Restore Corporate Discipline by Reining in Shareholder Proposals

Securities and Exchange Commission Chairman Paul Atkins gave an important speech on Oct. 9 at the University of Delaware’s John L. Weinberg Center for Corporate Governance, which I direct. Pointing out that the number of US public companies today is about half that of two decades ago, Atkins said he intends to help reverse that decline.

One cause he diagnosed is the SEC’s shareholder proposal rule, which allows public company shareholders to force advisory shareholder votes—called precatory proposals—on a wide variety of topics that have nothing to do with running or governing a business.

What began decades ago as a tool for good governance on topics such as shareholder voting rules and board structures has morphed into an advocacy tool—used for and against every imaginable special interest topic. Recent examples include requesting a report on viewpoint discrimination at Amazon.com Inc. and a proposal to change packaging labels about recycling at Kraft Heinz Co.

Many such proposals are made by shareholders with minimal economic stakes, yet they often require disproportionate attention from boards, lawyers, and management—resources paid for by fellow share owners. Delaware’s corporate statute and case law haven’t squarely addressed whether stockholders may compel advisory votes on non-governance matters, though both are clear that boards—not stockholders—manage corporate affairs.

That may sound like legal fine print, but it goes to the heart of the problem. If Delaware law doesn’t grant stockholders the right to force advisory votes on whatever topic they wish, then the SEC’s Rule 14a-8 (allowing shareholders to submit proposals to go in company proxy materials) can’t confer one.

Federal securities rules govern how and if proposals appear on a proxy; state law determines whether shareholders have the right to demand them in the first place. Atkins is now looking to Delaware to clarify whether precatory proposals on nearly any topic are a proper subject for stockholder action under state law.

I testified before Congress two years ago on the misuse of Rule 14a-8. The number of shareholder proposals on issues outside corporate governance had surged while their connection to corporate performance dropped. Although such proposals have eased somewhat since then, they remain significant and costly to fellow shareholders even when they fail, as most do.

Proponents argue that non-governance proposals are harmless expressions of sentiment. But sentiment can be weaponized. When the corporate ballot becomes a front in national culture wars, no one wins—not employees, not investors, not the public. Boardrooms that should be focused on strategy and performance are distracted.

Concerning overtly political proposals, some justify them as a way to influence corporate behavior or promote transparency on issues they believe affect long-term performance. They argue that companies operate within society and should be responsive to its concerns—even when political. In this view, politicized shareholder proposals serve as a democratic outlet for investor voice.

But that perspective, while understandable, risks conflating corporate governance with political activism. The corporate proxy isn’t a public referendum—it’s a tool for stewarding a specific enterprise. When political expression overtakes fiduciary focus, that risks division and diminished performance.

Nor is reviewing shareholder authority to make such proposals a threat to silence shareholders—it is rather to empower shareholders as a group. Shareholder bodies possess powerful governance tools—electing and removing directors, nominating alternatives, communicating with management, filing legal claims, and even making proposals on governance.

Delaware law gives corporations wide latitude to adopt bylaws regulating stockholder proposals, which can be restrictive or expansive. Some companies have begun doing so while others await clarification through experience or interpretation. Either way, the goal remains clear: Preserve the fiduciary focus that Delaware law has long emphasized.

Delaware’s courts, which are more fluent in business law than courts anywhere else in the country, have long safeguarded that fiduciary focus. Their case law reflects that good corporate governance depends not on political expression but on business judgment, good faith, and trustful loyalty.

For the SEC, that means respecting the limits of its rulemaking. Rule 14a-8 can ensure fair procedure, but it can’t invent substantive rights that state law doesn’t confer. Recognizing that boundary isn’t deregulatory zeal; it’s the basis of our federal system.

Corporate America faces enough real challenges—global competition, innovation, technological disruption—without its annual meetings being dueling stages for esoteric or ideological theater. Ensuring discipline in the shareholder proposal process is a modest but valuable step toward letting boards govern and investors invest.

While many factors explain the decline in the number of public companies in recent decades, the costs and distractions of non-governance shareholder proposals, which may not even be valid under state law, are certainly among them. Atkins is right to invite Delaware to clarify this issue.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Lawrence A. Cunningham is presiding director of the John L. Weinberg Center for Corporate Governance at University of Delaware and Henry St. George Tucker III Professor Emeritus at George Washington University Law School.

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