Proposed Amendments to Regulate Shareholder Engagement Weaken Corporate Accountability
Over the past 18 months, Athena Impact, our firm’s impact investing practice, has been proud to support the Women’s Inclusion Project (“WIP”), a shareholder initiative to promote gender equity within U.S. corporations. The initiative unites like-minded shareholders behind a clear message to corporate managers and boards that gender diversity, equal pay, and equal opportunity are not just moral imperatives, but are also essential conditions for the creation of shareholder value over the long-term. The key to the WIP’s success, and the success of any other shareholder engagement initiative, is the right to file resolutions that appear on a company’s proxy statement, the document publicly traded corporations use to solicit shareholder approval for a range of corporate matters. That right is now under threat.
In November 2019, the Securities and Exchange Commission (SEC) proposed amendments to the rules governing shareholder engagement that would increase the various thresholds for the submission and resubmission of shareholder proposals. Athena Capital expressed our opposition to the proposed amendments in a letter to the SEC. We believe the proposal will weaken corporate accountability, is inconsistent with the SEC’s mission to “protect investors,” and will disproportionately curtail the rights of younger and less affluent shareholders.[i]
Current State of the Shareholder Proposal Process
The current shareholder proposal process, outlined in the Securities and Exchange Commission “Rule 14a-8,” has worked effectively for years to facilitate dialogue between corporate management and the shareholders they serve. The rule gives any shareholder that owns at least $2,000 worth of stock for a minimum of one year the ability to file a resolution. Large and small shareholders alike have used the process outlined in Rule 14a-8 to highlight a range of concerns about corporate governance, executive compensation, corporate transparency, as well as climate change, gender diversity, and a number of other social or environmental issues. The process is ever more critical today as corporate managers face increasing pressure to deliver short-term results, even at the expense of long-term performance.[ii] Shareholder proposals often help draw management’s attention to strategic risks and opportunities they may not otherwise recognize or adequately address.
Amendments to the Shareholder Proposal Process
The SEC’s proposed changes would stifle shareholders’ ability to exercise their rights and do so in a way that unfairly penalizes small shareholders. Investors with $2,000 of stock in a company would have to hold their interest for three years before they could file a resolution, whereas those with $15,000 would only have to wait two years, and those with $25,000 would only need to wait one. The proposed rules would also increase the voting thresholds resolutions must meet in order to qualify for refiling in subsequent years. Under the current rule, shareholder proposals are eligible for resubmission if they win 3 percent of the vote in their first year, 6 percent in their second, and 10 percent in any subsequent year. The amendment would raise those thresholds to 5, 15, and 25 percent, respectively.[iii]
The SEC’s rationale for increasing the eligibility requirements is that the current threshold does not require shareholders to demonstrate enough of an “economic stake or investment interest” to justify granting them the ability to file resolutions.[iv] From the perspective of corporate managers that rationale may make sense. A $2,000 shareholding is a rounding error in the ownership base of a multi-billion dollar corporation. But for many investors, committing $2,000 to a single stock position means taking on significant risk. According to U.S. Census data, the median value of “stock and mutual fund shares” held by individuals under the age of 35 and households with less than $500,000 in net worth was far lower than their older and wealthier peers. The SEC is not charged with addressing wealth and income inequality, but it is required to consider the distributional effects of its regulations. Larger shareholders will almost always be able to outvote their smaller peers, yet the SEC’s proposal goes a step further to imply that the ideas of those with less capacity to purchase stock are less worthy of consideration.
