This article, written by Brian Croce, originally appeared in Pensions & Investments on October 5, 2020.
New amendments adopted by the Securities and Exchange Commission to raise the thresholds for submitting and resubmitting shareholder proposals in subsequent years has drawn the ire of investors large and small.
“The amendments weaken the voice of investors and jeopardize faith in the fairness of U.S. public capital markets by making the filing process more complicated, constricting and costly,” said Amy Borrus, executive director of the Council of Institutional Investors in Washington, in a statement. “The result will be fewer shareholder proposals — and that is precisely the goal of the business lobby that pressed the SEC to make these changes. Simply put, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters.”
In a 3-2 vote, with the commission’s two Democrats dissenting, the SEC on Sept. 23 amended Exchange Act Rule 14a-8 by replacing the current ownership threshold to submit a shareholder proposal, which currently requires holding at least $2,000 or 1% of a company’s stock for at least one year.
Under the new rule, shareholders submitting any proposal for an annual or special meeting to be held on or after Jan. 1, 2022, will have to meet one of three alternative thresholds: $2,000 of the company’s stock for at least three years; $15,000 for two years or $25,000 for one year, among other changes.
With the new rule, which would take effect 60 days after publication in the Federal Register, the SEC also raised the vote thresholds a proposal must get to be eligible for resubmission. Under the amendment, proposals must get at least 5% support in the first year, 15% in the second and 25% in the third in order to be resubmitted within a five-year span. That is up from the current thresholds of 3%, 6% and 10%, respectively.
The final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after Jan. 1, 2022.
New York state Comptroller Thomas P. DiNapoli, trustee of the $216.3 billion New York State Common Retirement Fund, Albany, said in a statement that the SEC’s action will “negatively impact investors and make it harder for shareholders to hold corporations accountable. These changes are unwanted by investors and may silence those challenging corporations to address issues like gender and racial pay equity, workplace diversity and racial discrimination.”
Patrick McGurn, special counsel and head of strategic research and analysis at proxy advisory firm Institutional Shareholder Services Inc., Rockville, Md., said the vote “shows that the comment period doesn’t count for much at the SEC anymore because if you look at the comments it was overwhelming from an investor perspective. Most of the changes that were adopted by the commission were not only not welcome, but were thought to be unnecessary by the vast majority of commenters on the investor side.”
The SEC originally proposed modernizing the rules concerning shareholder proposals in November, at the same time it proposed amendments to the rules governing proxy advisory firms that require those firms to disclose conflicts of interests to clients and allow companies that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients.
The proxy advisory firm rules were finalized in July. But both of the SEC’s proxy-related initiatives have broadly garnered similar reactions: support from the business community and opposition from the investor community.
Striking a balance
SEC Commissioner Elad L. Roisman, who spearheaded the commission’s efforts on the issue, said at the Sept. 23 meeting that the shareholder proposal amendments aim to strike a better balance by ensuring that a shareholder who submits a proposal to a public company has interests that are more likely to be aligned with the other shareholders.
It was a sentiment struck by other supporters, including SEC Chairman Jay Clayton. “A shareholder proponent should not be able to command the time and attention of the company and other shareholders to review, consider and vote on a proposal if 9 out of 10 votes cast by their fellow shareholders have been against the proposal after it’s been submitted for a vote three or more times in five years,” Mr. Clayton said at the meeting.
Christopher Burnham, president of the Institute for Pension Fund Integrity in Washington and founder of venture capital firm Cambridge Global Capital, who has previously served as Connecticut state treasurer and as a member of the Trump administration’s transition team for the State Department, noted that the resubmission thresholds in place today were adopted more that 60 years ago, which is why he said they must be updated. “The market has changed dramatically since 1954, participation has changed dramatically,” Mr. Burnham said. “We must not allow a small, teeny, activist minority to impose a personal political agenda on the majority.”
Despite getting a lot of comments criticizing the proposal, the SEC largely “stuck to their guns,” said Julie Mediamolle, a Washington-based partner with Alston & Bird LLP. “At the end of the day I think the SEC understands this could deter some proposals but on the opposite side (it’s) trying to encourage more engagement throughout the year, not just in connection with annual meetings,” she said.
At the SEC’s Sept. 23 meeting, Commissioner Allison Herren Lee, a Democrat who opposed the proposal, said the amendments, coupled with the SEC’s rules concerning proxy advisory firms, “collectively put a thumb on the scale for management in the balance of power between companies and their owners.”
When looking at the 2020 proxy season, of the 455 shareholder resolutions that made it onto a ballot and for which vote results are available to date, 64% earned at least 25% support, according to data from ISS. However, that figure does not take into consideration the number of times that a proposal has appeared on the ballot nor the number of times that boards may have decided to sit down with proponents to negotiate the possible withdrawal of proposals due to the existing resubmission thresholds, Mr. McGurn noted.
Research from CII found that the SEC’s new thresholds for resubmitting shareholder proposals would have more than doubled the number of excluded governance proposals from 2011-2019. In 2020, CII noted that several governance proposals that would have been eligible for resubmission in 2021 would be blocked by the new resubmission thresholds, including resolutions to require independent board chairs at Facebook Inc., Southwest Airlines Co. and Tenet Healthcare Co.
“Shareholder proposals play an invaluable role by providing a low-cost method for shareholders to talk to management and to each other about the future of their company and important policy issues affecting the company,” said Lisa Woll, CEO of Washington-based US SIF: The Forum for Sustainable and Responsible Investment, in a statement. “The votes on shareholder proposals provide more precise information about shareholders’ views of the given topic. In our view, the commission should not be in the business of reducing these lines of communication. Such reductions will likely be unavoidable now.”
But there is an election looming and depending on the results, there could be more traction on proxy-related issues, sources said. “I would think that if Democrats take over the White House and retake the majority of the SEC that these rules would be revisited fairly quickly,” Mr. McGurn said.
The president gets to nominate an SEC chair; currently the commission has a 3-2 Republican majority with Mr. Clayton at the helm.