S&P Global Market Intelligence: SEC proposed rule would have blocked 614 ESG resolutions since 2010, data shows

Author: Esther Whieldon

Since 2010 more than 600 environmental, social and governance-related resolutions likely would have never advanced under a newly proposed rule by the U.S. Securities and Exchange Commission, according to data the Sustainable Investments Institute shared with S&P Global Market Intelligence.

The SEC in November 2019 proposed to increase the amount of support a shareholder resolution required to be reconsidered in the years following an initial vote. Rather than resolutions needing at least 3% support the first year, 6% the second year, and 10% the third and subsequent years after an initial vote to be reconsidered, the SEC would raise those thresholds to 5%, 15% and 25%, respectively. The agency estimated the changes would cut the number of shareholder proposals by 7%.

While the rule has yet to be finalized, the Sustainable Investments Institute, or Si2, compiled a database of ESG resolutions voted on from the beginning of 2010 through Nov. 18, 2019. Si2 found that 614 ESG-related resolutions, or about 30%, of the 2,019 proposals voted on at company annual meetings over that period would not have been eligible for resubmission. That total is almost three times the number of resolutions — 206 resolutions — that could have failed existing threshold requirements over that time, according to Market Intelligence's analysis of the data.

Of the 614 potentially impacted resolutions, political activity, climate change and human rights issues would have taken the biggest hit.

Companies are coming under increased pressure from investors to disclose how ESG risks could impact their bottom line, and they are addressing those risks and opportunities. But groups such as the U.S. Chamber of Commerce and Business Roundtable have pushed for reforms to the shareholder resolution process.

Investor Voice: SEC’s Proposed Rule Changes Muzzle Shareholders and Shield CEOs From Accountability

SEATTLE – The U.S. Securities and Exchange Commission voted today to consider sweeping changes to the regulations governing the shareholder proposal process which negatively impact small investors as well as proxy advisory services. The proposed changes to Rule 14a-8 include substantially more strict and complicated thresholds for filing, significantly higher resubmission requirements, serious free speech infringements on independent third-party proxy advisory services, and onerous restrictions on an investor’s essential agency right to seek assistance. 

“The shareholder proposal rule is the bedrock of effective corporate engagement in the United States,” said Bruce Herbert, chief executive of Investor Voice.  “For over 70 years, the shareholder engagement process has been a vital tool for stockowners to propose good ideas involving sustainability, profitability, and governance; to hold CEOs accountable for mismanagement; and to mitigate risk by addressing issues like climate change and human rights.” 

“These proposed changes were not asked for by investors,” Herbert continued, “they are the result of a concerted influence campaign backed by large industry associations. Key players were the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce – each of whom believes that responding to small investors creates an undue burden on the corporation.”

The proposed changes, Herbert said, are a solution in search of a problem.  Trump appointees to the SEC, including Chair Jay Clayton and Commissioner Elad Roisman, argue that change is needed to ‘modernize’ the shareholder engagement process, asserting that the rules have not been “revised” in decades.  

“However,” Herbert observed, “that argument is highly misleading because ‘revision’ is very different from ‘review’ – the fact is that the shareholder engagement rule has been reviewed many times over the decades and always found to be fresh and beneficial as it stood.  Focusing on ‘revisions’ while ignoring ‘reviews’, as Clayton and Roisman purposefully do, is like asserting that someone who goes in for annual check-ups has received no medical attention whatsoever unless and until they undergo surgery.”

The two Democrats on the commission, Allison Lee and Robert Jackson, blasted the proposed changes as a power-grab by corporate CEOs.  “The bottom line is that today’s proposals would shift power away from shareholders and towards management,” said Commissioner Lee.

Commissioner Jackson, meanwhile, argued that, while some minor reforms may be needed, today’s proposals “amount to swatting a gadfly with a sledgehammer.”

The Commission passed the motion to consider the proposed changes on a party-line vote of 3-2.  The public will have only 60 days to submit comments to the SEC once the proposals are published in the Federal Register.

Contact:  Bruce Herbert  
206-522-3055  team@investorvoice.net

NY State Comptroller DiNapoli Statement on Proposed SEC Rule Changes

"The SEC's proposals are two of the most significant actions to restrict shareholder rights in the SEC’s history. There is no credible evidence to support the need for these proposals, and if adopted, they would undermine corporate accountability, entrench managements’ opposition to shareholder proposals and increase costs for investors. These proposals are contrary to the SEC's mission to protect investors and our financial markets. Along with other investors, I will continue to voice my opposition to these actions and my support for greater corporate accountability."

