SEC’s rule changes set back transparency and shareholder voice

Today, the SEC approved in a 3-2 party-line vote new rules that severely restrict shareholders’ access to the corporate proxy by limiting the filing of resolutions. These new rules are a consequence of lobbying by powerful industry trade associations that have sought to limit shareholder engagement with corporations on critical environmental, social, and governance issues.

The shareholder resolution process, governed by the SEC’s Rule 14a-8, has been effective for decades and has allowed smaller shareholders who had held at least $2,000 of shares for over one year to file proposals asking companies to consider non-binding proposals that may raise questions of environmental and social impacts of corporate policies and practices, or governance best practices.

Today’s new rules will significantly limit investors’ ability to submit these proposals. The new rules raise the thresholds of ownership both in terms of the number of shares and length of time they must be held. Under the new rule, new purchasers of stock must hold $25,000 in shares for at least a year, or hold $2,000 in shares for at least three years.

As well, the new rules make it much more difficult to refile a proposal that has been voted on. The prior rule required 3% support on a first-year vote, 6% on a second vote, and 10% on a third vote to keep a proposal before a company’s shareholders. Now resubmission will require 5% on a first vote, 15% on a second vote and 25% on a third vote. Emerging issues will be much more difficult to bring to the proxy.

SGI’s executive director, Frank Sherman said, “The choice to approve the new rule aims to fix something that is not broken. A half-century of evidence shows that shareholders have an important voice that companies need to hear. Pioneers like Fr. Mike Crosby have helped companies pay attention to environmental, social, and governance concerns that they were missing. To the detriment of U.S. companies, this rule restricts that important voice.”

In a press release, ICCR executive director, Josh Zinner said: “The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their priorities and concerns to management, with little economic analysis supporting the needs for these substantial changes. The new rules appear to be based on a wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary.”

Over many decades, the shareholder proposal process has served as an efficient way for corporate management and boards to gain a better understanding of shareholder priorities and concerns, particularly those of longer-term shareholders concerned about the long-term value of the companies that they own.  Engagement by shareholders has served as a crucial “early warning system” for companies to identify emerging risks and there are hundreds of examples of companies changing their policies and practices in light of productive engagement with shareowners.

For more information:

• ICCR’s press release can be found here.
• Joint letter from investor groups regarding the shifting interpretation of 14a-8 No-Action Challenges can be found here.
• Case Studies showing the impact of the new rules on shareholder engagement can be found here.
• For more information on the history of comments submitted to the SEC regarding these rule changes visit ICCR and Shareholder Rights Group
• See also SEC’s Proposed New Rules Threaten Shareholder Democracy
• See as well SGI’s formal comment submission to the SEC here.