The Securities and Exchange Commission, despite its mandate to protect investors, has proposed a new rule that would muffle the voices of investors who seek to encourage publicly traded companies to operate in a responsible and sustainable manner.
The SEC proposal upends shareholders’ ability to file resolutions at their companies’ annual meetings, a right they first began using several decades ago to ensure that the companies in which they invested had strong policies and were not causing social or environmental harm.
These shareholder engagement initiatives, which continue to this day, may involve investors meeting with company managers or writing to them about their concerns. However, when corporate managers exhibit little commitment to addressing investor concerns, investors have sought to hold them accountable by filing shareholder resolutions at their annual meetings
Massive Stock Ownership Requirement
The SEC proposal would do away with the longstanding and simple requirement that shareholders must have held at least $2,000 worth of shares for one year in a company to be eligible to file a shareholder resolution at its annual meeting. Instead, the proposed rule creates a new tiered system based on the length of time the shares are held.
For shares held one year, the SEC proposes a massive 1200% increase in the stock ownership required—to $25,000. If held for two years, the amount is $15,000. Only if a shareholder has held the shares for three years will ownership of $2,000 suffice to file a resolution.
Second, the SEC seeks to hike the support that shareholder resolutions must receive—based on the percentage of the shares voted—to be eligible for resubmission. Historically, resubmission thresholds have been set at modest levels to allow emerging issues to build support over time from other investors. The proposal changes these thresholds from 3% of the shares voted the first year, 6% the second year, and 10% the third year and beyond, to 5%, 15%,and 25%, respectively.
More troubling still is a provision that would handicap resolutions that reach the 25% to 50% support range after three years. If the support for such a resolution decreases by 10% from the previous year’s vote, a company can omit it from the proxy. This sets up an illogical scenario where a resolution that loses support from 49% to 44% in the fourth year (a 10% decline from 49%) can be omitted, but a resolution that remains steady at 27% on the fourth year’s vote can be resubmitted. This would imply that a vote of 44% is a weaker outcome than a vote of 27%.
What has traditionally been a fairly straightforward process for shareholder resolutions now becomes unnecessarily complex, leading to more work for investors and a more complex regulatory role for the SEC, an odd result for an administration that claims to desire less regulation.
Taken together, these measures will make it much harder for investors—especially retail “Main Street” investors as SEC Chairman Jay Clayton refers to them—to get important issues on publicly traded companies’ annual meeting agendas.
Time and again, investors have filed resolutions on critical environmental, social, and governance issues such as climate change, diversity in staff and on boards, fair executive compensation, and human rights abuses in supply chains. These are representative of multiple issues that have come to garner significant support and are viewed as material to financial and reputational success.
For example, in 2018 several multinational oil companies agreed to begin reporting on strategies to align their operations with international global warming reduction goals. In another example, an increasing number of technology, financial, and health-care companies have agreed to disclose their gender pay gaps and goals for achieving equal pay.
Why might the SEC be addressing these issues now? Making it more difficult for investors to engage companies has long been a priority of some members of Congress, some SEC commissioners and several corporate trade associations. With a limited window left to act before a potential change in administration, there is pressure to get these new proposals into law now.
Report Refutes Opinions
The SEC and some trade associations also claim that U.S. companies are drowning in a sea of frivolous and expensive shareholder resolution activities. But this is not the case.
According to an April report from corporate law firm Skadden, Arps, Slate, Meagher & Flom LLP, environmental, social, and governance-related shareholder resolutions actually declined in 2018 compared to the previous year. Skadden attributes the decline to “companies’ increasing willingness to engage with shareholders on these issues and collaborate to address their concerns.”
In other words, many companies are recognizing the benefits of shareholder resolutions, and some are engaging with shareholders earlier in the process.
A founding purpose of the SEC is to protect investors. This proposal betrays that mission. Public comment closed Feb. 3.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment and the US SIF Foundation. US SIF is the leading voice advancing sustainable, responsible, and impact investing across all asset classes.