Investors to SEC: "Rescind New No-Action Policy"

We recommend that the Division rescind the policy and retain the process that has worked reasonably well for decades. The number of no action requests processed by the Staff has not increased, and thus this change does not seem merited. In the event that the SEC does not rescind the new policy, we offer the following suggestions to reduce the level of uncertainty and conflict resulting from the new approaches….

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SEC: Nominal Thresholds Empower the Small Shareholder

The Securities and Exchange Commission last revised the requirement as to how many shares must be held by a proponent in 1998. At that time the Commission made it clear that increasing the threshold above $2000 held for a year would be detrimental to key participants in the process - the smaller shareholders empowered by the rule:

[W]e are increasing the dollar value of a company‘s voting shares that a shareholder must own in order to be eligible to submit a shareholder proposal ­­ from $1,000 to $2,000 ­­ to adjust for the effects of inflation since the rule was last revised. There was little opposition to the proposed increase among commenters, although several do not believe the increase is great enough to be meaningful, especially in light of the overall increase in stock prices over the last few years. Nonetheless, we have decided to limit the increase to $2,000 for now, in light of rule 14a­8’s goal of providing an avenue of communication for small investors. There was no significant support for any modifications to the rule’s other eligibility criteria, such as the one ­year continuous ownership requirement.

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Sanford Lewis, Shareholder Rights Group: Proxy Voting Outcomes, July 2019

According to data compiled by the Sustainable Investments Institute, 176 resolutions on social and environmental topics came to a vote at US companies in the spring of 2019. Many of these were filed by investors with relatively small stakes consistent with the existing filing thresholds. The proposals received on average of 25.5 % support (about the same as the average of 25.4% for resolutions of this kind in 2018, and 21% in 2017). These numbers demonstrate that proposals of interest to a large portion of a company’s shareholder base can and do originate with smaller individual and institutional investors.

Examples of such resolutions that received majority support include:

  • A human rights reporting proposal filed at private prison operator Geo Group, by the USA West Province of the Society of Jesus, which received 87% support after the company’s board of directors withdrew its opposition.

  • A proposal for disclosure of governance measures implemented related to opioids filed by Domini Impact Equity Fund and others receiving 60% support.

  • Proposals requesting diversity reports filed by Trillium at Newell Brands and Travelers Companies received 56% and 50.9% support, respectively.

The season outcomes also illustrate the continued applicability and viability of the existing resubmission thresholds. Voting outcomes show that there were very few proposals resubmitted when the prior votes were close to the resubmission thresholds and that sometimes the vote outcomes improved markedly. For instance, a resubmitted and refined request to report on the company’s prison labor policy received 28.7% this year at Costco, after a proposal on the same topic garnered only 4.8% of the vote in 2018; a similar proposal at TJX Companies received 38% support, up from 7.75% in 2018. Concerns about prison labor in the supply chain is an emerging issue which was first brought to the investment community’s attention by a few forward-looking investors, but is now of concern to many. Substantially higher resubmission thresholds for first-year or second-year resolutions might have interrupted consideration and flagging of these issue at those companies’ annual meetings.

The average of favorable votes for ESG proposals continues to increase as investors recognize the materiality of ESG issues at their companies. However, where the business case is not effectively demonstrated by the proposal and proponents, shareholders are quite able to reject resubmission via the existing resubmission thresholds. For example, shareholders consistently gave less than 3% support to proposals seeking an ideological litmus test for board members at Discovery, Starbucks, Apple, Twitter and Amazon. Shareholders at Exelon similarly rejected a proposal to “burn more coal” with only 1.6 percent support. Investors also rejected a request to report on how Gilead Sciences spent its share of the federal tax cut, a proposal that earned only 2.2%.

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Retail Investors Bring Big Improvements in Corporate Governance

James McRitchie

James McRitchie

Retail shareowners can improve the governance of companies throughout the economy, by filing proposals to improve governance — e.g. to ask that the CEO and chairman of the board roles go to two different people, that shareholders have rights to call special meetings, to require directors to receive support from a majority of shareholders and to require directors to run for election annually. Such proposals often receive substantial support from fellow shareholders, including  large institutional investors. In recent years their proposals at dozens of companies have focused on making it easier for shareholders to call special meetings of their companies. This is a right of shareholders to engage in rapid response, and not wait till the next scheduled shareholder meeting if things go awry — e.g. to  hold an interim meeting to elect a director to help implement a needed change, or to dismiss some members of the board of directors, or vote on important amendments to their bylaws.

According to Institutional Shareholder Services Inc. (ISS), “Since 2010, shareholders have voted on 183 proposals to adopt the right to call a special meeting, and 48 of these proposals received the support of majority of votes cast, with an average support rate of 43% of votes cast.” This trend is most pronounced among S&P 500 firms. ISS further notes: “In the S&P 500, a steadily increasing number of companies adopt the right to call a special meeting, potentially as a result of shareholder engagement and shareholder resolution filings. Since 2008, the percentage of S&P 500 firms giving shareholders the right to call a special meeting has increased from 41% to 67%.” A study of the occurrence of the right to call special meetings at companies  notes 84% of the firms that received at least one shareholder proposal asking for the right to call special meetings had granted their shareholders that right by the end of 2017.

In the 2019 proxy season the retail shareholders’ corporate governance proposals have seen strong support from investors:

  • 6 majority votes

  • 37 votes between 40% and 50%

  • 13 proposals adopted by companies without even going to a shareholder vote

  • 10 proposals adopted by companies in a process that included a shareholder vote

  • 12 proposals winning a 2018 majority vote that were adopted by the end of the 2019 proxy season.