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.

SEC’s Proposed New Rules Threaten Shareholder Democracy

Last December, our blog gave an update on efforts by trade associations to restrict shareholder rights .

On Tuesday, November 5, the Securities and Exchange Commission unveiled the exact nature of that threat and voted 3-2 on two separate measures to propose changes to rule 14a-8 that would severely restrict investors’ access to the corporate proxy. The changes would require that:

  • Shareholders own $2,000 worth of company stock for a minimum of three years (up from one) before they can submit a shareholder resolution. They can submit proposals earlier if they own $25,000 for one year and $15,000 for two years. Small shareholders can no longer come together to aggregate their shares to file a resolution.
  • Re-submission vote thresholds were raised from 3%, 6% and 10% for the first three years to 5%, 15% and 25%.
  • Proxy service providers (such as ISS and Glass Lewis) will be required to provide a draft of their proxy advice to companies for comment ahead of issuance. There are several other restrictions on these companies.

These proposed changes are significant threats to our voice as shareholders. They have received significant push-back in the media (Reuters, MarketWatch) and by several investor groups (ICCR, US SIF, CII). “Between the filing threshold increases and the doubling of percentages for resubmissions, it means that smaller investors are going to find it much more difficult to file resolutions,” says Josh Zinner, CEO of ICCR. “It’s a blow against shareholder democracy.”

The 60-day comment period opens once the proposed rule changes are published in the Federal Registrar. Our members are encouraged to sign on to Ceres and ICCR comment letters or, better yet, send in your own comments to the SEC. You should also consider sending letters to your Congressional representatives. Finally, consider submitting op-eds and letters to the editor to your local paper and newsletter stories and blog posts on your websites.

To learn more about the issue and concerns, you read the statements by Commissioner Robert Jackson and Allison Herren. “There is a common theme that unites the two proposals before us today”, said Commissioner Herren. “They both would operate to suppress the exercise of shareholder rights.”

With regards to a second proposed rule change, ISS (Institutional shareholder Services) has filed a lawsuit against the SEC. The final resource is a website, supported by ICCR, that is gathering evidence and sharing reports concerning the shareholder proposal process (Investor Rights Forum).

A lot more to come on these proposals. Please lift your voice in opposition!

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.