The Securities and Exchange Commission (SEC) met today to finalize proposed changes to the Exchange Act Rule, which sets standards for companies subject to federal proxy rules to include shareholder proposals in their proxy statements. These updates come in the wake of extensive work done by SEC staff to evaluate the proxy process and shareholder proposals across the board, and represents a major step toward modernizing the shareholder engagement process to reflect modern investment trends and set up more productive company-shareholder engagement.
The new rule would update the criteria for the inclusion of shareholder proposals in proxy statements, setting a time commitment of three years of investment in a company before a shareholder’s proposal may be considered. Furthermore, the rule would increase the level of shareholder support a proposal must receive to be eligible for resubmission at a company’s future shareholder meetings. Shareholder proposals may also be excluded from proxy statements if a proposal does not meet certain eligibility or procedural requirements. Finally, the “resubmission” threshold under which a proposal may be reconsidered after being voted on previously is significantly increased.
The Institute for Pension Fund Integrity commends the SEC for taking action to build greater constructive engagement between shareholders and the companies that they have invested in, ensuring better-functioning capital markets that prioritize long-term financial stability while at the same time reducing misuse of the shareholder proposal process. According to research from Harvard University, only ten filers accounted for 74 percent of all shareholder proposals in 2019. This lopsided trend indicates that real shareholder engagement has been diluted, and instead a select group of activists are attempting to game the system by using the shareholder proposal process to meet their personal agenda. Today, the SEC rightfully acknowledged the cost imposed to shareholders for proposal proponents’ actions as justification for the change to this rule.
Under these updated regulations, we believe that there is less likelihood of special interests sidetracking the agenda of public companies with little regard to broader shareholder interests and investment returns. By facilitating better communications between shareholders and companies, investors will be able to make more informed decisions and the influence of outside proxy advisory firms, which have not been shown to act in the best fiduciary interest of their clients, will be curbed. As noted previously by IPFI President Christopher Burnham, “A process for review and rectifying flaws in the research and recommendations by proxy voters better legitimizes the process and ensures that shareholders are voting with accurate information.”
As stated by SEC Commissioner Elad Roisman, “The proposed amendments would facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.” With little change to rules governing the proxy submission process in over fifty years, and a troubling decline in publicly traded U.S. companies over the past several decades, this proposal is welcomed and well-overdue.