New York City Comptroller Scott M. Stringer on Proposed SEC Rule Changes

"As Comptroller for the City of New York, I am the chief investment advisor and custodian of assets of the five New York City Retirement Systems (NYCRS) and a trustee of four of them. These Funds represent the retirement security of the City’s teachers, school employees, police and firefighters, and other employees. Many of our more than 700,000 members likely only participate in the capital markets through their role as pension fund beneficiaries and are the true main street investors whose interests the SEC should protect.

"The NYCRS are long-term shareowners of more than 3,000 U.S. public companies and are the fourth largest public pension system in the United States, with more than $200 billion in assets under management. Our funds have filed more than 1,000 shareowner proposals, almost certainly more than any other institutional investor in the world, with a record dating back 30 years.

"The proposed U.S. Securities and Exchange Commission changes will compromise the independence of our contracted proxy advisers, impose limits on shareowner proposals and therefore further insulate corporate management from accountability to shareowners. If implemented, these actions would be a shameful gift to corporate executives at the expense of shareowners.

"The proposed rules seek to remedy problems that do not exist but are merely false narratives put forward by corporate executives who want to limit the ability of investors to push for change and to hold them accountable for runaway CEO pay, excessive risk-taking and irresponsible and harmful business practices.

"These are mechanisms through which we and other shareowners have pushed for anti-discrimination policies, greater diversity in the C-suite, better climate policies and improved transparency and accountability in our interests as long-term investors. We should be demanding more of this, not less."

Council of Institutional Investors: Fact Sheet on Proxy Advisory Firms and Shareholder Proposals Nov. 5, 2019

1. The Business Roundtable, National Association of Manufacturers and other

management groups’ claim that proxy advice is rife with errors is based on anecdote not evidence.

·      The SEC comment file for the SEC’s Nov. 15, 2018, proxy roundtable includes a number of letters that assert that errors in proxy reports are endemic. But the letters offer very few examples and most of those do not identify the company and cannot be checked. CII believes most claims of errors actually are methodological differences.

·      The only study that CII is aware of that purports to tote up proxy advisor errors alleges just 39 factual errors over nearly three years (or 0.1% of more than 30,000 reports by leading proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis during that period). And the study inflates the claimed error rate. CII’s own analysis of the study found that no more than 17 of the claims of factual error had merit.

·      CEO and board member dislike of proxy advisors appears driven by discomfort with the role of proxy research to be critical and raise questions. The charge of systemic factual error appears to be fabricated as a means to quash critical analysis and commentary.

2. Claims that proxy advisory firms wield excessive influence over how institutional investors vote confuse correlation with causation.

·      Many pension funds and other institutional investors buy proxy and review advisors’ research and recommendations but vote according to their own guidelines and policies. According to ISS, 85% of its top 100 clients use a custom voting policy.

·      It is wrong and insulting to suggest that institutional investors “robo vote”—vote in lockstep with proxy advisor recommendations. While ISS recommended voting against say-on-pay proposals at 12.3% of Russell 3000 companies in 2018, just 2.4% of those companies received less than majority shareholder support on their say-on-pay proposals. In 2019, Glass Lewis recommended in favor of 89% of directors and 84% of say-on-pay proposals, while directors received average support of 96% and say-on-pay proposals garnered average support of 93%.

·      Academic research has found that while both ISS and Glass Lewis appear to have some impact on shareholder voting, media reports often substantially overstate the extent of that influence.

3. The proposed mandate that proxy advisory firms let companies review the firms’ reports before investor clients see them amounts to unprecedented interference in the free market and is the opposite of what is required by regulation of stock analyst reports.

·      Current rules prohibit analysts from sharing draft research reports with target companies, other than to check facts after approval from the firm’s legal or compliance department.

·      FINRA Rule 2241, which the SEC approved, establishes this safeguard to, as the SEC has explained, “help protect research analysts from influences that could impair their objectivity and independence.”

·      If the SEC adopts its proxy advisor regulation, an analyst and a proxy advisor could write a report on the same company and the analyst would violate securities laws by showing it to the company in advance, while the proxy adviser would violate the law if it did not show it to the company in advance.

·      This is the very definition of arbitrary and capricious government action.

4. Three SEC commissioners are attempting to jam through fundamental changes without appropriate analysis and public comment.

·       The predicate for the SEC’s new, heavy-handed regulatory structure for proxy advisory firms is a significant change made by the SEC on Aug. 15, 2019, on a 3-2 vote, without any public comment, zero cost-benefit analysis and limited and flawed legal justification.

5. Shareholder proposals have proven to be a key channel for effective shareholder engagement with public companies for more than half a century.

·      Shareholder proposals permit investors to express their voice collectively on issues of concern to them, without the cost and disruption of waging proxy fights.

