is less onerous than H.R. 4015 – Corporate Governance Reform and Transparency Act which passed the House last year (CNBC).

Legislative gridlock means that the battle shifted to the Security and Exchange Commission, who held a Proxy Process Roundtable on Nov 15th. In addition to the shareholder proposal rules, the Roundtable had panels on the proxy voting mechanics and technology and proxy advisory firms.

Investors were well represented in the Roundtable panels by the NYC pension fund, Trillium, CalSTRS, AFL-CIO, and Blackrock. Although opposing views were voiced by the Business Roundtable and the U.S. Chamber of Commerce, investor advocates had a compelling argument. In answer to the Chamber’s argument that the shareholder proposal process was one of the factors driving companies away from IPOs, Brandon Rees (AFL-CIO) noted that “the average public company receives a shareholder proposal only once every 7.7 years, and so it was preposterous to suggest that shareholder proposals were a reason companies avoided going public.” Harvard Law School Forum reported that “most panelists for this topic seemed to view the shareholder proposal system as relatively smooth functioning and didn’t offer that much criticism.”

Given these threats, SGI and some of our members submitted letters to the SEC supporting the current proxy rules as being fair and efficient. 

The topic of proxy process and rules returned to Congress last week when the Senate Banking Committee held a hearing on December 6th. The Chamber again testified that companies and their shareholders have been targeted over social and political issues that are unrelated to and, sometimes, even “at odds with” a public company’s long-term performance. Committee Chair Sen. Michael Crapo (R-ID) seemed to agree, stating “it is time to re-examine the standards for inclusion of these proposals as well as the need for fiduciaries to vote all proxies on all issues in light of the proliferation of environmental, social or political proposals, and the rise of diversified passive funds.” On the other hand, Michael Garland (NYC pension funds) defended shareholder rights and the proxy advisory firms stating “Many of those who are the subject of the proxy analysis do not like to be criticized and receive negative vote recommendations...”

SEC Chairman Jay Clayton amplified these attacks on shareholder rights in a speech at Columbia University on the same day. He indicated that review of the ownership and re-submission thresholds for shareholder proposals will be a priority item for the Commission in 2019.

While some will work to erode the rights of shareholders, we will continue to work with the investor community to protect the voice of shareholders.