SEC Must Avoid Errors of Omission

Sanford Lewis, Director, Shareholder Rights Group

In deciding whether to allow exclusion of shareholder proposals, the Securities and Exchange Commission must consider its clearly stated investor protection mission.  History has shown it can be far more detrimental to that mission to make errors of omission (wrongly omitting proposals) than to make errors of inclusion.  Recent history contains numerous examples of proposals that were excluded only to later prove to have been early warnings of highly material risks.

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Ceres, Costs of the Shareholder Proposal Process, April 2017.

From Ceres: The Business Case for the Current SEC Shareholder Proposal Process

The Business Roundtable suggests that companies spend an average of about $87,000 per shareholder proposal. This figure originates from an SEC release in which the SEC attempted to utilize limited and ambiguous data to calculate costs associated with the shareholder proposal process. Prior to its 1998 rulemaking, the SEC surveyed companies regarding the costs of the process. The questionnaire contained ambiguous questions yielding results that do not support the above figure.

First, the SEC asked how much it costs companies per year to determine whether or not to include shareholder proposals, including following the exclusion rules and procedures. Because the question was ambiguously worded, the average figure of $37,000 per year arguably applied to the total cost to companies of considering whether or not to include all proposals. It did not appear to reflect the cost per proposal. The wide range of responses to the question from $10 to $1,200,000 (a median value of $10,000) also reflects the ambiguity of the issue and question, as well as the range of resources expended by companies in their discretion in response to shareholder proposals. Similarly, the SEC reported survey results indicating an average cost of $50,000 to publish proposals, and as with the first question it appeared that this may be the average cost for including all proposals in the proxy, rather than a per proposal expense. These ambiguities in the original questionnaire and responses undermine the conclusion that it costs companies an average of $87,000 per proposal.

Most companies receive few, if any, shareholder proposals. While there are about 4,000 publicly listed companies in the U.S. (excluding over-the-counter stocks), in 2016 approximately 1,000 resolutions were filed — or approximately one proposal every four years per company on average. Moreover, most proposals tend to be filed with larger (i.e., S&P 500) companies, which have the resources to deal with such shareholder input. The number of shareholder proposals in recent years has not been significantly increasing. Rather the number of proposals has vacillated from a high of 1,126 in 2009 to a low of 691 in 2011.

Finally, the SEC oversees a robust “no-action letter” system that allows companies to exclude proposals from the proxy ballot that do not meet certain procedural and/or substantive hurdles. Requesting an informal no-action letter provides companies with a means of knowing whether the SEC Staff would recommend no enforcement action if the company’s excludes the proposal from the proxy. During the 2013–2015 proxy seasons companies challenged nearly one-third of shareholder proposals submitted. About half of those challenged proposals were omitted from the proxy with SEC approval.

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