November 5th, 2019—For over 70 years, the shareholder proposal rule has served main street investors, companies, and the public well. It has promoted and supported a marketplace of ideas that has harnessed the innovations and perspectives of small investors to the benefit of companies, workers, communities, the environment, and our economy. It has also served as an important counter-balance to crony capitalism and the concentration of power in corporate executives.
But the proposed rule issued today, if adopted, would weaken this important engine of the marketplace and would tip the scales in favor of corporate managers.
By making the eligibility thresholds more onerous, the rule would shut out many small main street investors that are a pillar of our economy. It is small investors that have filed proposals that regularly get majority votes and it is these proposals which have strengthened corporate governance through measures such as annual elections, majority voting, and other important improvements.
In proposing to move the goal posts of the resubmission thresholds, the proposed rule is “solving” a non-existent problem. Company proxy materials are not overrun by shareholder proposals – in fact the number of shareholder proposals voted on every year is remarkably stable. Shareholder proposals make up less than 2% of the total number of ballot items in a given year.
Commissioner Jackson made an important point – the SEC is making two changes at once without understanding how the two changes will interact. As the new proxy advisor rules bring pressure to bear on ISS and Glass Lewis will they support fewer proposals, thereby driving down vote results – while at the same time raising resubmission thresholds. The potential for unintended negative consequences is enormous and the SEC is flying us blind into that world.
I should also add that filing a shareholder proposal is not easy. The rule currently provides 13 reasons a company can exclude a shareholder proposal. When writing a shareholder proposal, one needs to take a large body of substantive material, boil it down to the right level of specificity, steer clear of the exclusions, provide a persuasive recommendation, and do it all in less than 500 words. Which is probably why, as I mentioned earlier, shareholder proposals make up less than 2% of the total number of ballot items in a given year.
Finally, this rulemaking is especially concerning because we know that the valuable time of the SEC is better spent on other more pressing matters that will advance the SEC’s mission to protect investors.
The SEC has not finished implementing the executive compensation rules mandated by Dodd-Frank over a decade ago. Investors want a universal proxy that will strengthen the checks and balances of healthy corporate governance. Our proxy plumbing system is creaky and woefully out of date – market participants are virtually universal in their calls for genuine proxy plumbing fixes.
But rather than do the work that our capital markets need, everyone is now forced to spend valuable time and resources responding to the grumblings of a few influential CEOs that just wish that investors would go away and leave them alone.
The views expressed are those of the author and Trillium Asset Management, LLC and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. This is not be a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The securities mentioned were selected to illustrate views expressed and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is for informational purposes only.