Critics of the current shareholder process have been much more explicit in making that case. Former Business Roundtable President John Engler argued in a May 2019 Wall Street Journal Op-Ed that filings from small shareholders are typically “frivolous” and consume “time and money that could be put to better use.”[v] The evidence suggests otherwise. Corporate managers are already quite successful at dismissing shareholder proposals they consider a waste of time. Between 2003 and 2015, according to researchers at Harvard University and the University of British Columbia, the SEC approved 73% of management’s requests to exclude shareholder proposals from their proxy materials.[vi] More telling, though, is that 21% of the requests the SEC denied involved proposals that went on to win a proxy vote or were withdrawn after the company compromised with proponents.[vii] “Our evidence supports the idea,” the researchers concluded, “that managers often seek to exclude proposals that are not necessarily frivolous and are ultimately supported by a significant proportion of shareholders.”[viii]
Finally, we are concerned that the SEC’s proposed increase in resubmission thresholds would suppress shareholders’ ability to raise awareness about complex issues that investors need time to understand. In the Rulemaking Petition response, one commenter noted that “a low vote—even over multiple years—is not necessarily correlated with the investment relevance of an issue.” The commenter went on to cite a climate change proposal that ultimately received a 62.1% support vote, despite having garnered only about 5% support several years prior to its final supporting vote. [ix]
The commission’s concern about the “burdens” these resubmissions impose on companies is overstated.[x] In 2016, approximately 1,000 shareholder resolutions were filed, equivalent to “1 proposal every 4 years per company on average,” according to a report jointly published by the Forum for Sustainable and Responsible Investment, Ceres, and the Interfaith Center on Corporate Responsibility.[xi] The majority of these were filed with the largest companies, which have ample resources to handle the inflow. Citing data from Institutional Shareholder Services, the Council of Institutional Investors reports that between 2004 and 2017, only 3.7% of shareholder proposals were directed at companies with less than $1 billion in market capitalization.[xii]
Importance of Corporate Accountability
Companies that issue securities in the U.S. public equity markets accept a bargain. They gain access to a vast pool of investor capital in exchange for greater transparency and broader accountability. The proposed changes to Rule 14a-8 will weaken a critical tool shareholders have to ensure companies hold-up their end of the deal.
Athena is proud to add its voice to a community of investors that recognize the importance of corporate accountability. We believe the shareholder proposal process should allow investors of all sizes to pursue their long-term investment goals by encouraging foresight and demanding accountability. We hope the SEC will take heed of the strong opposition to this proposal as it draft its final rule.
[i] “What We Do,” U.S Securities and Exchange Commission, June 10, 2013. Accessed: December 9, 2019, https://www.sec.gov/Article/whatwedo.html
[ii] Dominic Barton et al, “Measuring the Economic Impact of Short-Termism” (McKinsey Global Institute, New York, February 2017). Accessed: December 9, 2019, https://www.fcltglobal.org/docs/default-source/default-document-library/20170206_mgi-shorttermism_vfinal_public4dc2494db5326c50be1cff0000423a91.pdf?sfvrsn=df0258c_0
[iii] Proposed Rule, “Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8,” Federal Register 84, No. 233 (December 4, 2019): 66470, https://www.federalregister.gov/d/2019-24476/p-284
[iv] John Engler, “How Gadfly Shareholders Keep CEOs Distracted,” Wall Street Journal (New York, NY), May 26, 2019. Accessed: December 10, 2019, https://www.wsj.com/articles/how-gadfly-shareholders-keep-ceos-distracted-1464300425
[vi] Soltes, Eugene F. and Srinivasan, Suraj and Vijayaraghavan, Rajesh, What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management (July 14, 2017). Harvard Business School Accounting & Management Unit Working Paper. p. 3. Available at SSRN: https://ssrn.com/abstract=2771114 or http://dx.doi.org/10.2139/ssrn.2771114
[ix] “Wealth and Asset Ownership Data Tables” (U.S. Census Bureau, Washington, 2016), Tables 1 & 5. Accessed: December 16, 2019, https://www.census.gov/topics/income-poverty/wealth/data/tables.html
[x] Proposed Rule, “Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8,” Federal Register 84, No. 233 (December 4, 2019): 66470, https://www.federalregister.gov/d/2019-24476/p-284
[xi] “The Business Case for the Current SEC Shareholder Proposal Process,” USSIF.org, Jointly: Forum for Sustainable and Responsible Investment, Ceres, and the Interfaith Center on Corporate Responsibility, April 2017. Accessed: December 10, 2019, https://www.ussif.org/files/Public_Policy/Comment_Letters/Business%20Case%20for%2014a-8.pdf
[xii] Jonas Kron and Brandon Rees, “Frequently Asked Questions about Shareholder Proposals,” (Council of Institutional Investors) Accessed: December 19, 2019, https://www.cii.org/files/10_10_Shareholder_Proposal_FAQ(2).pdf