·      Shareholder proposals have encouraged many companies to adopt governance policies that today are viewed widely as best practice.

o   Electing directors by majority vote, rather than by plurality, a radical idea a decade ago when shareholders pressed for it in proposals, is now the norm at 90% of large-cap U.S. companies.

o   Similarly, norms such as independent directors constituting a majority of the board, independent board leadership, board diversity, sustainability reporting, non-discrimination policies and annual elections for all directors all were advocated early through shareholder proposals.

·      Shareholder proposals are a critical tool for expression of the collective views of holders, permitting them to communicate with each other as well as the company on whether an issue or approach has support. Another tool is voting against directors, but the message from negative voting on directors when the concern is a specific policy or disclosure is much less focused or clear.

6. Shareholder proposals are not a significant burden to U.S. public companies.

·      Shareholder proposals are almost always non-binding. The board actually does not have to do anything in response to a proposal.

·      Most public companies do not receive any shareholder proposals. On average, 13% of Russell 3000 companies received a shareholder proposal in a particular year between 2004 and 2017. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year.

·      Companies exaggerate the cost of shareholder proposals. Most of the cost involves attempts by management to exclude proposals from their proxy statements, which is a choice made by management. The cost to put a proposal on the proxy ballot is de minimis.

·      CEO advocacy organizations say that shareholder proposals keep private companies from doing an IPO, an unsupportable and fact-free assertion. It is ludicrous to argue that a board would forgo access to public capital markets because in the next eight years the company may face a nonbinding shareholder proposal requesting better disclosure on its carbon footprint or the annual election of all directors.

7. Additional curbs on shareholder proposals are not needed.

·      Raising resubmission thresholds will stifle new ideas and issues, which typically take time to gain traction with investors.

·      The raised resubmission thresholds will keep topics off corporate ballots for years, even though circumstances may change at a company (e.g., independent board leadership tends to be seen as much more urgent when a company is in crisis, and the proposed new thresholds are likely to bar a proposal to separate the roles of CEO and chair at companies with the worst governance records).

·      The increased ownership thresholds will especially hamper small investors, the very market participants that SEC Chairman Jay Clayton has made it a priority to protect.

·      Until 1983, ownership of a single share of stock carried the right to propose a shareholder resolution. Now we are on a slippery slope that strips that right from more and more small shareholders, whose ideas can be as important and valuable to consider as those of larger holders.

AS YOU SOW: As Shareholder Support for Climate Change and other Environmental, Social, and Governance Issues Grows, SEC Votes to Restrict Shareholder Voice

BERKELEY, CA—NOV. 5, 2019—The U.S. Securities and Exchange Commission (SEC), led by Chairman Clayton, voted today to severely limit the rights of shareholders, especially small shareholders to file proposals at companies. The SEC 14a8 process was created to ensure that shareholders have the right to seek transparency and disclosure from companies or raise significant policy issues that can create risk or harm company value over time. Such proposals, which are advisory and not mandatory even with 100% of the vote, have the goal of raising critical issues in front of management, boards, and company shareholders. Today’s draconian vote, split along party lines, would limit investor rights in ways that are incompatible with the basic premise that shareholders are owners of companies and should have a voice in the companies they own. 

“With this vote, the SEC has apparently inverted its mandate of protecting shareholders to that of protecting companies from shareholder input — even where company action creates increasing risk to shareholders, people, or the environment,” said Andrew Behar, CEO of As You Sow. “This proposal flies in the face of the SEC’s mandate of ensuring transparency, open discussion, and company responsiveness to shareholder concerns.”  

Shareholder proposals have served an important role in bringing cutting edge issues to the attention of management and boards, informing shareholders of growing risk, and increasing productive discussion of significant policy issues — in short, increasing transparency and shedding light on company actions. “Shareholders and companies have been well served by this process over the years; allowing company actions to fall back into the shadows is a giant step backward for all,” said Behar.  

Climate proposals are an important example of how shareholders have successfully used the process to flag the growing risk to companies and investors of inaction on climate change. Shareholder proposals have shined a light on the importance of climate change; highlighted the risks of inaction; underscored opportunities for responsive companies; flagged lead actors and lagging companies; and ensured that the market is appropriately addressing growing systemic climate risk. 

“The SEC has been unable to point to any demonstrable problem with the current shareholder system or make a case for how its proposal to limit shareholder rights will improve company value,” said Danielle Fugere, president of As You Sow. “To the contrary, this proposed rulemaking has the potential to increase shareholder and company risk, particularly regarding growing climate concerns. We don’t believe that it will withstand public or legal scrutiny.”